Go Forth- And Earn!

It is fairly passe to note now that IT has helped in cutting costs in
different organizations by stream lining operations, improving productivity by
helping deliver more with smaller resources, and enhancing business
competitiveness by closely aligning information technology with business
strategy.

Then came outsourcing, which also made current the joke about how outsourcing
would send the CIO to his early grave with the epitaph "Career is
Over". Which is when the CIO pulled the next set of punches in what now
seems to be an intricate Houdini maneuver. The CIO then started talking about
improving RoI, higher SLAs, crunching up any number of financial niceties with
ease. Clearly the CIO, over time, has not only enhanced his skills beyond
managing MIS, but has been offering quality products and services to his
organization, and leading a team of enthusiastic and ambitious IT professionals.

This new avatar has indeed upgraded some CIOs in the direction of the CEOs.
And the latest trend suggests that quite a few India Inc CEOs are encouraging
their CIOs to start looking for external customers too — there are quite a few
benefits, but who does not like some extra revenue.

Look at VVR Babu, CIO of ITC and VP, ITC Infotech. Says Babu, "ITC, in
its diversified businesses, has top-class IT talent for engaging in challenging
initiatives, leveraging IT to enable businesses achieve sustainable advantages.
In order to provide sustained impetus to the aspirations of such high-caliber
talent and also to leverage the deep domain expertise built in the diverse
businesses that ITC has presence in, we formed ITC Infotech." Visionary ITC
did it in 1999, but Babu could be becoming more the norm than the anomaly.

ITC
Infotech, like its VP, is the embodiment of another remarkable new trend:
scores of organizations in India have spun off their IT departments into
separate profit centers. These companies are more often than not IT service
companies seeking both global and Indian customers. Taken together, these
companies form a healthy chunk of what we now call the Indian IT services
industry. The lineage is illustrious: TCS and Wipro owe their origins to this
very phenomenon.

Why this venturesomeness, one might ask. The motors are fairly obvious: if
software services are indeed the flavor of the day, exploit its potential fully
to create a viable alternate line of business. Not that these companies were
changing their core businesses, but setting up IT offshoots not only offered
another lucrative line of business, but putting IT on the portfolio gave the
overall brand equity tremendous value-addition.

This space has become more exciting now, if anything. Given the expertise
that CIOs have gathered over the years, they are veterans enough to venture into
getting business.

Which begs the questions: can the IT department make money on its own? can
the CIO hold a revenue responsibility? can the IT operations be moved from being
a cost center to being a profit center?

These were the questions posed to a cross-section of CIOs in the country on
the CIOL Enterprise Connect Discussion Forum (at www.ciol.com). While there were
skeptics and conservatives who felt that a CIO and his IT unit need not run
after external customers, there were quite a few who see great benefits in this,
believe that is where the future is, and have taken it up as a challenge.

A Whole New World

The timing of this transition from the company's internal IT department,
to a shared-services organization depends on the maturity of the IT department.
With connectivity and enterprise system backbones in place, the IT department
gets into the "maintenance mode", according to Venkat Iyer, CIO, TVS
Motors, who feels that after this point, the work within the company keeps the
IT department occupied for no more than 20-30% of its available working time.
This is not a very happy state of things, since the IT staffers, the same as
anybody else, need to be given new challenges to keep them together, not to
mention that spare capacity has also to be used optimally. This is when the CIO
starts looking at newer avenues.

Here is another perspective. Sanjeev Munje, CIO, Kitchen Appliances, thinks
the IT department is never in "maintenance mode"; rather the IT
department reaches a "technology and experience plateau" after which
it looks at serving the interests of sister companies. But however one phrases
it, in either case, IT departments do go out into the world. Of course, they
often have to cut their teeth serving customers closer to home before they
venture out to serve other companies.

Some companies have actively encouraged this trend, while yet others tumble
into it when the exciting new opportunity for providing services to outsiders
comes along. Take companies like BPCL and Tata Steel. These companies, by the
sheer size and complexity of their SAP implementations, maintain a team of
functional and technical consultants and even an SAP competency center. Rather
than let this huge quantum of expertise and manpower become deadwood, BPCL and
Tata Steel can provide technical and functional expertise to SAP, its
implementation partners, and prospective customers. That much pin money will be
accumulated in the process should not hurt either.

