Why is it so hard to run IT like a business?  Because, I can choose to be a customer of a business, and I can choose not to be a customer.  Businesses don’t mind because there are usually lots of potential customers, so getting a market share of 1% can lead to a great deal of success.

IT does not have that luxury.  If IT is to run like a business, then its services have to be consumed by some or all of the business units.  It has to win MOST of the time that IT is in competition with an outside vendor.  The more successful any particular IT service is, the less expensive it gets because much of the overhead is spread out over many customers.  Economy of scale.  This is how businesses work.  Unfortunately, there is not an infinite supply of business units!  IT does not have a broad array of customers to compete for.  IT has a small handful of customers, and that is a problem.

If there are only three business units interested in a particular IT service, and two of them sign up, you have a 66% market share.  That’s great… until one of them decides to outsource.  Then you have dropped from a 66% share to a 33% share.  If I was an automaker, or even a consulting firm, and I have a product line that goes from 66% to 33% market share in a year, I’d go through organizational chaos.  Most businesses cannot scale back that quickly and neither can IT.  In addition to the human cost, financial costs for the service’s remaining customer will soar.

You also have the fact that IT works for the same CEO as the customer (business unit) does.  That means the CEO can issue an edict, and both the business units and IT must comply.  If the business unit chooses not to comply, but IT does comply, then the business unit has little choice but to outsource. 

You could be thinking “but how can a business unit ignore the CEO?”  For many organizations, accountability to the CEO’s edicts are governed very differently within IT than they are within the lines of business.  That is because IT is a cost center, while a line of business is a profit center.  Profit centers are given a LOT more flexibility.  Therefore, IT has a constraint that few successful businesses have: it has to comply with rules that its competitors do not have to follow. 

Running IT like a business, with these economic and market constraints, is nonsense. 

The more rational approach is to run IT as a two-headed organization.  One is a governmental agency, able to levy and collect taxes and responsible for providing uniform services to all citizens (the business units).  The other is a non-profit service provider that is under contract to the government, providing subsidized services to those citizens who need them.

The Governmental approach

Whether we want to admit it or not, this is often how IT runs.  The cost of IT is simply deducted as a corporate expense.  In other words, the cost of running IT is a tax.  In large organizations, a simple formula may be applied to determine the amount of money each business unit needs to pony up.  In Microsoft, your business unit pays a flat fee for each employee or contingent staff member that you have.  For that money, you get a wide array of networking, collaboration, security, and information management services that you don’t even think about.  The stuff is free and it runs.

The Subsidized Non-Profit Service Provider approach

While there are services that we all need, like a secure network and good collaboration and messaging tools (like Exchange and SharePoint), there are also services that some teams need while others really do not. 

For small companies, or companies with very simple business structures, this is not even an interesting conversation except to say that the line-of-business funding pays for line-of-business software.  It is still subsidized, because once the line of business application is running, the “government” side covers many of the operating, networking, and data management costs.

However, for a very complex organization like Microsoft, business-service funding can be a good bit more difficult.  That is because any single service may have five, ten, fifteen different business units that could, potentially, be their customer. 

This is where the “non-profit service provider” idea starts to take shape.

Here you can use some principles of business, like setting up a mechanism to insure that the business units who make the most use of a service are the ones that pay the most to use it. 

For example, let’s say that your company is a retailer that operates branded stores (like Gap and Old Navy).  Your company also sells uniforms to hospitals and health care institutions.  Marketing to these two different markets is quite different.  The marketing team for the branded stores will directly consume individual customer data at a far higher rate than the marketing team for the uniforms business.  Therefore, they should pay more for the “Customer Marketing Profile” services.

It is a non-profit model because you are billing the customer, but you are not billing them for the full costs, and you cannot make a profit on it.  The advantage of running IT this way is that the services provided are always competitive with market rates (due to the subsidy), while IT itself is buffered from the chaos that ensues when a business unit decides to use the cloud for a service and stop paying IT to do the work.

Conclusion

For years, we’ve heard the old saw: If only we could run IT like a business!  But really, we cannot.  IT does not have a market the way a business does, and IT cannot ignore the edicts of the CEO like an outside service provider can. 

It is far better to make a clear distinction between the services that need to run as cross-organizational “platform” services and those that support one or more lines of business.  The services that support one line of business can be funded by that line of business.  The ones that support many lines of business can use a “non-profit” model like I outlined above.   These are really two variations of the same model: the subsidized non-profit service provider.

One is government, the other is non-profit.  Both live together under one IT umbrella.