Don Jones

Tech | Career | Musings

Most companies of almost any size these days have several functions that are considered overhead. Now, it’s important to understand, from a business perspective, what “overhead” actually means.

The expenses of a business that are not attributable directly to the production or sale of goods or services.

For example:

  • Real estate (e.g., rent, property taxes, building maintenance, and so on)
  • Facilities (custodial services, you might drop building maintenance into this category; usually includes basic utilities like power and water)
  • Finance
  • Human Resources / Personnel
  • Legal

You get the idea. I’d argue that some of these shouldn’t be considered overhead in the usual sense. For example, you should be able to allocate some utilities, like power, to the production and sale of good or services.

I’ll point out that many, although not all, of these overhead items are in regulated industries. Finance (bookkeeping, at its simplest) is a highly regulated industry, and finance leaders will usually have a CPA – an industry-maintained license. HR is also highly regulated, and in fact spends more time dealing with regulations and laws than almost anyone else. Legal is obviously a highly regulated, independently licensed profession.

Which brings us to IT.

For most organizations, IT is considered overhead. That is, mainly due to lazy management and a lack of tools, the costs of IT aren’t allocated back to the goods or services that IT helps produce. Nor is IT allocated back to other overhead functions that consume IT.  IT is also almost completely unregulated in most industries/ There may be laws (HIPPA, SOX, GLB) that place certain restrictions and responsibilities on a company’s information-handling practices, but those don’t target IT specifically. IT has no professional licensing, just vendor-based certifications.

You can make much the same argument with other “overhead” functions, like HR. Most HR costs – payroll, benefits, etc – can be allocated on a per-person basis pretty easily, which means they can and should be allocated back to the cost of producing or selling goods or services.

So why all the overhead?

Simple: lazy management. It’s easier just to dump all of these functions into an “overhead” bucket than to spend the time allocating them out to individual business functions. But that lazy management means that, for some companies, these overhead functions account for the company’s biggest expenses. That’s like dividing your household monthly budget into “groceries,” “bills,” and “other.” Should you need to cut back, you really can’t do so intelligently without digging deeper into that “other” category.

Overhead categories encourage poor decision-making. In reality, absolutely everything IT does either directly leads to a sellable product or service, or directly supports someone who does. If you have any IT that doesn’t directly support a business function, you should get rid of it – but that’s hard to do when it’s all one big lump of “overhead.”

And that overhead is getting bigger. It’s also getting more diversified: storage, communications, virtualization, infrastructure, they’re all becoming increasingly specialized. And, because it’s all lumped into “overhead,” it’s difficult to determine if a particular function can be outsourced, moved to a cloud platform, etc. Simply making smart decisions about IT is difficult when you can’t tie cost and benefit back to a revenue-producing effort.

In the coming years, the companies that will do the best will be the ones who know exactly how every IT penny is being spent, and why. Not to micromanage that spend, but rather to maximize it in the places where it will contribute the most to revenue-producing activity. The companies most effective at doing this will be small and medium-sized businesses, and they’ll be the ones able to disrupt their much larger peers simply through smarter management and smarter allocation of resources. They’ll maintain better profit margins because they’ll have a better handle on expenses, and because they won’t settle for “overhead” anymore.

What could you do to encourage your organization’s leaders to start thinking of IT has an attributable cost of doing business, rather than as lump-sum overhead? Do you do any of that today?

 

 

 

 

%d bloggers like this: