22 ms·

The Cost Center Trap

128 points by nikolasavic 9y ago

bluetwo 9y ago
A good read. I believe the basics (internet, email, connectivity) of IT infrastructure should be a cost center, development of tools that assist the company in accomplishing their goals should not be.
rm_-rf_slash 9y ago
The given “best” solution - change accounting/metrics - is also one that is most difficult to meaningfully change. Everybody has a disagreement with metrics until it suits them. Metrics justify mid-level management to upper management, which then justify themselves to top management, then the board of directors, then the shareholders. “Look at the numbers!” It’s similar to a grumbling slogan of fund managers in the 1980s about the then-consistently poor stock performance of IBM: “Nobody gets fired for buying Big Blue.”
- mark-r 9y ago
  I've always heard that phrase used in reference to IBM products, never IBM stock.
stcredzero 9y ago
Let’s face it, unless there are mitigating circumstances, IT departments that started out as cost centers are going to remain cost centers even when the company attempts a digital transformation AWS and the Google Cloud are evidence of the possibility of escape. Are there any writeups for how they came about? (Particularly in the case of AWS.)
- rm_-rf_slash 9y ago
  I don’t know any write ups, but in short, AWS was a solution to the variable demand for Amazon’s, well, web services. Demand peaked considerably during holiday shopping months but otherwise remained far too low to justify keeping all of those peak demand servers running Amazon.com full time, so they were rented out to companies that actually had similar problems of peak demand. In particular, the Victoria’s Secret fashion show is a great example of extreme peak demand and scalability for a web service that otherwise attracts relatively little traffic most of the year.
  - wallflower 9y ago
    Origin of AWS is quite famous. https://news.ycombinator.com/item?id=12022915 https://news.ycombinator.com/item?id=12022915 Yegge's famous rant about Bezo's 2002 mandate https://plus.google.com/+RipRowan/posts/eVeouesvaVX https://plus.google.com/+RipRowan/posts/eVeouesvaVX
- user5994461 9y ago
  They came about because any fortune 500 has thousands of developers and critical software to run and they have to manage the hardware to run it. You will find an in house equivalent of the cloud in every single big company. Except, the software and the UI will be terrible because they have much less resources and competence than Amazon/Google.
deleted 9y ago
[deleted]
chasedehan 9y ago
This whole thing goes back to the accounting process of measuring "throughput" rather than some fixed number such as inventory. This book "The Goal" was incredibly beneficial for me in understanding the concept of throughput. While the book is a parable focused on manufacturing, it can be easily applied to companies in tech. https://www.amazon.com/Goal-Process-Ongoing-Improvement/dp/0884270610 https://www.amazon.com/Goal-Process-Ongoing-Improvement/dp/0...
- Jtsummers 9y ago
  That book is next on my reading list, but also worth checking out is "The Phoenix Project". It applies the concepts of "The Goal" to IT (operations to start, but it gets extended to development through the book). https://www.amazon.com/Phoenix-Project-DevOps-Helping-Business/dp/0988262592 https://www.amazon.com/Phoenix-Project-DevOps-Helping-Busine...
  - konpikwastaken 9y ago
    Was just going to recommend reading this book, glad someone did already. Being in tech/IT, you will be able to identify each of the characters in your work environment at one point or another.
    - Jtsummers 9y ago
      One of the best things about reading these books, IMO, is that I finally have the vocabulary to speak to management. Before I'd say the exact same thing, but I didn't know they had a term for what I wanted (value stream maps, for instance) and we couldn't communicate. Now that I can speak in management terms, they're listening to my inputs because we understand each other.
- cjalmeida 9y ago
  Eli Goldratt is an unsung hero of modern management practice. Though the Goal is his most famous work, his other books are pretty useful. And like this throughput accounting thing, his ideas can be quite heretic in some circles.
sidlls 9y ago
I'm not sure many IT functions are not cost center functions. Almost none of them, including software development, are revenue drivers for most companies. Like anything else in business this seems like a case where some hard, one size fits all rule is occasionally misapplied.
- cm2012 9y ago
  It's not a clear profit center like sales or direct marketing. But if you can clearly point to good engineering work leading to more sales (release happens, it's really good, lots of people buy the product clearly because of the good work) then it's more on the profit than cost side of the spectrum. It's really just a matter of how easily can you see that A led to B.
  - kgwgk 9y ago
    > release happens Release of what?
    - selllikesybok 9y ago
      From the context? A hypothetical next release of a software product.
    - cm2012 9y ago
      What selllikesybok said.
      - kgwgk 9y ago
        The discussion is about IT being considered a cost center for companies in other industries like banks, car manufacturers, restaurants, airlines, etc.
        cm2012 9y ago
        A bank can release a new well made app that lets people apply for mortgages easier, which gets them 10% new mortgages worth $100 billion, which can easily be tracked back to the dev team that made this amazing app.
rat_1234 9y ago
"However, accounting systems count inventory as an asset, so and any significant reduction in inventory had a negative impact on the balance sheet...successful JIT efforts tended to make senior managers look bad" This shows a poor understanding of managerial accounting. High "working capital" requirements, of which inventory is a big part, are a huge drain on free cash flow. Any company that sees its inventory as a % of assets go DOWN would view it as a positive by both its management and investors.
- bluGill 9y ago
  You are confusing what the business leaders of today think with what they thought in the 1920s. In the 1920s and before nobody could think of a reason why large inventories would be bad: they were a buffer against surges in demand, and you got to build them at today's prices. A large inventory just meant you need to hire more salesmen (literally men, it was a sexist time), and/or hold a sale. Of course now management theory knows of many reasons the above is wrong, it is entirely accepted that you want inventories low because of the advantages it brings.
  - kgwgk 9y ago
    The article is talking about the 80’s, not the 20’s. The importance of working capital management was well understood by then.
    - bluGill 9y ago
