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What are the behavioral implications of treating your IT function as a cost center? (Part 1)

While enterprises today have no choice but to connect with their customers through digital channels, many still treat the IT function as a cost center, something which doesn’t drive revenue but still requires (often significant) investment to operate. Even when asked to meet ambitious digital demands, such treatment can often compromise the function’s effectiveness and ability to reach its full potential and drive the sort of change the organization needs.

 

IT isn’t the only function often viewed as a cost center. Teams like HR and finance are cost centers too. This isn’t always a problem: teams like HR and finance are needed, after all, to support the administration and operations of a business. What is a problem, however, is that in a world where digital is fundamental to every organization, IT no longer plays the type of support or operational role it did 10 to 20 years ago. Businesses that still think it does are severely limiting its ability to deliver value.

 

Treating IT as a cost center will lead to a range of behaviors that undermine the function; some of the most significant are explored below.

 

Spending won't be driven by value

 

Given the performance of a cost center is primarily evaluated by comparing spending against an allocated budget amount, the focus will typically be on optimizing spending. This leads to a lack of focus on value for the customer; in other words, business outcomes won’t be aligned to spending. To be focused on value, you need to be nimble and able to pivot based on customer feedback. A budget-driven expenditure monitoring approach discourages this.

 

There will be no incentive to collaborate with the wider business

 

When IT is regarded as a cost center, there is little to no incentive for the function to collaborate with the wider business. Because it’s not responsible for achieving business outcomes, the work needed to achieve them isn’t a priority.

 

Money will be wasted on initiatives that aren’t delivering value

 

A cost center approach encourages continued spending on initiatives which aren't delivering the expected value and benefits. This usually happens because spending money in line with forecasts is looked at favorably in terms of leadership capability and performance, as opposed to making a move to stop spending (which would imply the forecast was wrong). This results in money being wasted on failed or low value initiatives, which could otherwise be spent on initiatives that could have a far greater impact.

 

It encourages a short term focus

 

There is typically a short term focus when IT is treated as a cost center. Since the window for allocating budget, as well as monitoring spending against the budget, is linked to the budgeting cycle, what typically gets prioritized for spending are initiatives which need funds immediately or in the near future. Most enterprises tend to follow an annual budgeting cycle, so the focus for anticipating budgetary needs will rarely go beyond a one-year period.

 

It can lead to a failure to accommodate emerging opportunities

 

If you treat IT as a cost center, you have little room to accommodate emerging opportunities. This is because the basic premise on which the cost center approach is based is the ability to accurately forecast spends for the budget period, which is usually annual.

 

Moreover, given that data collection for the budget usually happens a few months before the process actually begins, the forecast will be made even further away from the start of the budget period. The IT function must not only accurately forecast expenses for maintenance and service related activities, but also the money needed for delivering projects, new products and enhancements to existing products. Budget allocation will be based primarily on the forecast; once the budget is finalized, it's very difficult to get additional funding until the next budget cycle.

 

Provisions for opportunities which may emerge after the forecast are rare. In a fast changing environment, the inevitable rigidity that comes from funding being tightly coupled to a forecast made well in advance results in the enterprise missing out on emergent — and potentially impactful — opportunities.

 

 

IT no longer plays the type of support or operational role it did 10 to 20 years ago. Businesses that still think it does are severely limiting its ability to deliver value.
Sunil Mundra
Principal Consultant, Thoughtworks

 

You may miss out on funding for other vital activities

 

In cases where additional spending for an activity is required, spending on discretionary but important activities like capability development will sometimes be compromised. Funds that are allocated for these activities will instead be used for activities where additional spending is needed.

 

It creates a silo mindset

 

Treating IT as a cost center reinforces a silo mindset. This is because it can make people reluctant to share time, energy and resources simply to avoid accounting and reporting and accounting complications in adherence to budget.

 

It can lead to low team morale

 

The people that work in a cost center can easily become demotivated. This is particularly true in IT, where the scope of potential work could be huge. They may not get to do the type of work they want to do and they may not get the recognition for the work they actually do, unlike those whose roles and performances are linked to business outcomes. 

 

Conclusion: Treat IT as a strategic driver, not a cost center

 

To summarize, the behaviors linked to treating IT as a cost center arise from optimizing forecasting accuracy, adherence to budget, predictability and certainty. These behaviors are major impediments to IT becoming a crucial strategic function.

Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.

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