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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.
  - mongol 7y ago
    Yes that is true. Despite this, I think this is the way executives sees it. For example, without logistics, no physical products would reach customers. Despite this, logistics is traditionally a cost center.
- umanwizard 7y ago
  Without the janitors there would be no profit either.
ellius 7y ago
That "directly" is carrying a lot of weight, though. The salesmen have nothing to sell without all of the work of the other employees. I prefer the conception of profit and cost in "The Goal": you have throughput (money from sale of your product), inventory (goods in the system not yet converted to sales), and operating expense, the cost of translating raw materials to goods or services (e.g. payroll, cost of electricity for your buildings). In that model it's obvious that salespeople are an expense like everybody else, and the profit from their sales is a reward of the effort of the entire system, not just the salespeople.
cool-RR 7y ago
The bullshit is hidden in the word "directly". You can define this word to mean whatever you'd like to mean. You can say a salesperson directly adds revenue to the company, but it's not really directly, the billing department is much closer to the actual money. You allow yourself to take the billing department for granted, but that's just because you don't work for the billing department. In the same way you could view the developers as the profit center, and take the sales department for granted. I'll say it again, I'll be happy to see an objective definition of profit centers and cost centers.
- bloomer 7y ago
  Profit center: spending more money on it can make you more money. Cost center: spending more money will not be able to increase your revenue, hence the only way to improve your bottom line is by reducing costs. A lot of the confusion on this thread was conflating necessary functions with profit centers. Billing and compliance are both necessary. Done poorly they can cost a lot of money. Done perfectly they can never increase the actual income of t he company. That is why sale and product development are traditionally the only parts of the business identified as profit centers. It doesn’t mean the others aren’t important just that they have different goals. Profit centers look to expand the business while cost centers look to increase efficiency through optimization. They have different value during the life of a company. During growth, profit centers are the most valuable source of effort while for a mature company that has saturated its market cost centers are most valuable to focus on. The advice to stick to profit centers is somewhat equivalent to sticking to growth which nearly always has a higher return than optimization.
  - rightbyte 7y ago
    If compliance are doing a good job they protecting engineering from late changes in projects which might give a better product and more revenue. It's symbiotic.
- bdowling 7y ago
  The billing department is a profit center because it converts accounts receivable into cash and there are metrics like days sales outstanding that can be used to directly measure their impact on the bottom line. Cost centers on the other hand are indispensable, but evaluating their impact on the bottom line is hard to quantify and therefore subjective. Again, it’s not fair to the invaluable work done by the cost centers, but that’s what it is.

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.
- mongol 7y ago
  Yes that is true. Despite this, I think this is the way executives sees it. For example, without logistics, no physical products would reach customers. Despite this, logistics is traditionally a cost center.
umanwizard 7y ago
Without the janitors there would be no profit either.

ellius 7y ago

That "directly" is carrying a lot of weight, though. The salesmen have nothing to sell without all of the work of the other employees. I prefer the conception of profit and cost in "The Goal": you have throughput (money from sale of your product), inventory (goods in the system not yet converted to sales), and operating expense, the cost of translating raw materials to goods or services (e.g. payroll, cost of electricity for your buildings). In that model it's obvious that salespeople are an expense like everybody else, and the profit from their sales is a reward of the effort of the entire system, not just the salespeople.

cool-RR 7y ago

The bullshit is hidden in the word "directly". You can define this word to mean whatever you'd like to mean. You can say a salesperson directly adds revenue to the company, but it's not really directly, the billing department is much closer to the actual money. You allow yourself to take the billing department for granted, but that's just because you don't work for the billing department. In the same way you could view the developers as the profit center, and take the sales department for granted. I'll say it again, I'll be happy to see an objective definition of profit centers and cost centers.

bloomer 7y ago
Profit center: spending more money on it can make you more money. Cost center: spending more money will not be able to increase your revenue, hence the only way to improve your bottom line is by reducing costs. A lot of the confusion on this thread was conflating necessary functions with profit centers. Billing and compliance are both necessary. Done poorly they can cost a lot of money. Done perfectly they can never increase the actual income of t he company. That is why sale and product development are traditionally the only parts of the business identified as profit centers. It doesn’t mean the others aren’t important just that they have different goals. Profit centers look to expand the business while cost centers look to increase efficiency through optimization. They have different value during the life of a company. During growth, profit centers are the most valuable source of effort while for a mature company that has saturated its market cost centers are most valuable to focus on. The advice to stick to profit centers is somewhat equivalent to sticking to growth which nearly always has a higher return than optimization.
- rightbyte 7y ago
  If compliance are doing a good job they protecting engineering from late changes in projects which might give a better product and more revenue. It's symbiotic.
bdowling 7y ago
The billing department is a profit center because it converts accounts receivable into cash and there are metrics like days sales outstanding that can be used to directly measure their impact on the bottom line. Cost centers on the other hand are indispensable, but evaluating their impact on the bottom line is hard to quantify and therefore subjective. Again, it’s not fair to the invaluable work done by the cost centers, but that’s what it is.