      In the 1980s it was well understood in universities. However senior management in real companies were catching up. Some companies understood at and were executing well (mostly Japanese companies who started early). other companies had figured out how important it was, but were still trying to figure out how to apply it. Other companies were just waking up to the fact that their competition doing something else was beating them, without knowing why.
  - bsder 9y ago
    > it is entirely accepted that you want inventories low because of the advantages it brings. Advantages ... until you have an earthquake in Taiwan and the entire semiconductor industry shuts down because nobody has any inventory ...
gaius 9y ago
The "cost centre" concept is so silly, and it only ever seems to be applied to the IT department. Why isn't HR a "cost center"? They don't generate any revenue. Why isn't Accounting a cost centre? How many sales do they bring in? It's just a stick other departments use to beat IT with.
- kgwgk 9y ago
  Why do you think they are not considered cost centers?
- Jtsummers 9y ago
  Sometimes they are, that's why HR and Accounting get outsourced at many companies (or portions of them). See what companies outsource, that's what they see as cost centers.
- draw_down 9y ago
  > The "cost centre" concept is so silly, and it only ever seems to be applied to the IT department That isn't true, and this comment is weirdly defensive. HR and accounting are considered cost centers too.
- selllikesybok 9y ago
  They are, actually. All your operationally necessary but not directly revenue generating business units/functions are cost centers, in this model. And they get beaten with the same stick.
- disease 9y ago
  R&D, in my experience, is viewed even more harshly than IT as a cost center.
dsign 9y ago
Don't see the point of this article. There are accounting mechanisms that allow to activate money put into IT infrastructure as an asset in the balance sheet, at least in my cold and dark part of the world. Some IT expenses are indeed cost centres and should be just deducted from the profits immediately. However, other "IT expenses", like creating "back office cost reduction software" and generally IT infrastructure are no different than acquiring some fancy machinery that enhances an industrial process. This also applies to companies whose main revenue model is building software and cloud services.
- jdlshore 9y ago
  The point of the article is "accounting metrics drive company culture, which leads to damage." It's an important point that senior-ish managers need to understand.
NTDF9 9y ago
This is why employees of "cost centers" should just go on occasional strikes. Just don't work for 3 days, let the execs understand what the cost is of not having these "cost centers".
tboyd47 9y ago
This is a really profound point about software. The ironic thing is that this "cost-center culture" has even affected the mindset of individual software developers and how we think of our own work. Most developers ONLY look at their work in terms of cost. ALL pros and cons arguments are really about ways to reduce cost. Consider the term "tech debt" -- nothing could be clearer. Yet discussions rarely ever take place among engineers at a company about how to maximize profit or increase revenue. In fact, I would argue there is a heavy cultural bias on most engineering AGAINST optimizing for revenue, as it is seen as something that motivates sales or product people to rush timelines and sabotage sound engineering practices. The obsession with cost is baked into programmer culture in such a deep and foundational way, I'm skeptical will ever change, even if the accounting of software projects changes. If you perform a search for the word "cost" on the eBook for the Principles of Object-Oriented Design in Ruby by Sandi Metz, you will find it dozens of times in various sentences about the urgency and critical importance of reducing costs, but the words "profit," "income," or "revenue" appear not even once. I'm not trying to make a point about POODR in particular, because this bias is only reflective of the culture as a whole. You can certainly make the argument that it has to be that way, and engineering should be separated from revenue. I find it very interesting that, as a culture, we are only willing to speak about the monetary value of our work in negative terms.
- deleted 9y ago
  [deleted]
- paulddraper 9y ago
  That's not specific to software at all. Talk to any electrical, mechanical, or civil engineer and they will be focusing on getting this on time and under budget, not trying to increase "income" or "revenue".
  - HeyLaughingBoy 9y ago
    It's far more prevalent in software though. Those other fields realize that incurring any technical debt is going to involve very expensive repayment. One of Boehm's "fundamental problems of software" is that it's so easy to change, that it's easy to assume that you can always change it later at no cost. This is really why the problem is far greater in software.
CamTin 9y ago
Does anyone know of any further reading about how "software capitalization" works, with the audience of either a layman or somebody who is only cursorily familiar with real double-entry accounting? Also, do these rules vary significantly by country? It seems like the right way of accounting for software will be a huge structural advantage for countries as software becomes and increasing percentage of the value produced by the world economy.
pixelmonkey 9y ago
IT being a cost center at a modern information/product company is similar to doctors being a cost center for a hospital. Only a deranged accountant thinks the cost center is the scarce talent that delivers outsize customer value, and that the profit center is the back-office filled with billers who "monetize" a relationship that wouldn't otherwise exist. In tech, this flipped around in 2004-2008, I think. From 2001-2004, people thought IT was "over". Now, they realize software is "eating the world". I am hopeful a similar realization will eventually come to medicine. Doctors deserve Google-style work perks and competition for their scarce talent. Insurance, back-office, and billing deserve to be turned into the AWS of medicine -- outsourced commodity.
- Hextinium 9y ago
  I think it will actually reverse in the coming years ( 2-3 decades ) as the education programs that mold programers over compensate for supply and people in medical fields decrease to where they are valued again.
uiri 9y ago
patio11 covered this in his career advice article.[0] I read that article around the time it was first published. The tidbit about cost centers and profit centers has stuck with me since. I have, for the most part, been able to avoid being attached to a cost center. Primarily by working at "tech" companies rather than more conventional companies which put software engineers in "IT" departments. [0] http://www.kalzumeus.com/2011/10/28/dont-call-yourself-a-programmer/ http://www.kalzumeus.com/2011/10/28/dont-call-yourself-a-pro...

