IT leaders face a number of challenges within the enterprise, many of them driven by tight budgets or the perception of IT as a cost center. Budgets get cut while expectations stay steady or rise. Business units complain about their cost allocations, outsourcing or shadow IT is held up as an alternative, and infrastructure maintenance and innovation get short shrift.

Consultant Dean Meyer says the way to overcome the challenge is to run IT as a business within a business -- governing internal resources like a business, and communicating those costs in a way the rest of the enterprise can understand.

Dean Meyer

"IT provides products -- projects -- and services, just like any other business," Meyer says. "It 'sells' those products and services, whether or not money changes hands, to clients in the business."

Drawing from his book, Internal Market Economics, Meyer discusses how IT can shift to better manage resources and expectations, and, as a business within a business, better communicate and collaborate with the rest of the enterprise.

Q: How do market economics apply to a shared services function like IT?

Dean Meyer: The old way of thinking is this: We give IT a fixed budget to pay planned costs (compensation, vendor services, training, etc.); and in trade for that, we expect them to supply everything we need and want -- infinite demand with fixed resources! That can't work.

So thinking like a business, let's turn this paradigm around. We're not given money to pay our costs. We get money when customers buy our products and services. The revenues from those sales give us the money to pay our costs.

Q: That's clear when IT is fee-for-service, but what about direct budgets and allocations?

DM: Think of budgets and allocations as pre-paid revenues -- money put on deposit with you to buy your services throughout the year. Those pre-paids form a checkbook that belongs to the business (until you earn it); so business leaders get to decide what checks to write. No doubt 70 or 80 percent of that checkbook will go to keeping the lights on. Then clients invest the rest in discretionary projects and services through the year. With this paradigm, we can implement market economics without actual chargebacks.

Q: How does this help IT manage clients' expectations?

DM: Clients know how much is in their checkbook, and what things cost. It's up to IT to be the best deal in town. But it's up to the business to pay for what they get, and to manage demand and live within their means. At the end of the day, all IT's commitments have to be funded by one channel of revenue or another.

Q: How does this align IT with the business?

DM: Clients buy what they most need, and do without lower-payoff services. Alignment is virtually automatic.

Q: If you want IT to be the source for cloud, what should you do?

DM: Bureaucrats manage the resources they've been given; entrepreneurs manage businesses. When you're running a business, if a customer wants something and is willing to pay, you provide it.

Customers decide the what; suppliers decide the how. If the best way to provide the service is not to "make" it but to "buy" via external cloud, you should be the first to offer it. In that sense, every vendor and contractor in the world is part of your team. If you follow the business-within-a-business model, the only constraint on your ability to deliver is your customer's ability to pay.

Q: What does IT need to do to implement this paradigm?

DM: First, forget about allocating your cost to the business. Remember, you don't pay the grocery store for its rent, electricity, and check-out clerk; you pay for products. So the first step is, like any store -- and like cloud vendors -- you need a catalog of your products and services with rates.

Q: How will internal market economics affect the way we budget?

DM: An "investment-based budget" forecasts the costs of what you plan to sell, not just what you plan to spend. Then, your clients in the business can defend your budget, because they need your services. And executives can look at your proposed deliverables, and base budget decisions on the needs of the business and the investment opportunities at hand. As a bonus, you leave the budget process with a crystal-clear definition of what the budget does and does not pay for, which takes care of the problem of expectations exceeding resources.

Q: How does this affect your culture and organizational structure?

DM: It's absolutely transformational. Managers begin to think like entrepreneurs, running their own businesses within a business. Each has his or her own catalog and rates, and is expected to remain competitive and stay up to date. And they're expected to deliver on every funded sale.

It also clarifies your organization chart by forcing your managers to define which business each of them owns. This brings real focus to jobs, and highlights overlapping boundaries where the same product is sold by more than one group.

Q: How does this approach help IT be a better strategic partner to the business?

DM: Great partnerships are not built on shared authorities and accountabilities, each meddling in the other's decisions, and no one clearly accountable for individual results. The best partnerships are based on respectful customer-supplier relationships, with clear individual accountabilities and authorities, and yet still an understanding that each needs the other to succeed.

The business-within-a-business paradigm, implemented through internal market economics, clarifies relationships; empowers clients to decide what they buy from IT, aligning IT with their priorities; empowers IT's entrepreneurs to run viable businesses, investing in sustainability; establishes clear and realistic expectations so that IT doesn't disappoint its customers for lack of resources; and induces mutual respect without muddled accountabilities.

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