Fieldman has a point: The dollar figure isn’t what’s remarkable; it’s the fact that his department brings in money at all.

Most organizations count their IT departments as cost centers, but some CIOs have had success selling their technology or services to external customers. As a result, they bring money into their organizations. It’s a business model that could change how companies view IT.

“It will never be a dominant part of what companies can do, but in the right circumstances, it is something they will do,” says John Karnatz, group director at Technology Services Development Group in Bartlett, Ill.
Executives caution against envisioning too many dollar signs, though. They agree that extra revenue is secondary to improvements in products and services for internal and external clients that are made possible by the additional money IT brings in.

For a thin-margin business such as that of DSC Logistics, Fieldman’s accomplish-ment “is significant to our bottom line,” says Chief Financial Officer JoAnn Lilek. “But the bigger thing is it’s of value for our customers.” DSC Logistics provides national supply chain management to companies such as Kimberly-Clark Corp., Georgia- Pacific Corp. and Kellogg Co.

DCS Logistics’ business model always included some IT services to customers, but Fieldman says he noticed shortly after starting at the Des Plaines, Ill.-based company in 1998 that some requests went beyond standard services. “So over time, we slowly began to put in a framework, setting up in our contracts that there were base IT services and supplemental IT services at an additional rate,” he says.

company that wanted to simplify how it put holds on warehoused products. His IT staff built customized software for that customer based on a form that the customer had been using internally.

Fees for such services vary, taking into account the work involved for each project, Fieldman says. He won’t disclose how much money his IT department makes but says the investment required to create a revenue-generating shop was minimal.

“The main thing that changed is how people think,” Fieldman explains, saying he worked with people in sales, customer service and the executive suite to help them understand the market for IT services. “The paradox is when you charge people, they really appreciate the value,” he observes. “When it’s free, there’s a risk that people will perceive it’s not valuable.”

Insourcing

Customer needs also transformed Ellen Barry’s IT department. Barry is CIO of the Metropolitan Pier and Exposition Authority, a public entity that operates McCormick Place and Navy Pier in Chicago. When she started the job in 2000, an outsourcer provided technical services to groups using the tourism and convention spaces. Barry thought her staff could do better. “I wanted quality to be primary,” she says.
Barry says she wouldn’t have pursued the idea if she thought the venture would have lost money; she initially figured she could break even. But when the outsourced provider fought her attempts to take over the services, she realized there was money at stake. “I clicked my fingers and said, ‘I’m on the right track,’ “ she recalls.

To make her plan work, Barry had to add both products and people to her department. She now has 500 miles of fiber running among the various facilities.

Barry hired eight people, all technical folks who work well with clients under tight deadlines. These new hires joined the 20-plus who manage the authority’s internal systems.

This venture didn’t come cheap: It cost $1.7 million to implement, Barry says. She wouldn’t disclose how much her Internet/technical services group brings in annually, but she says she recouped her initial investment within two years. Like Fieldman, Barry says the value doesn’t necessarily rest with the dollars brought in. “It’s part of what I consider my competitive advantage,” she says.

“By providing these kinds of services, she’s not only going to maintain her current clients; she’s going to attract new customers,” says Joe Mambretti, director of the International Center for Advanced Internet Research at North-western University. He points out that McCormick Place in early June hosted Supercomm, the world’s largest annual all-inclusive exhibition and conference for communications service providers and private network managers. The event used many advanced technologies, such as webcasting and high-definition broadcasting over IP networks.

Not Easy

Despite successes such as Barry’s, revenue-generating IT departments aren’t common, experts say.

Karnatz studied the trend as part of The ProfIT Research Initiative, a joint venture of Northern Illinois University and Technology Services Development Group.

Karnatz’s study identified some of the challenges of turning an IT department into a revenue-generating operation. He says most executives aren’t fully prepared for the organizational shift it requires. They don’t know how to gather and account for revenue, set up contracts and provide customer service to external customers.

The study also identified a continuum, Karnatz says. On one end were IT groups that were entirely internally focused; on the other end were IT departments operating as profit and loss centers. In between were departments becoming more strategic and supportive, moving toward a quasi- commercial model.

That’s exactly what Randy Smith discovered. As chief technology officer and associate professor of business admin-istration at the University of Virginia’s Darden School of Business in Charlottesville, Smith helped develop a suite of student-life applications. When officials demonstrated one of the appli- cations to other business school IT executives, they discovered a market for their homegrown systems.

Smith didn’t jump right in, though. He and other Darden leaders considered whether they would be selling away a competitive advantage. But Smith says he learned from American Airlines Inc., which in the 1950s developed SABRE, or Semi-Automated Business Research Environment, then the largest electronic data-processing system for business use. In the 1970s, American Airlines started marketing SABRE to travel agencies, and in the 1990s spun it off as its own company.

The Darden School followed a similar route, and in 1998, it licensed the first application under the name Darden Solutions. Smith says he sees this arrangement more as a consortium. Schools pay Darden an initial licensing fee as well as annual maintenance fees. In return, the IT staff - Darden Solutions employs 15 developers who are separate from Darden’s internal IT workers - works on installations, configurations, a help desk and user conferences. Darden Solutions also provides regular system improvements and worked on a $3 million investment in a second-generation product.

Today, 17 academic institutions, including 15 of the country’s top 30 business schools, use the product. Smith won’t disclose how much money the agreements generate, but he says that Darden wouldn’t have such high-quality applications without that extra cash.

“We decided we could have the best student systems by partnering this way,” he says. “This has been a successful venture, and it has value. And as we move forward, the university and school will continue to benefit.”