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Re: Profit Centers vs Cost Centers I was once on a team that maintained a SaaS application that was in some sort of bizarre super-position of "cost center" and

Re: Profit Centers vs Cost Centers I was once on a team that maintained a SaaS application that was in some sort of bizarre super-position of "cost center" and "profit center" a few years back. The company technically sold the app and made money from it, but they also tended to give it away almost for free as long as the buyer was going to be paying lots of money for the company's $FLAGSHIP_BUSINESS_SERVICE that integrated with the app. (Think of it like a free mobile game with micro-transactions.) The primary way customers interacted with $FLAGSHIP_BUSINESS_SERVICE (and generated micro-transaction revenue) was through our application. However because the application wasn't what the customer was actually paying for, the executives had an impossible time deciding whether to treat the app like a cost or a profit center. Whenever the app was working fine and everybody was happy the executives were convinced it was a cost center and looked down on it. Whenever it wasn't working fine and companies began to get angry and threaten to take their business elsewhere suddenly the executives would realize that without the SaaS application they wouldn't be able to sell more $FLAGSHIP_BUSINESS_SERVICE. Long story short, it was a strange and frustrating experience in many ways.

cool-RR 7y ago
My best conclusion is that there is no definition of "cost center" and "profit center" that makes sense. I challenge anyone to give me such a definition. This is as good a place as any to put this: Peter Drucker originally coined the term "profit center" around 1945. He later recanted, calling it "One of the biggest mistakes I have made". He later asserted that there are only cost centers within a business, and "the only profit center is a customer whose cheque hasn’t bounced."
- bdowling 7y ago
  Profit centers consist of people who can directly attribute revenues or savings to the work that they do. Everyone else is a cost center. No, it's not fair.
  - mongol 7y ago
    Sales people are usually profit centers, as I understand it. Without sales, no profits.
    - matz1 7y ago
      But without product, no sales?
      - Viliam1234 7y ago
        I suppose the real difference is between short term and long term. If you double the number of salesmen, you can increase your income right now. Firing all the salesmen would drop the income to zero. If you double the number of developers, there is no difference during the following month or two. If you fire all the developers, you can still continue selling the product for a few months, maybe years. As a manager, you may be tempted to increase the short-term profit, grab your bonus, and get promoted to somewhere else, so that someone else will have to deal with the long-term impact.
      - swsieber 7y ago
        Nah, you can totally have sales without a product - it's just not very sustainable. It's a little tongue in cheek, but I think illustrates a real perspective - improving a product doesnt necessarily extract more revenue from existing customers. Selling more copies does extract more revenue from existing products though.
        matz1 7y ago
        Likewise, you can totally have sales with just the product. There is saying good product sell itself.
        magicalhippo 7y ago
        Indeed. Not long ago our sales team was our existing customer base. Users would call up their friends who work in other companies and tell them "you need to get this software". We've since added a dedicated sales person, but we still get a significant amount of sales this way.
- leetcrew 7y ago
  not sure this is an airtight definition, but think about employee skill vs revenue in a particular department. if you're selling software, you would expect revenue to go up a lot if you increase the overall skill of the developers. if you're a restaurant, you probably don't see a huge increase in revenue from hiring a very good website designer. basically, how hard is it to get people who do a "good enough" job? maybe "not very hard" means you're looking at a cost center and "very hard" means you're looking at a cost center. of course the problem is that things are very interrelated at a company. maybe you can't hire good developers if you don't have good HR people to recruit them. if you have bad or not enough cleaning staff, maybe none of your "profit center" employees are actually willing to work for you because your office is filthy. maybe the event planning staff do really good parties that help with retention. I guess I'm inclined to agree with you that there's no clear, workable definition of "cost center" or "profit center", but there are certainly areas of your company that generate more ROI than others, and I think that's kinda the point of this (crude) way of thinking about it.
