CIO —
By N. Dean Meyer
Many business leaders want to own their own IT groups. In other words, they advocate decentralization.
Most grant that corporate IT should be the sole provider of some infrastructure-based services like voice and data telecommunications, corporate applications hosting and e-mail. But they’ll adamantly cling to their decentralized applications developers.
What these business leaders may or may not know is that decentralization is costing them money, reducing quality and undermining corporate synergies that may be strategic. Furthermore, the benefits they feel they’re getting from decentralization can all be delivered by a healthy centralized (shared-services) IT department.
First, let’s understand why decentralization is so costly and reduces quality. Then, we’ll look at why people advocate decentralization, and how a corporate IT organization can address those root causes without decentralization.
The Costs of Decentralization
Decentralization increases costs and reduces quality for two reasons: reduced specialization and fragmentation.
Reduced specialization: When IT staff are scattered among the business units, they cannot specialize as much as they could within a consolidated IT function. For example, each business unit might have a small team of applications engineers to support its entire suite of financial systems. If those same staff were consolidated, they could specialize in data-objects and modules like receivables, payables, general ledger, tax, etc.
Specialists perform better than generalists. It’s that simple. They accumulate more experience in their specialty, and hence are more productive and produce better quality in less time. Furthermore, they keep up with the literature in their field better, enabling a better pace of innovation.
Also note that a greater degree of specialization provides more interesting career paths for technical professionals, attracting better people and motivating everyone to perform better.
Fragmentation: Fragmenting IT staff inevitably fragments systems. Where IT is decentralized, it’s not uncommon to find different financial, customer and procurement applications in each business unit.
When systems are fragmented, costs rise for many reasons. There’s duplication of efforts. Economies of scale are lost, affecting both infrastructure and software licensing. And bargaining power with vendors is diminished.
More insidious, corporate synergies are lost. For example, I once used an insurance company that decentralized its IT staff. One day, the company canceled the policy covering my vintage sports car, saying they were no longer interested in that type of business. What they didn’t consider was that I also used them to insure my other cars, my home, my personal liability umbrella and my company. Because their systems were fragmented, they saw a bunch of individual policies; they didn’t see me as a total customer with diverse needs. As a result, I moved all my insurance to another vendor.
Corporate synergies can be found in every external interface: customers, vendors, investors, regulators, media and the community. More subtle but still powerful, synergies can be attained through collaboration across business units in every functional area. In fact, the days of pure “holding companies” are over. Corporate leaders seek synergies across business units as fundamental to competitive differentiation. Fragmenting IT undermines these corporatewide strategies.
The costs of decentralization are explored in more detail in my book, Decentralization: Fantasies, Failings, and Fundamentals.
Why People Decentralize IT
