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Profit Centers vs. Cost Centers September 12, 2005

Posted by Coolguy in Service Delivery.
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  • In business, an operating unit is either making money or it’s detracting from a company’s profits. In simple terms, it’s the difference between a profit center and a cost center.
  • Conceptually, a business unit is considered a profit center when “it’s set up as a small business — it has its own revenue and profit targets,”
  • On the flip side, a company unit such as the human resources department doesn’t earn revenue or turn a profit. Its objective is to hire, train and support the company’s employees, and there’s a cost to the company to run the unit. As such, human resources is typically viewed as a cost center.
  • IT departments traditionally were set up as cost centers. An IT organization would charge back costs to a business unit. For example, IT would charge a commercial loan division of a bank for monthly transaction processing costs or mainframe use costs. But it wouldn’t bring in a profit because the division would be charged at cost. In some cases, those costs may be absorbed by the company or as part of a business unit’s overhead.
  • If an IT department is a cost center, “the rest of the business views you as a burden”
  • However, it’s common for IT organizations to be set up as cost centers in highly-regulated industries, such as financial services or electric utilities, “to show regulators where the costs are” by charging IT costs to individual business units
  • Other companies, such as The Hartford Financial Services Group in Hartford, Conn., have elected to set up their IT organizations as profit centers with a goal of generating zero profit
  • Some CIOs think their IT departments should remain cost centers. “Our core competency [in IT] is to help our company build aircraft structures, not to code [enterprise resource planning] systems, so I could not see us as a profit center”
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Comments»

1. Metrics Management « Executive in wait - May 12, 2008

[…] can be viewed either as a cost center or a profit center in companies. Financial management for solution delivery is responsible […]


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