IT as a revenue center

The entrepreneurial spirit is alive and well in corporate IT. Here's how three IT organizations are making money for their companies -- and loving it

When the Security Benefit Group’s IT department hit the streets in 2004 to try selling a homegrown service to external customers, there was skepticism in the ranks. “I can’t say anybody believed we would actually make a sale,” CTO Brent Littleton says.

After developing a state-of-the-art contracts processing platform for internal use, Littleton and CIO Dave Keith had decided to see if they could sell extra capacity externally, potentially opening a lucrative new revenue stream for the company. But when word came that the first sale had been made, Littleton recalls: “It sent the IT department into shock.”

Two years later, the venture has become a full-blown technology services unit called se², with CIO Keith as president. The fast-growing division boasts several large Wall Street clients, including one that does more business with se² than with parent company Security Benefit. “There’s a renewed energy here,” Keith says. “The IT department is standing tall.”

Around the globe, there’s a new entrepreneurial spirit percolating in IT. Perhaps more a re-awakening — recall that the first high-profile money-making venture to emerge from an IT shop, the Sabre reservation system, was born decades ago.

The stars may be uniquely aligned today, however, for a resurgence of money-making ventures developed in IT. More products and services than ever have software at their core, playing to IT’s strengths. IT has grown closer to the business, affording a better view of market opportunities. Commodity projects are getting outsourced, freeing up development resources. And finally, entrepreneurship has become cool again, if not obligatory, for IT. (See also "How to know when to keep great ideas in-house or launch a startup.")

“There’s a lot more pull for innovation now,” says Forrester principal analyst Alex Cullen. “CIOs are getting dinged in their performance reviews for not being innovative enough. IT is saying we have to do more to help the business grow.”

Although most IT shops deliver innovations that support their company’s current products, Cullen notes, far fewer develop offerings that can be translated into new, monetizable revenue streams. Yet examples are cropping up everywhere, from Boeing to MasterCard to Harris Corp. The models vary, but it’s clear that more and more innovations born in IT are coming to market and generating new revenue.

Security Benefit Group: The New Business Unit
Security Benefit’s IT department didn’t set out to build a revenue generating product. Instead, in 2002, it was given the task of transforming the company’s legacy contracts processing system to support faster growth.

“We were your typical slow-moving insurance company,” CTO Littleton recalls. “It took a long time to get products out to the street, and we were spending 70 to 80 percent of our IT dollars on maintenance.”

The 650-employee provider of financial services and retirement plans for employers, founded in 1892, was running a traditional Amdahl and IBM mainframe environment, Littleton explains. Product rules were embedded right in the source code, requiring “massive coding changes” for any product modifications or introductions.

To support more ambitious growth, CIO Dave Keith led the internal development of a new paperless processing platform, based on a distributed Unix and Oracle environment, incorporating rules-based homegrown applications plus some third-party workflow and imaging toolsets.

“We were trying to meet customer demands, for example to provide data to the end customer the way they wanted to see it,” Keith explains. “But we were also able to put new products out in four months or less, versus over a year with the old system,” he adds. “We saw our cost per annuity contract drop as much as 50 percent even while transaction volumes went up 50 percent. We’d picked the right tools and architecture … it was a high-performance solution.”

By shutting down the legacy system and retiring 14 apps, Keith shrank IT from 140 to 80 people, freeing up more resources for innovation and cutting overall IT costs by 40 percent. More significantly, recalls Keith, even though Security Benefit was growing quickly, “The new infrastructure was barely breathing. …We had so much capacity and the processing was so fast it didn’t seem to stress at all.”

“We realized we’d done something really innovative,” Keith adds, explaining his decision to ask senior management for permission to try selling the internal processing capabilities to external customers — potentially, even Security Benefit competitors. “The company was looking for additional ways to bring revenue, and we knew in our industry that sooner or later others would get there. So the question was, ‘How do we take advantage of what we have now?’ ”

With the blessing of CEO Chris Robbins, who Keith explains “always says we should be thinking boldly and challenging norms,” IT in 2004 assembled a small group to assess the potential market and write a business plan. The team included such business-side experts as the head of the company’s service operation, “who had very good understanding of the processing we’d need to do,” Keith says. “Everybody saw it as good opportunity to explore, but nobody thought it was a no-brainer,” he recalls.

In 2004 the plan was approved and the company’s IT department became the se² business unit, including a team that went into the field to start selling. Today se², with 150 employees and Keith as president, maintains all IT services for Security Benefit, and offers an array of third-party contract and policy administration services to external customers, including servicing, call handling, back office and payment processing, pricing, compliance, document management and storage, and offshore workflow management.

With new clients on board, se² is now officially a success — administering $34 billion worth of contracts and policies, Keith notes, of which Security Benefit represents $16 billion. “We’re growing our non-Security Benefit business at a very rapid rate,” he adds.

Keith cites a few factors as critical to the venture’s success, including the initial burst of confidence and momentum than came from building the new platform. “IT rallied,” he says. “We realized the only way we were going to improve as an organization was if we took charge, took the accountability and fixed it. There’s a renewed energy now.”

Using IT staff to sell the new services rather than hiring others to sell it was also a good idea, Keith explains. And in 2002 the company realigned its service operations to report through IT, “so we started to see more collaboration and synergy, the two groups sort of blended together,” he adds.

