IT As Profit MakerIT As Profit Maker

The practice of vertical integration has been on the outs for a decade or two, as companies shed or outsourced ancillary operations in order to focus on their "core" expertise. That thinking has extended to IT, especially in the era of cloud computing: Why tie up internal resources building and managing data centers, infrastructure, and applications, the argument goes, when third parties can provide that technology more efficiently and effectively?

The decision comes down to your company's definition of core business. Is Ford a car and truck manufacturer, or is it the operator of one of the world's most sophisticated supply chains, requiring a wide range of IT competencies from start to finish? Is Amazon.com an online retailer, or is it a for-profit technology company whose world-class infrastructure underpins a variety of external as well as internal businesses?

Scores of companies, including NYSE Euronext, Sears, United Stationers, The Associated Press, Zynga, Google, and Union Pacific, not only are innovative users but also committed builders and sellers of IT systems, software, and services. NYSE Technologies, for instance, is pitching a range of transaction, infrastructure, and data services and software, mostly to other financial companies. The MetaScale unit of Sears, launched in April, aims to sell Hadoop and other big data management services to "traditional brick-and-mortar enterprises" across all industries.

Union Pacific, the largest railroad company in the U.S., now generates $35 million to $40 million in annual revenue by selling, leasing, and licensing various technologies it owns and/or develops. For example, it was going to buy communications radios for its locomotives from a specialty manufacturer, but the engineers who work in UP's technology R&D lab said they could do the custom electronics for less. By developing the 8,000 radios it needed in-house and farming out their fabrication to a contract manufacturer, UP not only saved $7 million to $8 million, says CIO Lynden Tennison, but the subsequent sale of about 5,000 of those radios to a couple of competitors generated enough money to more than cover development costs.

Such examples, while not the norm, aren't the rare exception either. Consider that in 2011, 26% of information 500 companies had patented, trademarked, or copyrighted at least one tech innovation, implying that their IT organizations had moved beyond operating as strict cost centers.

If IT truly is intertwined with "the business," as information has been chronicling for decades, then in-house IT expertise--whether it's for sale or competitive advantage--must be cultivated. It's certainly wrong-headed to suggest that most IT work is a mere commodity best left to cloud vendors, outsourcers, consultants, hosting companies, dev shops, and other outsiders.

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That was Enron's "asset light" business model, which the now-defunct energy company took to the extreme. Thinking that it was almost always more efficient for some third party to own and operate the gas pipelines, electricity grids, telecom infrastructure, and other assets on which its core businesses depended, Enron divested itself of almost everything--to the point that it had little "core" left.

The challenge is to find the middle ground--build best-in-class technical competencies and consider off-loading the true commodity work to others. But as Charles Babcock reports in an information feature story on the costs of the cloud versus on-premises computing, sometimes it makes financial sense to keep even the commodity stuff in-house. (We'll publish that story in a couple of weeks.)

Before your IT organization jumps into selling its technology, ask several basic questions:

>> Have you run pilots to validate the business approach?

>> Does that business have adequate development, sales, marketing, and capital support? (Or would you be better off partnering with a company that has that expertise and those resources?)

>> Will the projected revenue make a material difference? Is the CEO and board committed to your creating and running, say, a $5 million-a-year business that distracts you from leading IT for your multibillion-dollar company?

>> Is everyone on board that you're not selling the company's competitive advantage?

"In most cases, the value proposition of these services needs to be linked to the overall value provided by the company," says Dave Bent, CIO of office supplies distributor United Stationers, which sells e-commerce and other software and services to its reseller and retail customers. "The combined value needs to be greater than the sum of the parts."

Rob Preston,
VP and Editor in Chief, information
[email protected]

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At this year's information 500 Conference C-level execs will gather to discuss how they're rewriting the old IT rulebook and accelerating business execution. At the St. Regis Monarch Beach, Dana Point, Calif., Sept. 9-11.