Is IT a Profit Center or a Cost Center? Yes

Ann All

Nothing (except maybe the theme from "Green Acres") sticks in my head quite like frequently aired TV commercials. I can't remember my daily schedule without a calendar, but I can unerringly match 20-year-old advertising slogans with the products they promoted. And these slogans pop into my mind far more often than they should.


After several years of covering IT, I've come to think of it as the Miller Lite of the enterprise. Instead of jocks arguing about whether it "tastes great" or is "less filling," you have suits arguing about whether it's a "cost center" or a "profit center."


Patrick Gray, founder and president of Prevoyance Group, and author of "Breakthrough IT: Supercharging Organizational Value through Technology," last week addressed the cost center vs. profit center question on TechRepublic and concluded "Who cares?" He wishes the argument would just go away.


Attempts to portray IT as a profit center (because no one wants to be known as a cost center) tend to involve "accounting gymnastics that convolute IT's role in the company rather than clarifying it." Gray mentions chargebacks, which he says result in "accounting headaches for the organization as a whole." The chargeback model has its fans and foes, as I wrote in January. Proponents say it helps IT departments get a better handle on their costs and prioritize projects, while opponents insist it results in decisions that run counter to corporate goals. Writes Gray:

A profitability mind-set can be a wonderful thing, as long as it considers profitability for the entire corporation, not the amount of money it can transfer from one internal account to another. Partnering with other business units with the needs of the paying external customer will create real monetary value for the organization and free IT from convoluted arguments used to justify its existence. A focus on true profitability for the organization as a whole will likely generate far different results, both in terms of the projects IT focuses on and its execution, than mindlessly worshiping the internal "customer.

In a interview, Harvard Business School professor Robert Kaplan, co-creator of the balanced scorecard, suggests that rather than perform a cost-savings analysis to help illustrate IT's value to the business, which will largely come down to its ability to reduce headcount, IT needs to demonstrate how it supports critical processes that help achieve broad business goals such as creating greater customer satisfaction. He mentions offering both shippers and recipients the ability to track their FedEx packages as an example of "an intimate partnership between IT function and the business strategy." Says Kaplan:

Most IT value comes indirectly through improving processes and relationships with customers and suppliers. In turn, that leads to better financial results, but it has to work through the company's business model, and not be a standalone investment that could be justified in its own right. Not every investment or application has to go directly to some financial number. And that's been so frustrating to IT, and 25 years later IT still hasn't solved this problem [of proving the business value of IT] because they don't deliver direct benefit by themselves. It's only when it's bundled in with strategic processes and customer relationships that the value is created.

In a Meet the Boss TV interview with JetBlue CIO Joseph Eng posted on, Eng responds to a question about countering "the very widely held view that IT is a cost center" with a refreshingly matter-of-fact statement:

It is a cost center. But if you are just considered a cost, I don't think you're really part of the strategic agenda of the firm; and so it is about top line as well. It is about creating innovation, driving out new products and services; and so an IT capability needs to be very focused on that....

Echoing Kaplan's thoughts on IT supporting critical processes, Eng says IT projects aren't just about cutting costs or generating revenue, but about harder-to-quantify benefits such as improving customer experience. (Yes that may result in revenue growth somewhere down the line but, as Kaplan says, it won't "go directly to some financial number.") Says Eng:

All projects, especially IT projects, have the typical measures or parameters with them. We have a scope. We have a budget or cost. We have a schedule, and these are things that we need to continue to drive to and manage to. But also every project needs to have a set of business objectives. We're not just doing these projects to go meet a date. We're doing it for a set of business reasons.

Life would probably be simpler for IT if the "business reasons" for projects always involved reducing costs or making money. Sometimes, however, the benefits are a bit more nebulous -- though no less important.

Add Comment      Leave a comment on this blog post
Mar 10, 2010 4:33 AM Patrick Gray Patrick Gray  says:

Hi Ann,

Nice summary. I fail to understand why IT has such a distaste for being an internal cost, regardless of the machinations some companies attempt to make it look like a profit center.

Cost centers need not have a negative perception. R&D, Marketing, Real Estate, M&A, etc. are all beneficial costs at the corporate level, and IT can certainly join their ranks.

If you have a Ferrari in your garage it's a cost, but the smile you get when turning the key is, as the Visa commercials say, priceless. I'd rather have IT be that Ferrari than attempting to turn my Yugo into an "income stream" through accounting gyrations.

Mar 10, 2010 6:55 AM Phil Simon Phil Simon  says: in response to Patrick Gray

Great comments, Pat.

I agree. It ultimately doesn't matter. I've heard the same arguments about departments such as HR over the years.

The real question is, "Are the costs justified by their benefits?" This question should transcend each department of an organization.

The Ferrari analogy is a good one.



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