After nearly ten years of IT outsourcing, managers are beginning to look for other ways to manage IT investments. Three factors make rethinking the logic of managing IT resources important: (1) there is increasing use of a hybrid multimedia platform to link business processes with suppliers and buyers; (2) managers expect more business value from IT investments; (3) there are fundamental changes in the external market for IT products and services.
Venkatraman introduces a framework, the value center, for managing IT resources. The center consists of four building blocks of value from IT resources to allow companies to balance the role of IT in today’s operation with tomorrow’s requirements.
The cost center is the traditional way that companies have managed most IS activities. They allocate resources based on quantitative payback criteria, operate the infrastructure independent of business strategy, design the IS organization as a support unit reporting to finance, and assess it with cost-based indices.
The second building block, the service center, is distinguished from a cost center in several ways. There is no presumed classification of activities into cost or service centers. A help desk may be a cost center activity or a service center activity, depending on whether the expected benefit relates to business strategy. A company can assess a help desk in terms of the degree of perceived contribution to specific business processes, rather than in terms of operating costs. The degree of service orientation further distinguishes the service center.
The investment center, the third building block, has a strategic focus and tries to maximize business opportunity from IT resources. It focuses on scanning, selecting, evaluating, and transferring emerging technologies to the business. IT also licenses technology and does beta testing to create new future-oriented business capabilities.
The final building block, the profit center, focuses on delivering IT products and services to the external marketplace. When a company intends to leverage its best-of-industry IT proficiency, it can go beyond licensing to create a new unit to market the expertise commercially and create new products and services. Not only a source of incremental revenue, the profit center provides valuable experience and market knowledge to IT managers.
Venkatraman provides questions that business and IT managers can ask in reorienting their IT operations and managing from a value center perspective. Is the IT organization’s purpose to repair current weaknesses or create new business capabilities? How much should we spend on IT to support the value center and how should we measure that allocation of resources? What should we outsource? How can we assess the value from IT resource deployment? Who has overall responsibility for the value center? The author proposes designing the IT organization as a solutions integrator to join the various components in delivering business solutions. Overall, companies need to find ways to approach managing IT resources that go well beyond outsourcing.
Beyond Outsourcing: Managing IT Resources as a Value Center
Acknowledgments
I thank the Boston University Systems Research center for the support provided to complete this paper. I have benefited significantly from discussions and interactions with several managers and academic researchers. I particularly thank those whose comments and challenges have sharpened my thinking and refined my ideas: John Henderson, Lawrence Loh, Tom Boehm, Frans Lion, Jay Michaud, Joseph Guegan, Jim Noble, Jack Prouty, Walt Whalen, Robert Brammer, Jim Kinney, John Cross, Jim Short, David Feeny, Charlie Gold, Ron Tarro, Robert Lukas, Randy Grossman, and Christopher Sprague. Lawrence Loh first suggested that I use the label value center as an organizing framework as I was struggling with a way to unite the different components. I thank the SMR referees for their constructive comments on an earlier version.