  - cool-RR 7y ago
    I understand that we're mostly agreeing, and I think that we both have an intuition for what it means for something to be a profit center. Still, I'd like to show a gap in what you said: You talk about what kind of increase in revenue you'd have if such and such people did a better job, and what kind of ROI you'd get from each department. But the question is, an increase relative to what, or an ROI relative to what? Let's take the billing department. If you made sales for $10 million, and your billing department works okay, then you would have a revenue of $10 million. If you hired the best billing experts on earth, you still would get just $10 million. So that might make you look at the billing department as a cost center rather than a profit center. But maybe if the billing department fucked up royally, either by not charging a customer, or overcharging them and hurting the relationship, or breaking obscure laws and getting the company in legal trouble. Then you could be out a lot more than $10 million. So in effect, you could view the billing department's ROI as "how big a disaster they can prevent, and how good they are at preventing it." That kind of thinking makes sense for any department in the company. That's the reason why I don't see the logic behind branding some departments as profit centers and some as cost centers.
- BjoernKW 7y ago
  Drucker also stated that the basic functions of a business are marketing and innovation because those produce results; everything else is a cost.
- Finnucane 7y ago
  Most places I’ve worked had the attitude that profit center = sales and everyone else was a cost to be controlled or eliminated. It shouldn’t be really surprising that management thinks management is the most valuable function, and actually making the product is not.
  - k1t 7y ago
    This has been my experience exactly. I used to think that the team building the product was a profit center. The more time we spend solving customer problems, the more revenue the company generates. The reality is they view engineering teams like assembly line workers. The revenue was generated by the sales team and now they come to the engineers to get the bad news of how much that revenue is going to cost them.
- dorgo 7y ago
  >I challenge anyone to give me such a definition. If the balance of a department is positive then its a profit center. It's a matter of income attribution inside of a company and can be manipulated by people in charge.
goatinaboat 7y ago
The marketing department is a cost centre. The accountants are a cost centre. HR is a cost centre. Middle management is a cost centre. But the logic of profit centre vs cost centre is only applied to engineering departments, or workers in general. That’s really all you need to know about it.
- mobjack 7y ago
  Marketing is a huge profit center. Improving efficiency in marketing spend can bring in millions in new business value. If you can do that, it will definitely be noticed by the business.
  - krallja 7y ago
    Marketing spend is a cost. You are talking about reducing costs.
    - mobjack 7y ago
      Everything is a cost. Marketing brings in more revenue if done efficently making it a profit center. It is no different than sales. Marketing spend is usually fixed in costs and the goal of efficiency is to acquire more customers for the budget. Most engineers dismiss this part of the business, but if you can do it successfully, businesses will pump more money into it.
  - imhoguy 7y ago
    Joga classes in the office can improve employees and management efficiency and their comfort of life so such spend can bring in millions in new business value by healthier and happier staff. Is joga trainer a profit center?
    - mobjack 7y ago
      Marketing brings in new customers directly. Joga classes for employees do not.
    - 7y ago
virgilp 7y ago
The better way to think about it is that you want to be close to the money. If you can quantify your contribution easily (I was the lead on product X that was a huge success/ brought in $Y additional revenue) you have little trouble getting some share of that success. If you can't (I fixed the tests so that they're no longer flaky and improved the overall product quality), then generally it's a lot harder to get the deserved recognition, even if your impact was actually larger! The trick is to go back to money, when you can (be specific, "build machines are costing us $X/Mo, people used to rebuild three times on average to get a "green status" so just by that I saved 0.66*$X/Mo; add an estimated y% of developer time; add cost of extra incidents/ support tickets if you can quatify it; and all of the sudden you can reasonably claim a larget $ amound that much more will easily get the attention of a high-level manager).

