3 ms·

I think profit center vs cost center is a better model.

by DeathArrow 3y ago

vanderZwan 3y ago
Why not combine them? Both give different insights that could complement each other, no?
- verinus 3y ago
  But I think it has a lot to do with how profit is made: if you sell machinery for example that has a software part you are a cost factor, even if software is required to run it. Think of it as an in-house supplier that could even be outsourced. Not that I think it is feasible, but upper management does. And as long as they do, you won't rise far building software in such a company...
joshka 3y ago
This has been how I've usually define it too. I like the addition of the R+D section because I think a good Maintenance oriented team should be doing R+D related to bringing their maintenance costs down the same way a good sales team would be doing R+D to bring their sales profits up.
LudwigNagasena 3y ago
I think it’s a nonsensical model. Every department is ideally responsible for both revenues and costs. If you can’t measure it, it is a problem of your KPIs. So the KPIs may be cost-oriented (and thus badly aligned), it doesn’t make the department itself a cost center.
- Kudos 3y ago
  Which department are you talking about? If your department doesn't drive revenue, then the business leaders will see it as a cost center. It doesn't matter if you disagree with that perspective unless you can change their minds. How have you done that in the past, or hypothetically how do you think that might work?
  - anticorporate 3y ago
    This has been my experience as well. It doesn't matter how many presentations and case studies and financial models you build, whether you're a cost center or not is basically entirely determined by what a few people in the c-suite believe. This became blatantly clear over the past year or so of layoffs, when the same people who nodded and thanked teams for showing them how they generate revenue for the business immediately turned around and put them on the chopping block.
  - LudwigNagasena 3y ago
    It doesn't become any less nonsencial just because some business leaders who are still stuck in 1980s believe in it. Both profit centers and cost centers are supposed to increase profit, otherwise you wouldn't hire those people. If a department doesn't drive profit, then just axe it and stop wasting money on it. If you can't [1], then it actually drives profit, you just have no idea how. The fact that you can't set proper KPIs to measure impact doesn't imply absence of impact, and of course it doesn't imply that you should treat it as if it has no impact. Departments are engaged either in primary or support activities. And those activities are either efficient and optimal or not. Your competitive advantage doesn't even have to be your primary activity. If you are successful at making fidgets because you hire, plan and budget better than others in your industry; what insight can talking about profit centers and cost centers provide to you? [1] How is someone supposed to run a company without HR or accounting?
    - count 3y ago
      You redefined cost / profit center as 'primary' or 'support'. This is a circular argument.
      - CRConrad 3y ago
        > You redefined cost / profit center Well, those are rather funny categories in the first place. Cost and profit aren't complementary categories; cost and revenue are. Profit consists of them both (i.e. the difference between their sums across all departments). Just as there are no pure revenue centers -- every department has costs! -- it could be argued that there are no pure cost centers: Every department contributes to revenue in its own way. Without maintenance, you'd soon have no services to sell; without R&D you'd soon have no new products to sell... Heck, even HR -- without it, you'd soon have no personnel to staff the other departments. Seems a bit skewed that some departments get to hog the "profit" label all to themselves while others are -- pejoratively, in MBA-speak -- condemned to the "cost" category.
- marcosdumay 3y ago
  It is a completely nonsensical model, and leads to completely stupid decisions if applied. But management uses it for every decision anyway.

I think profit center vs cost center is a better model.

vanderZwan 3y ago

Why not combine them? Both give different insights that could complement each other, no?

verinus 3y ago
But I think it has a lot to do with how profit is made: if you sell machinery for example that has a software part you are a cost factor, even if software is required to run it. Think of it as an in-house supplier that could even be outsourced. Not that I think it is feasible, but upper management does. And as long as they do, you won't rise far building software in such a company...

joshka 3y ago

This has been how I've usually define it too. I like the addition of the R+D section because I think a good Maintenance oriented team should be doing R+D related to bringing their maintenance costs down the same way a good sales team would be doing R+D to bring their sales profits up.

LudwigNagasena 3y ago

I think it’s a nonsensical model. Every department is ideally responsible for both revenues and costs. If you can’t measure it, it is a problem of your KPIs. So the KPIs may be cost-oriented (and thus badly aligned), it doesn’t make the department itself a cost center.

Kudos 3y ago
Which department are you talking about? If your department doesn't drive revenue, then the business leaders will see it as a cost center. It doesn't matter if you disagree with that perspective unless you can change their minds. How have you done that in the past, or hypothetically how do you think that might work?
- anticorporate 3y ago
  This has been my experience as well. It doesn't matter how many presentations and case studies and financial models you build, whether you're a cost center or not is basically entirely determined by what a few people in the c-suite believe. This became blatantly clear over the past year or so of layoffs, when the same people who nodded and thanked teams for showing them how they generate revenue for the business immediately turned around and put them on the chopping block.
- LudwigNagasena 3y ago
  It doesn't become any less nonsencial just because some business leaders who are still stuck in 1980s believe in it. Both profit centers and cost centers are supposed to increase profit, otherwise you wouldn't hire those people. If a department doesn't drive profit, then just axe it and stop wasting money on it. If you can't [1], then it actually drives profit, you just have no idea how. The fact that you can't set proper KPIs to measure impact doesn't imply absence of impact, and of course it doesn't imply that you should treat it as if it has no impact. Departments are engaged either in primary or support activities. And those activities are either efficient and optimal or not. Your competitive advantage doesn't even have to be your primary activity. If you are successful at making fidgets because you hire, plan and budget better than others in your industry; what insight can talking about profit centers and cost centers provide to you? [1] How is someone supposed to run a company without HR or accounting?
  - count 3y ago
    You redefined cost / profit center as 'primary' or 'support'. This is a circular argument.
    - CRConrad 3y ago
      > You redefined cost / profit center Well, those are rather funny categories in the first place. Cost and profit aren't complementary categories; cost and revenue are. Profit consists of them both (i.e. the difference between their sums across all departments). Just as there are no pure revenue centers -- every department has costs! -- it could be argued that there are no pure cost centers: Every department contributes to revenue in its own way. Without maintenance, you'd soon have no services to sell; without R&D you'd soon have no new products to sell... Heck, even HR -- without it, you'd soon have no personnel to staff the other departments. Seems a bit skewed that some departments get to hog the "profit" label all to themselves while others are -- pejoratively, in MBA-speak -- condemned to the "cost" category.
marcosdumay 3y ago
It is a completely nonsensical model, and leads to completely stupid decisions if applied. But management uses it for every decision anyway.