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 / Summer 2005 / Issue 39(originally published by Booz & Company)


In Search of Overhead Heroes

By implementing market-driven management, cost centers get what has eluded them: respect and results.

Illustration by Lars Leetaru
Every profession has its heroes. Baseball has Babe Ruth. Literature has James Joyce. For-profit business has Peter Drucker. Bookstores and libraries offer row upon row of books, tapes, and CDs from business gurus who have advice on just about every aspect of making a profit. But where are the overhead heroes? This seems to be one category of management counsel where icons are in short supply.

The overhead business is a necessary expense that’s rarely viewed as a source of competitive advantage. Running a unit that’s considered overhead, whether its function is accounting, human resources, information technology, or marketing, is among the most frustrating corporate job there is.

Working as a chief information officer (CIO), leading a corporate information technology group, and advising other CIOs on how to run their IT departments, I feel the overhead manager’s pain. Perhaps because IT is one of the most costly support functions to run, it’s also a lightning rod for management criticism. American companies typically earmark anywhere from half to three-quarters of their annual equipment budgets for IT.

But it’s the rare company that’s happy with the results. Most business unit leaders are mystified by technology, and it irritates them to spend so much money on systems that don’t seem to make a difference. CIOs are unhappy because they find it difficult to communicate IT’s value to the business and to deliver a level of service quality that’s satisfying to end-users. CEOs are unhappy because all they generally see is the high cost and a return on investment that’s hard to measure.

Over the past four years, our IT department has tried some new approaches to improving IT service effectiveness, controlling cost, and understanding and articulating the business value of IT. One critical step we took: We stopped focusing solely on satisfying the people we call clients — C-level executives and business unit leaders who are mostly concerned with IT alignment and cost control. Instead, we adopted what we termed Market-Driven Management, which reemphasized our responsibilities to our end-users. These are the technology consumers and, often, the revenue generators of our firm. As we see it, increasing support for salespeople on the road, clerks entering orders, or (as in our case) consultants at client sites anywhere around the world translates into sales, revenue, profits — and, eventually, bonuses.

Our management ideas seem to be working. Moreover, we believe that what we have learned about overhead management in our quest to improve how we run IT has relevance for all types of support functions.

Profit Center Solution
In the early 1990s, many IT organizations dealt with this challenge by trying to become profit centers. In a weird way, this made sense. If being a cost center wasn’t working, why not try turning the support service into a profit center?

IT departments by the score sought revenue streams in a variety of ways. For example, homemade software applications, in such categories as sales force automation and customer management, were spiffed up for sale to other companies, often in direct competition with better-known brands offered by leading software makers. Large banks marketed credit card systems to small banks, while securities firms peddled trading systems to anybody. Some information technology departments even sold excess computer capacity or unused data center floor space to other firms.

But, with few exceptions, these efforts were problematic. Applications created internally and sold externally required expensive technical support and frequent updates. Meanwhile, the IT group’s internal customers complained about being shortchanged as their own IT staff ran off to serve “paying” clients. By the late 1990s the trend was over and forgotten…almost.

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