How do you measure and improve the performance of cost centers?

1 Define cost objectives

The first step to measure and improve the performance of cost centers is to define the cost objectives that align with the strategic goals of the organization. Cost objectives are the desired outcomes or results that the cost center aims to achieve within a given period. For example, a cost objective for a human resources department could be to reduce the turnover rate by 10% in a year. Cost objectives should be specific, measurable, achievable, relevant, and time-bound (SMART).

2 Identify cost drivers

The next step is to identify the cost drivers that influence the costs incurred by the cost center. Cost drivers are the factors that cause a change in the level or intensity of an activity that consumes resources. For example, the number of employees, the hours worked, the training sessions, and the recruitment campaigns are some of the cost drivers for a human resources department. Identifying cost drivers helps to understand the behavior and variability of costs and to allocate them to the cost objectives.

3 Establish performance measures

The third step is to establish performance measures that track and evaluate the progress and achievement of the cost objectives. Performance measures are the indicators or metrics that quantify the performance of the cost center in terms of efficiency, effectiveness, quality, or customer satisfaction. For example, a performance measure for a human resources department could be the cost per hire, the retention rate, the employee satisfaction score, or the training effectiveness rate. Performance measures should be relevant, reliable, consistent, and comparable.

4 Implement budgeting and variance analysis

The fourth step is to implement budgeting and variance analysis to plan and control the costs and performance of the cost center. Budgeting is the process of estimating the expected costs and revenues for a given period based on the cost objectives, cost drivers, and performance measures. Variance analysis is the process of comparing the actual results with the budgeted amounts and identifying the causes and effects of the deviations. Budgeting and variance analysis help to monitor and adjust the performance of the cost center and to identify areas for improvement.

5 Apply benchmarking and best practices

The fifth step is to apply benchmarking and best practices to compare and improve the performance of the cost center with other similar units or organizations. Benchmarking is the process of measuring the performance of the cost center against a standard or a reference point, such as an industry average, a competitor, or a leader. Best practices are the methods or techniques that have been proven to achieve superior results or outcomes. Benchmarking and best practices help to identify the gaps and opportunities for improvement and to learn from the experiences and successes of others.

6 Foster continuous improvement

The sixth and final step is to foster continuous improvement in the performance of the cost center. Continuous improvement is the ongoing effort to enhance the quality, efficiency, effectiveness, or customer satisfaction of the processes, products, or services of the cost center. Continuous improvement involves setting SMART goals, collecting and analyzing data, implementing changes, evaluating results, and making adjustments. Continuous improvement also requires a culture of innovation, collaboration, feedback, and learning within the cost center.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?