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I keep reading over and over again indignant comments about "cost centers" on Hacker News and I think it's not a good term to use because I looked up the defini

by jart 5y ago

I keep reading over and over again indignant comments about "cost centers" on Hacker News and I think it's not a good term to use because I looked up the definitions and the only logical consensus I could find is that everything which isn't shareholder profit is a cost center. It's just rhetoric.

sgt101 5y ago
I don't think it is - I think it's cultural and organisational. The CFO and Finance in general see businesses as capital flows, they don't see value being added - just opportunities for leverage and cash management. The description of a cost center is a labelling denoting a target for removal and reduction - the destruction of value that occurs (typically 12 -24 months after the exercise) is seen as disconnected and irrelevant.
- jart 5y ago
  Eye of the beholder topics don't generalize. If your CFO and Finance team is doing things like laying off all the information security people since they thought Axa would pay the ransom gangs, then state the name of the company. Otherwise it's just venting handwavy frustration about people whose job requires taking risk mitigation seriously.
  - sgt101 5y ago
    I'm not going to name companies as I don't fancy the blowback, but the fact is that CFO's aren't doing risk minimisation, they're doing bonus optimization. There is a common misconception that CFO's fiduciary duty to their shareholders determines that they should protect the long term stability of the company, but now most shareholders are in the company for 6mths tops. The duration of a CFO's fiduciary duty is arguably about 6mths out. The devastation of large companies in the economies of the west since 1980 is a testament to this.
- srtjstjsj 5y ago
  But everything is a cost center , even product development and sales. A salesperson is a cost center except for the singular moments when they sign a deal.
  - syshum 5y ago
    It comes down to the balance Fake Numbers: sales "generates" 100,000,000 in revenue and "costs" 1,000,000 however IT "generates" 0 in revenue and "costs" 2,000,000 So to an bean counter, clearly the "investment" in sales is better because they make money for the company, where IT just costs money... Thus IT is often treated like a utility service, say something like custodial services, where they want to find the cheapest way to keep the bathrooms not disgusting... not clean mind you, just not disgusting
ChuckMcM 5y ago
I always recommend that engineers who aspire to manage at the executive or "C" level take some classes or read up on how business school teaches business leaders to analyze the health of their company. Those are the classes where 'gross profit margin', 'marginal costs', and 'operational efficiency' are discussed and explained. If you are looking at US curriculum, my experience is that you will see the discussion in terms of dollars and their "flow" through the firm from the customer and perhaps ultimately to a bank account (in the case of having positive cash flow) or how much 'short' the company is when it comes to a negative cash flow situation. Understanding the cash flow dynamic for a company is critical to the company's success. If a company does not understand how they make money and how they spend money, they will not be able to manage themselves to a sustainable level. As with engineering, it is a simplification to group "like" costs, and "like" revenues together. So for example all the money made by extended warranties and charging for repairs might be grouped as "service revenue." Similarly, all the money spent on leasing office space might be grouped of "real estate costs." Every accounting program I have seen (and it isn't exhaustive of course, just consistent in my view), facilitates this grouping of costs into larger and larger groups. Depending on the size of the enterprise, the manager at a particular layer who had "profit and loss" responsibility could see a small number of these groups (which I have only ever heard referred to as either "revenue sources" or "cost centers") and they could get an idea of the health of their part of the business by seeing if their margin target (total_revenue - cost) / (total_revenue) was being met. And at the managerial level, they typically would split their activities into ones that "improve revenue" or "cut costs." Doing either increases the gross margin which is what they are measured on by their manager, whether it is another person at the company or the board of directors. Because these are fundamentally an accounting thing, increasing money coming in by say raising the price of the product or restructuring pricing plans is called "growing top line revenue" because that usually the top line of a financial report. And when they cut costs or improve efficiencies so that they can make more product for less money, that is called "growing bottom line revenue" because the amount that gets subtracted from the top line is reduced and so the number at the bottom of the page gets bigger. Finally, nobody is an expert on everything. And the larger the enterprise the wider the expertise needed to understand the costs and expenses of that enterprise. What is worse, is that sometimes the people in that role were experts at one time but the area where they developed their expertise has moved on and so they believe they know what is the right answer and don't bother to check. And sometimes they don't know the right answer but don't want to "look stupid" and they buy all the reasons the sales guy gives them for using their product as pass that along as justification without knowing the risks. It adds up to a bad choice. And when that choice is to move to open offices (for example) the impact of losing productivity in people who cannot deal with that environment isn't readily apparent. And when it leads to outsourcing something which wouldn't be outsourced, the error might only become apparent when you're suffering a ransomware attack. Meanwhile, best practices are slow to reach the curriculum and so there is a lag between people doing things poorly and it being taught as a bad thing in business school.

