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IT Moves from SGA to COGS

Bernard Golden | March 18, 2016
Accounting – or, more accurately, IT finance – is undergoing just as dramatic a shift as the reset of IT, and with good reason.

For anyone in the tech industry, these are the best of times and the worst of times. As I noted in my last piece, we are in a period of tremendous innovation, but also one of enormous dislocation, brought on the upheaval of technology disruption. 

I addressed the changing role of IT in that piece, noting four key tenets that will drive IT organizations’ role over the next decade: 

  • Software is eating the world
  • Open source is eating the technology industry
  • No enterprise is Netflix, or ever will be
  • Helping enterprises become software companies via the use of open source is the opportunity of the next decade 

This transition in IT’s role can be summarized in this phrase: IT is changing from "support the business" to "be the business." Obviously, this imposes tremendous change upon IT – from the kind of applications IT builds to the way they’re built, the people and skills used to build and operate them, and even the kinds of business partnerships and customer relations the company at large will carry on. 

There’s one other aspect of this role shift that needs to be addressed. It’s one that typically considered as quite boring. It goes by the name of accounting, or, if you want to gussy it up a bit, IT finance. Simply put, how should the work that IT does in this new “be the business” world be accounted for? 

Traditionally, IT has been lumped into the Sales, General and Administrative expense category. These are unavoidable expenses necessary for a company to function – consider the cliché (typically proclaimed quite loudly by salespeople) that “Nothing happens until someone sells something.” 

Notwithstanding their essential requirement, SGA costs detract from company profitability. Consequently, most firms seek to squeeze SGA costs, looking for ways to reduce the amount of money spent there. 

Those who have worked in enterprise IT organizations certainly recognize this phenomenon. Endless budget trimming, outsourcing, inability to meet strong talent salary demands – these are all familiar signs of an organization viewed as a cost center delivering nothing but commodity services. 

Here’s the thing, though: given the changing role of IT, relegation to the arid SGA climate is no longer necessary; truthfully, continuing to view IT as an SGA cost center runs the risk of failing to support that changing role. 

In fact, in a cloud world IT is changing to a COGS (Cost of Goods Sold) role, and it’s vital to understand why, and how IT organizations – and businesses – should respond. 

First, and most obviously, IT functionality is now a core part of most products and services. That means IT costs are part of the overall cost of a product or service. From an accounting perspective, it’s important that product/service costs are assigned appropriately. Calculating the profitability of a modern product or service while placing its IT costs inside of SGA would be like Ford calculating the profitability of an auto without assigning manufacturing cost to the overall cost of the product. 

 

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