How should an IT department be organized ?

         “Message from Jeremy: To all Tech IT Easy readers, who could obviously not necessarily remember the initial announcement, I have invited my friend Steve to help me try to provide you, dear readership, with everyday better technology insights. Steve’s mission statement is that there’s no mission statement: what matters most here is to raise the right issues on underlying market trends, bringing to light new software, Internet services and consumer electronic devices. Steve, the floor is yours…”

     Along as my working paper (The various business models for websites based on connecting users), for which I would still welcome any kind of help (just mail to steve.danino@mailhec.net), I am also conducting a project for a large industrial company to reorganize its (large) IT department. The problems should sound familiar: costs are through the roof, quality of service is desperately poor, and many valuable projects proposed by other divisions of this group are just scrapped off because the IT Manager just doesn’t have any budget left…

 I felt it could be interesting to provide Tech IT Easy’s readers with some of our current findings. We’d be glad to know, by the way, whether the organization for which you work or have worked for has experienced already the same problems and implemented the same type of solutions.

 Here we go then :

- First of all, it appeared that the IT department was a discretionary cost center, ie the headquarter would simply pay for all its expenses. Costs were not allocated, and certainly not allocated by customers (the other firms divisions), which considered this internal service as “free”. Instead of having a P&L for the IT department, or even a line estimating IT expenses within the P&L of the divisions, all the costs would be grossly included in the overhead costs. Problems: 1) It’s difficult to identify and punish the black sheeps who are responsible for overconsumption 2) Free ? this of course is an illusion. Nothing is free. At the end of the year, the overall budget for IT will be systematically reconducted – if not capped by the HQ.

- And here comes the problem of misallocation. Since the IT department is under pressure by the HQ to reduce its costs, it might refuse to engage in some of the projects the other divisions would ask for. But then, one might say that this department did indeed accept to work earlier for least valuable projects … first come, first-served ! This is not a serious way to deal with a 1 billion dollar large IT budget. And what about trade-offs when it comes to suppressing maintenace fees, which are piling up little by little, until they become unmanageable ? Just bear in mind that an organization like the one we consider uses hundreds of systems and thousands of different applications….

 So, there are some very serious issues here. It has been estimated that this company could save up to 30% ot its IT costs – a mere 300 million dollars per year ! And here’s how:

1) The first possibility would be outsourcing the IT department to an external provider, such as IBM Global Services, Cap Gemini, Accenture, EDS, etc… Empirical data shows that very significant savings can be performed this way – up to 40%.

Problem: this very company already tried this a couple of years ago. And the quality of service was an absolute disaster. Besides, contract management was tough and supplementary expenses were billed on and on by the provider, (the name of which I will not disclose – or only by email). The result: within less than 3 years, the services were internalized once again.

2)  Another possibility would be transforming the IT department in a profit center, very much like Siemens did with its new subsidiary Siemens Business Services. The big picture: you tell your IT guys that instead of being “civil servants” of their company, they should endorse the market principles, and try actually to make profit…which is far from obvious since all the other divisions are now allowed to purchase their IT services on the external market.

Problem: the IT department is absolutely non-competitive. So let’s forget about this one.

3) Last possibility: keep the current structure, but make the IT department bill its services to each division (ie allocating the costs) and make sure that a market reference is taken into account when negotiating transfer prices. If the head of any division complains to the HQ that the IT service is billing twice as much as an external provider would, then a “positive” pressure would be built upon this division. Problem: this solution sounds slightly awkward, since very few companies, to my knowledge, have chosen this organization.

So, have you ever heard of similar cases ? What would be the best choice according to you ?