by jart 5y ago

sgt101 5y ago

I don't think it is - I think it's cultural and organisational. The CFO and Finance in general see businesses as capital flows, they don't see value being added - just opportunities for leverage and cash management. The description of a cost center is a labelling denoting a target for removal and reduction - the destruction of value that occurs (typically 12 -24 months after the exercise) is seen as disconnected and irrelevant.

jart 5y ago
Eye of the beholder topics don't generalize. If your CFO and Finance team is doing things like laying off all the information security people since they thought Axa would pay the ransom gangs, then state the name of the company. Otherwise it's just venting handwavy frustration about people whose job requires taking risk mitigation seriously.
- sgt101 5y ago
  I'm not going to name companies as I don't fancy the blowback, but the fact is that CFO's aren't doing risk minimisation, they're doing bonus optimization. There is a common misconception that CFO's fiduciary duty to their shareholders determines that they should protect the long term stability of the company, but now most shareholders are in the company for 6mths tops. The duration of a CFO's fiduciary duty is arguably about 6mths out. The devastation of large companies in the economies of the west since 1980 is a testament to this.
srtjstjsj 5y ago
But everything is a cost center , even product development and sales. A salesperson is a cost center except for the singular moments when they sign a deal.
- syshum 5y ago
  It comes down to the balance Fake Numbers: sales "generates" 100,000,000 in revenue and "costs" 1,000,000 however IT "generates" 0 in revenue and "costs" 2,000,000 So to an bean counter, clearly the "investment" in sales is better because they make money for the company, where IT just costs money... Thus IT is often treated like a utility service, say something like custodial services, where they want to find the cheapest way to keep the bathrooms not disgusting... not clean mind you, just not disgusting

ChuckMcM 5y ago

I always recommend that engineers who aspire to manage at the executive or "C" level take some classes or read up on how business school teaches business leaders to analyze the health of their company. Those are the classes where 'gross profit margin', 'marginal costs', and 'operational efficiency' are discussed and explained. If you are looking at US curriculum, my experience is that you will see the discussion in terms of dollars and their "flow" through the firm from the customer and perhaps ultimately to a bank account (in the case of having positive cash flow) or how much 'short' the company is when it comes to a negative cash flow situation. Understanding the cash flow dynamic for a company is critical to the company's success. If a company does not understand how they make money and how they spend money, they will not be able to manage themselves to a sustainable level. As with engineering, it is a simplification to group "like" costs, and "like" revenues together. So for example all the money made by extended warranties and charging for repairs might be grouped as "service revenue." Similarly, all the money spent on leasing office space might be grouped of "real estate costs." Every accounting program I have seen (and it isn't exhaustive of course, just consistent in my view), facilitates this grouping of costs into larger and larger groups. Depending on the size of the enterprise, the manager at a particular layer who had "profit and loss" responsibility could see a small number of these groups (which I have only ever heard referred to as either "revenue sources" or "cost centers") and they could get an idea of the health of their part of the business by seeing if their margin target (total_revenue - cost) / (total_revenue) was being met. And at the managerial level, they typically would split their activities into ones that "improve revenue" or "cut costs." Doing either increases the gross margin which is what they are measured on by their manager, whether it is another person at the company or the board of directors. Because these are fundamentally an accounting thing, increasing money coming in by say raising the price of the product or restructuring pricing plans is called "growing top line revenue" because that usually the top line of a financial report. And when they cut costs or improve efficiencies so that they can make more product for less money, that is called "growing bottom line revenue" because the amount that gets subtracted from the top line is reduced and so the number at the bottom of the page gets bigger. Finally, nobody is an expert on everything. And the larger the enterprise the wider the expertise needed to understand the costs and expenses of that enterprise. What is worse, is that sometimes the people in that role were experts at one time but the area where they developed their expertise has moved on and so they believe they know what is the right answer and don't bother to check. And sometimes they don't know the right answer but don't want to "look stupid" and they buy all the reasons the sales guy gives them for using their product as pass that along as justification without knowing the risks. It adds up to a bad choice. And when that choice is to move to open offices (for example) the impact of losing productivity in people who cannot deal with that environment isn't readily apparent. And when it leads to outsourcing something which wouldn't be outsourced, the error might only become apparent when you're suffering a ransomware attack. Meanwhile, best practices are slow to reach the curriculum and so there is a lag between people doing things poorly and it being taught as a bad thing in business school.