IT as profit maker
In defining your company’s core operations, is IT one of them? Many non-it companies have patented, trademarked, or copyrighted at least one tech innovation
The practice of vertical integration has been on the outs for a decade or two, as companies shed or outsourced ancillary operations in order to focus on their “core” expertise. That thinking has extended to IT, especially in the era of cloud computing: Why tie up internal resources building and managing data centers, infrastructure, and applications, the argument goes, when third parties can provide that technology more efficiently and effectively?
The decision comes down to your company’s definition of core business. Is Ford a car and truck manufacturer, or is it the operator of one of the world’s most sophisticated supply chains, requiring a wide range of IT competencies from start to finish? Is Amazon.com an online retailer, or is it a for-profit technology company whose world-class infrastructure underpins a variety of external as well as internal businesses?
Scores of companies not only are innovative users but also committed builders and sellers of IT systems, software, and services. NYSE Technologies, for instance, is pitching a range of transaction, infrastructure, and data services and software, mostly to other financial companies.
Union Pacific, the largest railroad company in the U.S., now generates USD 35 million to USD 40 million in annual revenue by selling, leasing, and licensing various technologies it owns and/or develops. For example, it was going to buy communications radios for its locomotives from a specialty manufacturer, but the engineers who work in UP’S technology R&D lab said they could do the custom electronics for less. By developing the 8,000 radios it needed in-house and farming out their fabrication to a contract manufacturer, UP not only saved USD 7 million to USD 8 million, says CIO Lynden Tennison, but the subsequent sale of about 5,000 of those radios to a couple of competitors generated enough money to more than cover development costs.
Such examples, while not the norm, aren’t the rare exception either. Consider that in 2011, 26 percent of
Information week 500 companies had patented, trademarked, or copyrighted at least one tech innovation. If IT truly is intertwined with the business, then in-house IT expertise — whether it’s for sale or competitive advantage — must be cultivated. It’s certainly wrongheaded to suggest that most IT work is a mere commodity best left to cloud vendors, out sourcers, consultants, hosting companies, dev shops, and other outsiders. The challenge is to find the middle ground — build best-in-class technical competencies and consider off-loading the true commodity work to others. But sometimes it makes financial sense to keep even the commodity stuff in-house. Before your IT organization jumps into selling its technology, ask several basic questions: Have you run pilots to validate the business approach? Does that business have adequate development, sales, marketing, and capital support? (Or would you be better off partnering with a company with this expertise?) Will the projected revenue make a material difference? Is the CEO and board committed to your creating and running, say, a USD 5 million-ayear business that distracts you from leading IT for your multibillion-dollar company? Is everyone on board that you’re not selling the company’s competitive advantage?
“In most cases, the value proposition of these services needs to be linked to the overall value provided by the company,” says Dave Bent, CIO of office supplies distributor United Stationers. “The combined value needs to be greater than the sum of the parts.”