128 points by nikolasavic 9y ago

A good read. I believe the basics (internet, email, connectivity) of IT infrastructure should be a cost center, development of tools that assist the company in accomplishing their goals should not be.

rm_-rf_slash 9y ago

The given “best” solution - change accounting/metrics - is also one that is most difficult to meaningfully change. Everybody has a disagreement with metrics until it suits them. Metrics justify mid-level management to upper management, which then justify themselves to top management, then the board of directors, then the shareholders. “Look at the numbers!” It’s similar to a grumbling slogan of fund managers in the 1980s about the then-consistently poor stock performance of IBM: “Nobody gets fired for buying Big Blue.”

mark-r 9y ago
I've always heard that phrase used in reference to IBM products, never IBM stock.

stcredzero 9y ago

Let’s face it, unless there are mitigating circumstances, IT departments that started out as cost centers are going to remain cost centers even when the company attempts a digital transformation AWS and the Google Cloud are evidence of the possibility of escape. Are there any writeups for how they came about? (Particularly in the case of AWS.)

rm_-rf_slash 9y ago
I don’t know any write ups, but in short, AWS was a solution to the variable demand for Amazon’s, well, web services. Demand peaked considerably during holiday shopping months but otherwise remained far too low to justify keeping all of those peak demand servers running Amazon.com full time, so they were rented out to companies that actually had similar problems of peak demand. In particular, the Victoria’s Secret fashion show is a great example of extreme peak demand and scalability for a web service that otherwise attracts relatively little traffic most of the year.
- wallflower 9y ago
  Origin of AWS is quite famous. https://news.ycombinator.com/item?id=12022915 https://news.ycombinator.com/item?id=12022915 Yegge's famous rant about Bezo's 2002 mandate https://plus.google.com/+RipRowan/posts/eVeouesvaVX https://plus.google.com/+RipRowan/posts/eVeouesvaVX
user5994461 9y ago
They came about because any fortune 500 has thousands of developers and critical software to run and they have to manage the hardware to run it. You will find an in house equivalent of the cloud in every single big company. Except, the software and the UI will be terrible because they have much less resources and competence than Amazon/Google.

deleted 9y ago

[deleted]

chasedehan 9y ago

This whole thing goes back to the accounting process of measuring "throughput" rather than some fixed number such as inventory. This book "The Goal" was incredibly beneficial for me in understanding the concept of throughput. While the book is a parable focused on manufacturing, it can be easily applied to companies in tech. https://www.amazon.com/Goal-Process-Ongoing-Improvement/dp/0884270610 https://www.amazon.com/Goal-Process-Ongoing-Improvement/dp/0...

