28 December 2022

tl;dr: The recent collapse of Southwest Airlines' operations that forced them to cancel 2/3 of all of their flights across the country, which current analysis suggests was due to "outdated IT systems" (specifically their employee-scheduling system), reminded me of a conversation over dinner with some speaker-friends a few years back. Companies can be classified into two categories: Those that view IT as a "cost center", and those that view IT as a "competitive advantage". How do you see the difference, and if you're a part of management, how do you influence the outcome?

Cost centers

For those unfamiliar with the terms, the official definition of term "cost center" is "a department or other unit within an organization to which costs may be charged for accounting purposes." This is frequently the case for internal (enterprise) IT software development teams, who "bill" other departments for development of projects that those other departments are looking to have built. More importantly, these organizations often don't add directly to the company's income or profits, which then leads to some less-than-ideal implications.

For example, if the Accounting department needs some custom software built to help track costs and an off-the-shelf solution doesn't work, it's pretty common for Accounting to "hire" a team from the IT department to build that software and "pay" for it out of their budget. Since this new Accounting software won't really add any new lines of income to the company, or grow an existing line of income, the only "measurable metric" for the IT department is how much it draws away from the income--in other words, how much does it cost? And if more cost is bad, then the natural growth/improvement approach here is to look for ways to minimize costs.

That statement is dangerous.

On the surface of things, sure, it makes sense to minimize costs--if my team can get a project done faster, then we cost less and all is good. Of course, because there is no countervailing metric by which to measure the quality or effectiveness of the project, it becomes something of a runaway metric: We can cut costs by reducing the amount of work we do, or by paying more junior people less to do it, or even by removing people entirely! This approach works all the way up until Accounting complains about it, at which time we can take on a new project with them to address the issue. Our metrics look good: we cut our costs down, and we got a follow-up project out of it.

Internal accounting like this leads to some really screwed-up results sometimes, particularly for those companies that insist on being "metrics-facing" or "data-driven".

(Yes, I know Amazon right now is strong on using data to drive their decisions, and everybody loves them for it--and yet, "data-driven" was a thing twenty years ago, too, and it was a synonym for "metrics-facing", and it led to the kinds of results I just described.)

Competitive advantage

If your IT department is a "competitive advantage", it means your IT department is at the forefront of how the company is able to accomplish things that other companies can't (or can't as quickly). Rocket Mortgage, for example, was the first mortgage lender to put the mortgage application process on a website, thus opening up a whole new line of income for the company. Those of you readers who are about 30 or older probably remember a time when flying a commercial flight meant arriving at the airport, going to the airline counter, giving your name and ID, and receiving printed boarding passes before going through security. Then an airline realized that the process of verifying the ID and the name and printing the boarding pass could be done by a kiosk. Then another airline realized that it didn't really require being in the airport to do that, and boarding passes could be printed ahead of time on your own computer and printer. Then yet another airline realized that you didn't even need the paper, and the "airline app" was born, using QR codes and scanners to let you on the airplane.

By the way, it should be pretty obvious that the first company to do something like this has a competitive advantage; by the time the third or fourth competitor in the same space does it, it's table stakes--it would be a significant missing feature if they didn't have that feature. Imagine being the airline today that requires printed boarding passes available only at the airline counter.

The point here is that these approaches and these strategies are never static--today's "IT as a cost center" company is yesterday's "IT is a competitive advantage" company, and vice versa. Consider: after building the website to start mortgage applications, what has Rocket Mortgage done to leverage IT as an advantage? Delta was the first to roll out their "Fly Delta" app, but aside from piling more features into the app (airport maps, access to in-flight entertainment options, tracking frequent-flier status, and so on), what else can the airline's IT group do to hold an advantage over their competitors? (Answer: I was recently on a Delta flight where the in-flight monnitors had Bluetooth, meaning for the first time I didn't have to use my corded Bose speakers to watch a movie. Smooth.)

Life wasn't always smooth for Delta's IT. They've clearly made a strong effort to redress that, and use IT as a differentiating factor from their competitors.

Take careful note that being a "competitive advantage" company doesn't always mean not having legacy systems--Delta still uses some of the some infrastructure that all the airlines share, and always will. Lots of banks still use the COBOL-based mainframes to exchange electronic records that maintain the accounts between them. This hasn't stopped Chase from having apps that allow you to deposit checks using your mobile phone's camera, however.

Knowing the difference

The real key is, where are your IT projects coming from, and where are they going? If your project is customer-facing, there's a strong chance it's going to be in "competitive advantage" territory... but not always. If a project is to replace a legacy system whose functionality growth has stagnated, that can in turn unlock some new features and/or speed of execution that would be impossible to achieve with the legacy system. And not all internal-facing projects are "cost center" candidates; building a platform that allows the company to more quickly and easily integrate with their supply chain, for example, can help speed the delivery of product to customers, and/or open up new sales opportunities or options or products.

The bigger question is, as it so often is in business, what is the company's strategy around this? If the project aligns with the company's overall strategy, then it is likely to be a competitive advantage project. If it doesn't, it's probably falling into the "cost center" bucket.

Ironically, just about anything can be a competitive advantage within a company. Those companies that really go above and beyond to take care of their employees often see a significant competitive advantage from doing so. Those that invest into their infrastructure often see it pay off when the investment creates resiliency that their competitors lack, and allow them to keep going when something disastrous strikes. For many years, for example, the key competitive advantage McDonald's had (and arguably still does) was the heavy degree of investment into their supply chain, which helps them isolate against supply-chain shocks. (Which I think, in late 2022, we can all better appreciate the need to consider.)


Southwest pretty clearly considered its IT to be a "cost center", which doesn't surprise me in the slightest, given both the fact that they've not really used IT as a competitive advantage anywhere in their execution. (Ironically, Southwest used to be one of those companies that invested heavily into their employees, and still might, but that's a different discussion for a different day.)

Note that the people running Southwest are not stupid--if somebody had come to them a year ago and said, "You are going to have to cancel 2/3 of your entire flight catalog for several days if you don't fix this scheduling system", they would have immediately made that project a top priority. But that's still a cost-center mentality, because they would be comparing the cost of that project against the cost of those cancellations (which has a pretty clear winner). But in the absence of something to compare the cost of that project against, a cost center mentality says "let's not incur the cost" and postpones it or duct-tapes it or addresses only the most critical flaws. Which, then, leads us to a system that is only marginally able to resist a system-wide shock.

Like the "Blizzard of 2022". Or the "Pandemic of 2020". Or the "Server Fire of 2016". Or ....


Note that one of the reasons companies often don't engage in exercises of IT competitive advantage is that it can be so damn expensive to do so. Given that any non-trivial software project can take a team of five or more upwards of nine to twelve months before something tangible is able to be rolled out for people (customers or otherwise) to start using, you're looking at a pretty large bet on something that--if truly innovative--has no guarantees of actually yielding anything more than a yawn (or worse, a new legacy system that has to be maintained).

If you're an IT manager or organization head, then, your goal is to find ways to enable IT teams to be able to get something up to a usable state as quickly as possible--the traditional "Lean MVP"--so that the business can find out if this is something that will "move the needle" for the company or not. Part of that means putting some infrastructure in place to enable that fast development--what we now refer to as a "platform". Build your platform to allow for people to innovate on it, and they will.

And the next thing you know, suddenly, your IT team is in the "competitive advantage" side of the ledger.

Tags: industry   languages   management   strategy  

Last modified 28 December 2022