cool-RR 7y ago

My best conclusion is that there is no definition of "cost center" and "profit center" that makes sense. I challenge anyone to give me such a definition. This is as good a place as any to put this: Peter Drucker originally coined the term "profit center" around 1945. He later recanted, calling it "One of the biggest mistakes I have made". He later asserted that there are only cost centers within a business, and "the only profit center is a customer whose cheque hasn’t bounced."

bdowling 7y ago
Profit centers consist of people who can directly attribute revenues or savings to the work that they do. Everyone else is a cost center. No, it's not fair.
- mongol 7y ago
  Sales people are usually profit centers, as I understand it. Without sales, no profits.
  - matz1 7y ago
    But without product, no sales?
    - Viliam1234 7y ago
      I suppose the real difference is between short term and long term. If you double the number of salesmen, you can increase your income right now. Firing all the salesmen would drop the income to zero. If you double the number of developers, there is no difference during the following month or two. If you fire all the developers, you can still continue selling the product for a few months, maybe years. As a manager, you may be tempted to increase the short-term profit, grab your bonus, and get promoted to somewhere else, so that someone else will have to deal with the long-term impact.
    - swsieber 7y ago
      Nah, you can totally have sales without a product - it's just not very sustainable. It's a little tongue in cheek, but I think illustrates a real perspective - improving a product doesnt necessarily extract more revenue from existing customers. Selling more copies does extract more revenue from existing products though.
      - matz1 7y ago
        Likewise, you can totally have sales with just the product. There is saying good product sell itself.
        magicalhippo 7y ago
        Indeed. Not long ago our sales team was our existing customer base. Users would call up their friends who work in other companies and tell them "you need to get this software". We've since added a dedicated sales person, but we still get a significant amount of sales this way.
leetcrew 7y ago
not sure this is an airtight definition, but think about employee skill vs revenue in a particular department. if you're selling software, you would expect revenue to go up a lot if you increase the overall skill of the developers. if you're a restaurant, you probably don't see a huge increase in revenue from hiring a very good website designer. basically, how hard is it to get people who do a "good enough" job? maybe "not very hard" means you're looking at a cost center and "very hard" means you're looking at a cost center. of course the problem is that things are very interrelated at a company. maybe you can't hire good developers if you don't have good HR people to recruit them. if you have bad or not enough cleaning staff, maybe none of your "profit center" employees are actually willing to work for you because your office is filthy. maybe the event planning staff do really good parties that help with retention. I guess I'm inclined to agree with you that there's no clear, workable definition of "cost center" or "profit center", but there are certainly areas of your company that generate more ROI than others, and I think that's kinda the point of this (crude) way of thinking about it.
- cool-RR 7y ago
  I understand that we're mostly agreeing, and I think that we both have an intuition for what it means for something to be a profit center. Still, I'd like to show a gap in what you said: You talk about what kind of increase in revenue you'd have if such and such people did a better job, and what kind of ROI you'd get from each department. But the question is, an increase relative to what, or an ROI relative to what? Let's take the billing department. If you made sales for $10 million, and your billing department works okay, then you would have a revenue of $10 million. If you hired the best billing experts on earth, you still would get just $10 million. So that might make you look at the billing department as a cost center rather than a profit center. But maybe if the billing department fucked up royally, either by not charging a customer, or overcharging them and hurting the relationship, or breaking obscure laws and getting the company in legal trouble. Then you could be out a lot more than $10 million. So in effect, you could view the billing department's ROI as "how big a disaster they can prevent, and how good they are at preventing it." That kind of thinking makes sense for any department in the company. That's the reason why I don't see the logic behind branding some departments as profit centers and some as cost centers.
BjoernKW 7y ago
Drucker also stated that the basic functions of a business are marketing and innovation because those produce results; everything else is a cost.
Finnucane 7y ago
Most places I’ve worked had the attitude that profit center = sales and everyone else was a cost to be controlled or eliminated. It shouldn’t be really surprising that management thinks management is the most valuable function, and actually making the product is not.
- k1t 7y ago
  This has been my experience exactly. I used to think that the team building the product was a profit center. The more time we spend solving customer problems, the more revenue the company generates. The reality is they view engineering teams like assembly line workers. The revenue was generated by the sales team and now they come to the engineers to get the bad news of how much that revenue is going to cost them.
dorgo 7y ago
>I challenge anyone to give me such a definition. If the balance of a department is positive then its a profit center. It's a matter of income attribution inside of a company and can be manipulated by people in charge.

goatinaboat 7y ago

The marketing department is a cost centre. The accountants are a cost centre. HR is a cost centre. Middle management is a cost centre. But the logic of profit centre vs cost centre is only applied to engineering departments, or workers in general. That’s really all you need to know about it.

mobjack 7y ago
Marketing is a huge profit center. Improving efficiency in marketing spend can bring in millions in new business value. If you can do that, it will definitely be noticed by the business.
- krallja 7y ago
  Marketing spend is a cost. You are talking about reducing costs.
  - mobjack 7y ago
    Everything is a cost. Marketing brings in more revenue if done efficently making it a profit center. It is no different than sales. Marketing spend is usually fixed in costs and the goal of efficiency is to acquire more customers for the budget. Most engineers dismiss this part of the business, but if you can do it successfully, businesses will pump more money into it.
- imhoguy 7y ago
  Joga classes in the office can improve employees and management efficiency and their comfort of life so such spend can bring in millions in new business value by healthier and happier staff. Is joga trainer a profit center?
  - mobjack 7y ago
    Marketing brings in new customers directly. Joga classes for employees do not.
  - 7y ago

virgilp 7y ago

The better way to think about it is that you want to be close to the money. If you can quantify your contribution easily (I was the lead on product X that was a huge success/ brought in $Y additional revenue) you have little trouble getting some share of that success. If you can't (I fixed the tests so that they're no longer flaky and improved the overall product quality), then generally it's a lot harder to get the deserved recognition, even if your impact was actually larger! The trick is to go back to money, when you can (be specific, "build machines are costing us $X/Mo, people used to rebuild three times on average to get a "green status" so just by that I saved 0.66*$X/Mo; add an estimated y% of developer time; add cost of extra incidents/ support tickets if you can quatify it; and all of the sudden you can reasonably claim a larget $ amound that much more will easily get the attention of a high-level manager).