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Does IT chargeback pave the way to outsourcing?

If your organization is talking about moving to an IT chargeback or a supply and demand model for IT, could that be its first step on the road to outsourcing?

That was an interesting sidelight raised by a story I did this week on a company that cut millions of dollars in technology spending by splitting its IT organization into a demand side and a supply side.

To back up a bit, the management experts I interviewed about this “supply demand” model agreed it can be an effective way to go. Demand-side IT works with the business on an IT roadmap and negotiates with supply-side IT on getting it done. Done right, the model recognizes that requests for IT services must come from the business, even as it imposes fiscal and strategic discipline on those requests. In turn, supply-side IT people become expert in their areas. Relieved of having to respond to a chaotic barrage of business demands, supply-side IT staff can focus on efficiency and competitive advantage — the stuff that makes internal IT departments relevant. That’s the ideal, anyway.

In practice, the model has the potential to disenfranchise the supply side of IT, a former CIO in the financial services industry told me.”I’ve been in situations where the supply side is viewed as a commodity,” said Jack Santos, who’s now a research vice president at Gartner Inc.’s Burton Group. “The thinking [from the business] was that this was the first step to outsourcing.”

Mark McDonald, Santos’ colleague at Gartner, saw it a bit differently, arguing that IT chargeback, per se, can pave the way to outsourcing IT, because the focus is strictly on price: “When I do IT chargeback, I make my pricing visible, which automatically means it will be compared to external providers,” he said. On price alone, the internal IT organization is almost guaranteed to be noncompetitive, Santos and McDonald said, especially when the IBMs and CSCs of the world typically underbid for the first couple years to get the business.

No matter, said Bruce Barnes, another former financial services CIO, who now runs a consulting practice out of Ohio. The wave of the future is that IT organizations are getting smaller not bigger, and the piece that survives is business literate, he said. Being a consultant, he naturally offered up a four-box matrix to explain. “One axis is running from simple to complex, and another from generic to highly proprietary,” he said. In the past, internal IT was in the lower left-hand quadrant — simple and generic — and the business hired consultants for the high-level stuff. The upper right-hand quadrant — complex and highly proprietary — is where internal IT people need to be. The rest can be given away if the business finds somebody good enough to take it.

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