Running IT like a business isn't easy, executives say

Running IT like a business isn't easy, executives say

Ask any small business owner, and they will tell you that starting and running a business takes a massive amount of work. Some IT executives who are trying to run their IT operations like a business are beginning to discover the same thing.

"We started a chargeback system on Day 1 of (establishing) our services corporation, and it was miserable. We didn't really know what we were doing," said David Pelosi, an IT business partner at Public Service Enterprise Group (PSEG), a diversified energy holding company. In 2001, Newark, N.J.-based PSEG formed a shared-services organization that included its IT, legal and human resources activities.

PSEG's IT shared-services operation has since developed a mature chargeback system for IT services delivered to business units. It has also built credibility with business peers by benchmarking costs with external IT providers and reducing IT expenses by US$63 million between 2001 and 2004.

Still, Pelosi said that getting PSEG's 300-person IT organization to run smoothly took a fair amount of time and effort. "You have got to train the technology folks" with high-level definitions of financial concepts such as financial plans and return on investment, said Pelosi, who spoke at the IT Financial Management Week conference here this week. The event was presented by the International Quality & Productivity Center, a conference organizer in New York.

"Most IT people don't give any thought to the financial side," Pelosi said.

Other problems can crop up even after years of evolving an IT shared services business. For instance, Carlson Companies has had an IT shared-services organization since the late 1990s. Since 2001, the Minneapolis-based provider of travel and hospitality services has automated its chargeback system to the point where business-unit customers can view invoices online with a detailed summary of services and pricing, said Bev Swanson, director of business strategy at Carlson.

Despite that kind of progress, there have been snags. For example, Swanson's group once charged business units for storage on a per-gigabyte basis on the 15th of each month. But last year, it learned that some business directors were moving data from one set of disk drives to another on the 14th, resulting in zero-sum charges, she said. Then they would move the data back to the original disk drives on the 16th.

Swanson's group called one of the business directors to try to ascertain how they had suddenly gone from very high storage requirements to very low charges. The business director was candid about how they had been moving the data around, said Swanson. "We didn't go back and recharge them" for the storage fees, she said. "It was a relationship issue."

Some companies have implemented fairly sophisticated chargeback systems. At Lehman Brothers Holdings, depreciation on new and existing hardware purchases is automatically calculated and applied to customer invoices using software from San Business Engine. The New York investment bank put the system into production earlier this year, according to Brian Greenberg, vice president of IT.

Last year, KeySpan developed a 26-category IT services catalog. In November, the company began issuing an itemized monthly bill of IT services for business-unit customers, said Frank La Rocca, acting CIO at the electric and gas utility. "We met with (business) customers two months ago, and they struggled with defining what they use from IT," he said. The itemized bill "helps articulate that," La Rocca said.

KeySpan has decided not to implement a chargeback system -- at least not for the time being. "Our CFO told us, 'Don't spend a quarter to chase a nickel,'" said La Rocca.

Just like small-business owners, some CIOs have had to make difficult choices in order to effectively run their IT shops. For example, The Williams Co, a natural gas and electric power company, has whittled its IT organization from 1,000 people across four IT shops to just 100 people in a single department over the past few years -- thanks, in part, to outsourcing some of its application support, said CIO Ron Mucci.

Said Mucci, "IT workers are expected to have as much business knowledge as business people."

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