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

InformationWeek - - Down to Business - Rob Pre­ston Rob Pre­ston is VP and Edi­tor-in-chief of In­for­ma­tion­week. You can write to Rob at rpre­ston@tech­web.com.

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.”

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