Quite
early on, some of these trailblazing companies decided to spin off their IT
departments into separate companies, with the CIO of the old IT department most
often becoming the CEO of the new company. Cases in point are ITC Infotech, as
noted above, CanBank IT, ICICI Infotech, L&T Infotech, Tata Technologies,
Mahindra Consulting, and NSE IT, amongst others. There is nothing spectacular
about this model: these companies continue to serve the IT needs of their
parents on the one hand, while, on the other, facing the growth challenges of
any other IT company.

Rites of Passage

Clearly, quite a few companies are encouraging their traditional IS set-ups
to slowly move from being pure cost centers to partial profit centers. The
transition most often happens when the captive IT department of a group takes on
the role of a shared services organization to deliver IT services to other group
companies or geographical regions before becoming an externally focused
organization. Says Anand Ramakrishnan, global CIO, Intelligroup, a services
organization, "The rite of passage requires success in the intermediate
stage: servicing associated or group companies or similar entities, entities not
bound to fund you, entities that require some selling to and entities that
expect to be treated as customers."

Venkat Iyer, TVS Motors In a non-IT company there cannot be many daily challenges. The IT team normally is young, has completed one or two ERP implementations within the organization and also one or two group companies. What next? At this juncture the issue of the IT department's not having internal work for more than 20-30% of productive time comes up. How do we utilize the remaining time productively?  So while companies may not ask their CIOs to take up revenue responsibility, the need of the hour will drive the CIO to take it up. In our case, we set up a data center where we host our group company servers also at a price. This income offsets some of the expenses we incur.  Also many organizations may not pursue this as it is not their core competency, but it will happen in the periphery of the organization. Only when it accounts for 3-5% of the total revenue of the organization do companies consider this source of income seriously. Sanjeev Munje, Kitchen Appliances The idea is not new. In fact, the technology base which IT or IS or EDP has enjoyed is next in importance only to manufacturing in any organization, and this has always created the expectation that it can generate revenues. Irrespective of this, a majority of the organizations don't seem to have any mandatory revenue responsibility and I also never had it. All in all, we have always been geared-up to make us available at cost and do it voluntarily as and when needed by any external customer. Revenue generation has been always primarily assigned to the core competency of the organization. However, any of these organizations may outsource any of their non-core-competency activities like IT-services to an outside organization instead of maintaining their own in-house IT department, thus fueling the external-service-model. Sundar Vishwanathan, Clariant Yes this is happening now. The example of BPCL was also done by one of our group companies when a person was sent to SAP Germany as consultant and charged to SAP on a daily basis. Secondly, IT must be turned into service to the business and I am of the view that it will be beneficial to both the sides. We also did it for our connectivity to distributors for order booking. We charge some minimum amount per month to each of the distributors more to allow them to use the system and also we could get back some of the cost we had spent in developing the system. Shashank Ghatpande, Bajaj Tempo A service department, according to me, cannot be made a profit center. If consultants start working with profit as motive, then the whole purpose is shifted towards making profits and service quality is bound to suffer. I do agree that one should be cost-cautious and internal cost should not be high as compared to external/outsourcing cost. Anand Ramakrishna, global CIO, Intelligroup CIOs inclination towards revenue responsibility is directly proportional to their perception of their organization's maturity to handle internal and external customers. Even more important is "How IT is perceived by CEO and the board". Revenue responsibility is directly proportional to positive nature of this perception. The focus at Intelligroup is always on internal customers. My group does not have any specific mandate to chase external opportunities. Since Intelligroup is a professional services organization, many of our internal facing investments and resultant developments are packaged and sold to external customers. For our existing or potential customers, we share our best practices and tools. In essence, we eat our own dog food before sharing/selling to customers. We don't have any revenue mandate per se. But invariably we end up with some revenues year after year. The difference is, we don't chase the business. What we do is mostly stuff that lands on our table through word of mouth references and other non-traditional channels. But then, this is by choice and we might change this model to sales driven over a period of time. Anjan Bose, Haldia Petrochemicals  The issue is not about IT being a cost or profit center, but the role of a CIO in a company's wealth creation for its stakeholders and customers. While this is obvious in the service sector, e.g., in banks, it is not so in manufacturing centric companies. In the capital intensive integrated, commodity and petrochemicals industries, "sweating the assets" and "feedstock hedging" are key to success. The CIO plays a strategic role in ensuring asset life cycle management, grade scheduling, stocking policy and cash flow planning. This is done through understanding of the business issues and providing "easy to use" modeling and decision-making services, obviously on top of an ERP. I believe IT in such industries should focus on making the core operation more efficient and flexible to market dynamics. IT should not cast aspirations on generating their own revenue from IT services to others. There can be conflicts of business interest. Also, such revenues, as a percentage of the overall revenue, will be miniscule and consume too much "management bandwidth" and human resources.  There are other niggling issues we should not be too dismissive about. For instance, in a Rs 5,000 crore, 800-strong company, how much revenue can IT add? One can, however, use this new model as a staff "retention tool". And how many additional people are needed for that incremental revenue creation? Arun O Gupta, Pfizer Is revenue responsibility for the CIO desirable? Probably the CFO would also wish to then start a new line of business that can add to the top and bottom lines of the company. Some companies have encouraged this trend and that is primarily driven by an opportunity that comes along akin to, say, BPCL. Others thought to use their IT functions to diversify into a new business line. Most of these happened during the IT boom and none have been visible in these last three to four years. When the large companies are rethinking "core competency", IT beginning to spread wings may not be very welcome to the CEO or the board.

