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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.

Sales people are usually profit centers, as I understand it. Without sales, no profits.

But without product, no sales?

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.

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.

Likewise, you can totally have sales with just the product. There is saying good product sell itself.

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.

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.

Without the janitors there would be no profit either.

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.

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.

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.

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.

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.

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.

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.

I agree with you 100% and have attested to the same claims on other threads. With small exceptions, businesses exist to make profit. The whole discussion going all the way back to the original terms should be recast as "ROI positive centers" and "ROI negative centers". From that perspective I would agree, it's better to be working for an "ROI positive center" in the company. And even though it might seem the security compliance department is ROI negative, if the alternative is being shutdown by a government agency or paying heavy fines then it really is ROI positive; it just might be harder to make those calculations up front.

The janitor unlocking the doors in the morning is a cost centre but nothing would get done without one. I agree with the coiner that there are only cost centres.

However, close to the top of the pyramid is where the money is at. I think that's more important than whether it's core business or whatever.

Drucker also stated that the basic functions of a business are marketing and innovation because those produce results; everything else is a cost.

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.

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.

>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.