Flipping IT from Cost to Profit Center

The concept of IT as a money-maker is counterintuitive to many. But that’s exactly what makes it appealing in a world of business models turned on their heads by digital disruption.

“The goal is not just disrupting the old ways of doing business, but leveraging the amazing boost in performance that comes from swapping out the old infrastructure and cutting over to the new,” the author Geoffrey Moore once told an interviewer. 

Moore is the author of the legendary 1991 book Crossing the Chasm, a guide to taking new technologies from innovators to mass markets. Today, he said, the marginal IT costs of many business activities are near zero, leading to a sterling opportunity. Automating customer transactions, adding more computing power, adding resources to a sharing economy, even optimizing the system through data-driven decisions are all ways to derive revenue from activities which scale cheaply.

Moore’s recent book, Zone to Win, presents this idea in a chart which plots the paths from investment to revenue on one axis, and disruption to sustainability on the other.  Three of the four are immediately recognizable to most executives.

• Performance is the core money-making business in operation — anything that contributes to more than, say, 10 percent of total revenue.

• Incubation is those areas that develop new products or explore new markets.

• Productivity is where IT usually sits in execs’ mental landscapes. It’s like finance or building operations.

Moore advocates the creation of a fourth Transformation Zone, where disruptive innovations bring in revenue, rather than being sunk costs that one day could become profitable products and services. This is where IT has the potential to become a profit center.

“Bizarre as it may seem, the less correlated the new business is to the old, the better,” Moore wrote in a LinkedIn post.

“You cannot successfully disrupt yourself. There are just too many inhibiting factors. Apple’s music franchise did not disrupt the PC business, just as the phone did not disrupt the music business. Ditto for Amazon’s entry into cloud computing or Google’s entry into Android operating systems.”

In hindsight, IBM’s reluctance to sell its PCs to potential customers for its much more profitable minicomputers, or newspaper owners’ refusal to rush into online publishing, were neither short-sighted nor naive. IBM succeeded instead by transforming itself to meet a different emerging business need: the world’s largest IT services company. Newspapers went out of business even after investing billions in online publishing not because of blogs but because readers’ attention and advertising dollars went to Google and Facebook.

Established Firms Have Advantages

“Established enterprises have enormous advantages over next-generation disrupters,” Moore said. “They have a large installed base of customers that, all things being even close to equal, would prefer not to switch vendors. They have global footprints, reasonable balance sheets, knowledgeable investors, seasoned employees—these are all the very things that the disruptor covets.”

Moore said that established companies have two resources they must be willing to risk putting into play.

“The first is a highly functioning performance matrix,” he stated. “They have to have a go-to-market system that already has the global reach and the capacity to perform at scale, and they must be willing to put that system to the test.”

Second, populating the Transformation Zone is likely a buy, rather than build, maneuver.

“They have to have a market capitalization or cash reserves that can fund a major acquisition to accelerate hyper-growth once it is under way,” he said.

“Here too they will be put to the test, for the price multiple on the acquisition will be eye-popping, given the target company is in a high-growth category and has material size.”

Stepping Back to Move Ahead

Moore said that it’s easy to point to the Transformation Zone, but moving into it is risky and expensive.

“Transformation Zone initiatives demand deep sacrifices from the other three operating zones, each of which has its own inertial momentum that resists such change,” he wrote.

Performance Zone leaders are asked to give up a chunk of their go-to-market capacity for the new initiative. Productivity Zone managers “need to find ways to reengineer, outsource, automate or otherwise offload their existing workloads” in order to free up resources to deal with the disruptive impact.

Incubation Zone management will be hit the hardest. Their projects may be delayed, back-burnered, or killed outright rather than being brought to market, explained Moore. 

Altogether, the difficulty of managing these sacrifices and course changes are why new endeavors – even those built on billion-dollar acquisitions – often fail to make the transition from Transformation Zone to Performance Zone.

Moore’s playbook for transformation and ultimate performance is detailed and complex, requiring attention to finance, reallocation of resources, and management of investor perceptions and expectations. But his basic premise for making IT a profit center is simple.

“You’ve got an established customer base and brand,” he wrote. “You’ve got large-scale IT for which the cost of many new additional functions is minimal. You’ve got experienced go-to-market resources. How can you leverage that to bring a new line of business to market?”

Moore advises looking for something as unrelated to your existing performers as Amazon’s Prime Video is to free two-day shipping.

The market doesn’t reward incremental improvements. It wants to see transformations.

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Paul Boutin is a contributing writer. Find him on Twitter @paulboutin.

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