However, “the largest challenge we were faced with was being willing to try something new,” Keith recalls. “Traditional insurance-based companies struggle with that. Money wasn’t a problem, there was a commitment on this from the board of directors on down. But we did it when the market was down, and stayed the course.”

Today, Keith says he challenges his team to constantly “look at other ideas or ways we could bring new solutions to the marketplace. We see our IT shop as a core competency — the group is empowered.”

Verizon: The New Internal Products Group
When Shaygan Kheradpir became president of e-business at Verizon in 2000, he realized that the traditional model in telecom — where R&D developed products and IT supported the back-office — was breaking down thanks to the Internet.

“It used to be that innovation would get cooked up in an R&D lab and then pushed to the customer,” Kheradpir says, “but that model was beginning to shift dramatically; lots of people with creativity could do stuff they couldn’t do before.”

Today, Kheradpir is Verizon’s CIO, and many of those creative people are on his 10,000-person-plus IT payroll. Although Verizon still has a large R&D department focusing on network infrastructure, the IT team has taken the lead in developing many new customer-facing products that leverage software and the Internet.

“We saw IT coming together with traditional networking, media, and entertainment,” Kheradpir says. “More and more of these products are coming out … MySpace, Second Life. People look at YouTube, for example, and they’re shocked — how did that happen? The customers are changing their habits fast because of connectivity and the power of the software. They expect you to bring innovation to life.”

In 2001, Verizon IT began its product development efforts, leveraging small entrepreneurial teams of developers, strategists, and UI designers who are responsible for pitching their own ideas, then helping take them to market. “Since there was no factory model for this, we said, ‘OK, let’s get in and see what we can do,’ ” Kheradpir recalls. “It’s grown every year.”

IT’s first product was the iobi connectivity suite for consumers and small businesses, which launched in 2003 and married the IP world with the public telephone network, synchronizing caller ID, IM, and address books across multiple platforms. Next came a hybrid consumer device called Verizon One consisting of a telephone, DSL modem, wireless router, and display screen for news and information. More recently, Kheradpir’s IT group has built a VoIP product, and contributed to the development of Verizon’s FiOS fiber optic video initiative and related DVR.

“The foundation of all these products is similar,” Kheradpir explains. “It’s pushing bits around all these different devices without you having to have an IT department in your home.”

Organizationally, Verizon’s IT product people sit side by side with IT teams that develop internal applications and support external products when they are launched (billing, provisioning, and so on). Yet Kheradpir explains that the product folks have “multiple DNA” — they not only understand software, communications, and service quality, but have “really honed their product development skills.”

“Everything that happens on the Internet, these guys tell us years in advance,” Kheradpir adds. “And they also understand that you can’t get my mother to set up a server in her home. … it’s just not gonna happen.”

The product teams are “very startup-driven,” Kheradpir explains, and people get onto them by surfacing a good idea, then prototyping and refining it until they’ve made the case to be pulled off their day job to work on it full time. Kheradpir recalls having lunch with a group of IT architects when they proposed the Verizon One concept. “They said we’re missing a big opportunity … we pay to ship all these DSL modems and people just put them in the closet. Had that employee not brought it up, we wouldn’t have this product.”

To bring products to market, the software-centric IT teams work closely with R&D to ensure network compatibility, as well as with Verizon’s marketing teams to determine features, pricing, and positioning, Kheradpir says. Product developers receive incentive compensation based not only on how many products are shipped, “but more importantly we want you to get rave reviews — customers liking the product.”

Verizon senior IT fellow Ruchir Rodrigues, who leads a 300-person product group within IT, says that the product effort has changed how marketing perceives IT. “As so many of these services become software based, it’s become a more productive and constructive cycle,” he says. “Instead of going to a vendor, they now come to IT first, and say, ‘What do you think about this? Is this something you want to build?’ ”

Kheradpir cites the ability to execute, plus having broad company support, as key success factors for product development within IT. “If the company isn’t behind it, if it isn’t material to their business plan, you’ll have some sparks but no light,” he says. “Not just the execs, but the employees who have to sell and support it every day. This is by far the No. 1 item.”

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He says he’s also learned that personal engagement and the encouragement of risk-taking by IT managers at all levels is crucial. He personally authors a video blog on Verizon’s intranet, carrying a video camera into the field to highlight products and ideas in all stages of development. “Product development by nature takes a lot of leadership, and has a lot of twists and turns,” he explains. “It’s fuzzy and chaotic. If you’re not in the innovation machine every day, it’s hard to nurture it. You’ve got to open up the black box, jump in it, and hold hands with everyone else.”

Vidus: The Spinoff
Although many products that come out of IT departments these days are platforms to support services, occasionally an application emerges that can be sold to a broader market as well. In the case of BT (formerly British Telecom), that application was a field-service support solution developed internally in the 1990s, then spun off as a company called Vidus — and recently sold to Fremont, Calif.-based @Road, which is marketing it globally.

Back in 1992, BT had about 30,000 field personnel in the United Kingdom and was struggling to determine how to manage them more efficiently, recalls Pol Sweeney, at the time a chief architect in BT’s IT department and now CTO of @Road. The field force’s cost was more than 800 million pounds sterling a year, says Sweeney, and needed to be reduced.

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