During this transition, the budgeting process is also transformed: the
traditional budgeting method of headcount plus expenses plus capital changes to
SLA-based budgets. The typical challenges include charge-back of shared costs
and prioritization of projects and resources among internal and external
customers.

There are various avenues for an IT department to earn revenue even before it
becomes a shared services entity. These avenues may range from tasks as routine
as handling a mammoth printing job for another group company to an advisory role
in preparing a strategic IT plan for another group company, from sharing
infrastructure facilities like data center and networks to loaning out certified
technical consultants for implementation projects.

Revenue Responsibility: Business or Pleasure?

So, does the CIO have a revenue responsibility? As a mandate, no. "But
many a time, the need of the hour will drive the CIO to take it up," says
Venkat Iyer. Again, it is not so much the revenue earned that is of importance
as what proportion of the total revenue it is. For most organizations, it is
usually less than 1% of the total revenue. "Unless the revenue earned by
the IT department gets to at least a 3% to 5% of the total revenue, no one takes
notice," says Venkat Iyer. The income thus earned can be used to offset
some of the departmental expenses. Which is okay, when offsetting costs is the
name of the game.

While the trend has started, the fact is that not everyone might be
convinced. Even if the CIO and his team take on the mandate of generating
revenues, it may not always be welcome. An overriding interest shown by the CIO
and his team in getting revenues would make companies worry about shifting away
from their core competencies. Says Arun Gupta, CIO, Pfizer, "When the large
companies are rethinking 'core competency', IT beginning to spread wings may
not be very welcome to the CEO or the board."

Sanjeev Munje adds, "CIOs have been and are battle-ready enough to
generate revenues, but non-IT organizations don't see them as
revenue-generators and consider only their core competency to be the revenue
generator." A pertinent fact, though, is that most of these ventures have
at best remained second-rung IT companies and the phenomenon itself has slowly
wound down. Profit center or not, shared services or otherwise, charge-back or
something else, Arun Gupta strongly advises that every CIO should create a
notional profit center and charge back to his customer what they spent. Says
Gupta, "Economic value created is another measure. I have seen many of my
peers use it to justify their budgets and in some cases alignment with the
strategic goals."

While the CIO's efforts at making money will continue to be peripheral in
the perception of the rest of the organization, a shift in the direction of the
notional profit center model cannot hurt, as it will offset costs at the very
least. In the future, however, there is no gainsaying the possibility that what
is now at the periphery won't itself become the nerve center of these
enterprises. And the CIO also becomes a significant revenue earner.

Iishwar Daas Nair in
Mumbai