Jtsummers 9y ago
That book is next on my reading list, but also worth checking out is "The Phoenix Project". It applies the concepts of "The Goal" to IT (operations to start, but it gets extended to development through the book). https://www.amazon.com/Phoenix-Project-DevOps-Helping-Business/dp/0988262592 https://www.amazon.com/Phoenix-Project-DevOps-Helping-Busine...
- konpikwastaken 9y ago
  Was just going to recommend reading this book, glad someone did already. Being in tech/IT, you will be able to identify each of the characters in your work environment at one point or another.
  - Jtsummers 9y ago
    One of the best things about reading these books, IMO, is that I finally have the vocabulary to speak to management. Before I'd say the exact same thing, but I didn't know they had a term for what I wanted (value stream maps, for instance) and we couldn't communicate. Now that I can speak in management terms, they're listening to my inputs because we understand each other.
cjalmeida 9y ago
Eli Goldratt is an unsung hero of modern management practice. Though the Goal is his most famous work, his other books are pretty useful. And like this throughput accounting thing, his ideas can be quite heretic in some circles.

sidlls 9y ago

I'm not sure many IT functions are not cost center functions. Almost none of them, including software development, are revenue drivers for most companies. Like anything else in business this seems like a case where some hard, one size fits all rule is occasionally misapplied.

cm2012 9y ago
It's not a clear profit center like sales or direct marketing. But if you can clearly point to good engineering work leading to more sales (release happens, it's really good, lots of people buy the product clearly because of the good work) then it's more on the profit than cost side of the spectrum. It's really just a matter of how easily can you see that A led to B.
- kgwgk 9y ago
  > release happens Release of what?
  - selllikesybok 9y ago
    From the context? A hypothetical next release of a software product.
  - cm2012 9y ago
    What selllikesybok said.
    - kgwgk 9y ago
      The discussion is about IT being considered a cost center for companies in other industries like banks, car manufacturers, restaurants, airlines, etc.
      - cm2012 9y ago
        A bank can release a new well made app that lets people apply for mortgages easier, which gets them 10% new mortgages worth $100 billion, which can easily be tracked back to the dev team that made this amazing app.

rat_1234 9y ago

"However, accounting systems count inventory as an asset, so and any significant reduction in inventory had a negative impact on the balance sheet...successful JIT efforts tended to make senior managers look bad" This shows a poor understanding of managerial accounting. High "working capital" requirements, of which inventory is a big part, are a huge drain on free cash flow. Any company that sees its inventory as a % of assets go DOWN would view it as a positive by both its management and investors.

bluGill 9y ago
You are confusing what the business leaders of today think with what they thought in the 1920s. In the 1920s and before nobody could think of a reason why large inventories would be bad: they were a buffer against surges in demand, and you got to build them at today's prices. A large inventory just meant you need to hire more salesmen (literally men, it was a sexist time), and/or hold a sale. Of course now management theory knows of many reasons the above is wrong, it is entirely accepted that you want inventories low because of the advantages it brings.
- kgwgk 9y ago
  The article is talking about the 80’s, not the 20’s. The importance of working capital management was well understood by then.
  - bluGill 9y ago
    In the 1980s it was well understood in universities. However senior management in real companies were catching up. Some companies understood at and were executing well (mostly Japanese companies who started early). other companies had figured out how important it was, but were still trying to figure out how to apply it. Other companies were just waking up to the fact that their competition doing something else was beating them, without knowing why.
- bsder 9y ago
  > it is entirely accepted that you want inventories low because of the advantages it brings. Advantages ... until you have an earthquake in Taiwan and the entire semiconductor industry shuts down because nobody has any inventory ...

gaius 9y ago

The "cost centre" concept is so silly, and it only ever seems to be applied to the IT department. Why isn't HR a "cost center"? They don't generate any revenue. Why isn't Accounting a cost centre? How many sales do they bring in? It's just a stick other departments use to beat IT with.

