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Reading an article about how many IT divisions of big companies in Japan, became seperate companies. The motivation is apparently to turn them in profit centers. Can anyone explain how becoming a seperate company would be profitable for the original company?

Extract from article:

"Software development is a critically important part of the Japanese IT sector. The software developers can be categorized into three groups – Maker, User, and Independent System Integrator (so-called SIer). The Maker group consists of computer manufacturers and their subsidiary companies which provide total system solutions including software development and support as well as hardware. Representative companies are Fujitsu, NEC, Hitachi and IBM. Companies in the User group are former IT divisions which were spun off from parent “user” companies in order to transform themselves into profit centers from cost centers. Most of the large players in financial, manufacturing, and trading sectors keep vertical relationships with their IT subsidiary companies. "

Source: Evaluating The Strategic Implications Of Japanese IT Offshore Outsourcing In China And India

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  • $\begingroup$ It would be helpful to add a link to this article. $\endgroup$ – Bayesian Jun 6 '19 at 11:56
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The parent company pays (roughly) the same amount for IT services as it did before, but those payments are now counted as income for the spinoff company. It's mostly an accounting trick, although as Aidan O'Gara pointed out, the new spinoff may take on other clients and start to generate additional income that way.

Note that some companies use a form of internal currency to track inter-departmental services. In such situations, departments providing critical infrastructure (such as IT) can often build up a hefty surplus of this internal currency, which can sometimes be spent by managers on internal "perks" for employees (free meals in the company cafeteria, free transportation home from work in a company limo, etc.) I enjoyed such perks (working in a software support department as an otherwise low-paid intern) at a Wall Street firm in the 1990s. However, if such internal accounting is denominated in actual currency — as it was when I worked at a public university — then it can lead to flawed apples-to-oranges comparisons by some departments, in which they (incorrectly) believe it is cheaper to use an outside vendor rather than the institution's internal department, due to local optimization that ignores economies of scale or the needs of other departments.

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The next sentence in the article says "Some of those spin-offs expanded their business to get contracts with other companies." I imagine this is how they become profitable: rather than having an IT department strictly to serve your own company's needs, which is purely a cost, have it sell its services to many other companies, making it a profit center.

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