kgwgk 9y ago
Why do you think they are not considered cost centers?
Jtsummers 9y ago
Sometimes they are, that's why HR and Accounting get outsourced at many companies (or portions of them). See what companies outsource, that's what they see as cost centers.
draw_down 9y ago
> The "cost centre" concept is so silly, and it only ever seems to be applied to the IT department That isn't true, and this comment is weirdly defensive. HR and accounting are considered cost centers too.
selllikesybok 9y ago
They are, actually. All your operationally necessary but not directly revenue generating business units/functions are cost centers, in this model. And they get beaten with the same stick.
disease 9y ago
R&D, in my experience, is viewed even more harshly than IT as a cost center.

dsign 9y ago

Don't see the point of this article. There are accounting mechanisms that allow to activate money put into IT infrastructure as an asset in the balance sheet, at least in my cold and dark part of the world. Some IT expenses are indeed cost centres and should be just deducted from the profits immediately. However, other "IT expenses", like creating "back office cost reduction software" and generally IT infrastructure are no different than acquiring some fancy machinery that enhances an industrial process. This also applies to companies whose main revenue model is building software and cloud services.

jdlshore 9y ago
The point of the article is "accounting metrics drive company culture, which leads to damage." It's an important point that senior-ish managers need to understand.

NTDF9 9y ago

This is why employees of "cost centers" should just go on occasional strikes. Just don't work for 3 days, let the execs understand what the cost is of not having these "cost centers".

tboyd47 9y ago

This is a really profound point about software. The ironic thing is that this "cost-center culture" has even affected the mindset of individual software developers and how we think of our own work. Most developers ONLY look at their work in terms of cost. ALL pros and cons arguments are really about ways to reduce cost. Consider the term "tech debt" -- nothing could be clearer. Yet discussions rarely ever take place among engineers at a company about how to maximize profit or increase revenue. In fact, I would argue there is a heavy cultural bias on most engineering AGAINST optimizing for revenue, as it is seen as something that motivates sales or product people to rush timelines and sabotage sound engineering practices. The obsession with cost is baked into programmer culture in such a deep and foundational way, I'm skeptical will ever change, even if the accounting of software projects changes. If you perform a search for the word "cost" on the eBook for the Principles of Object-Oriented Design in Ruby by Sandi Metz, you will find it dozens of times in various sentences about the urgency and critical importance of reducing costs, but the words "profit," "income," or "revenue" appear not even once. I'm not trying to make a point about POODR in particular, because this bias is only reflective of the culture as a whole. You can certainly make the argument that it has to be that way, and engineering should be separated from revenue. I find it very interesting that, as a culture, we are only willing to speak about the monetary value of our work in negative terms.

deleted 9y ago
[deleted]
paulddraper 9y ago
That's not specific to software at all. Talk to any electrical, mechanical, or civil engineer and they will be focusing on getting this on time and under budget, not trying to increase "income" or "revenue".
- HeyLaughingBoy 9y ago
  It's far more prevalent in software though. Those other fields realize that incurring any technical debt is going to involve very expensive repayment. One of Boehm's "fundamental problems of software" is that it's so easy to change, that it's easy to assume that you can always change it later at no cost. This is really why the problem is far greater in software.

CamTin 9y ago

Does anyone know of any further reading about how "software capitalization" works, with the audience of either a layman or somebody who is only cursorily familiar with real double-entry accounting? Also, do these rules vary significantly by country? It seems like the right way of accounting for software will be a huge structural advantage for countries as software becomes and increasing percentage of the value produced by the world economy.

pixelmonkey 9y ago

IT being a cost center at a modern information/product company is similar to doctors being a cost center for a hospital. Only a deranged accountant thinks the cost center is the scarce talent that delivers outsize customer value, and that the profit center is the back-office filled with billers who "monetize" a relationship that wouldn't otherwise exist. In tech, this flipped around in 2004-2008, I think. From 2001-2004, people thought IT was "over". Now, they realize software is "eating the world". I am hopeful a similar realization will eventually come to medicine. Doctors deserve Google-style work perks and competition for their scarce talent. Insurance, back-office, and billing deserve to be turned into the AWS of medicine -- outsourced commodity.

Hextinium 9y ago
I think it will actually reverse in the coming years ( 2-3 decades ) as the education programs that mold programers over compensate for supply and people in medical fields decrease to where they are valued again.

uiri 9y ago

patio11 covered this in his career advice article.[0] I read that article around the time it was first published. The tidbit about cost centers and profit centers has stuck with me since. I have, for the most part, been able to avoid being attached to a cost center. Primarily by working at "tech" companies rather than more conventional companies which put software engineers in "IT" departments. [0] http://www.kalzumeus.com/2011/10/28/dont-call-yourself-a-programmer/ http://www.kalzumeus.com/2011/10/28/dont-call-yourself-a-pro...