Does Your Business Need Value Centers?

Traditionally, a department or larger portion of a business is either a profit center or a cost center; each has different challenges and expectations. At Middlesex Consulting, we think those two extremes are too limited and propose a new organizational concept – a value center.  This post will explain all three terms and will show the benefits of looking at all parts of an organization in a unique way.

What do profit and cost centers mean (according to Investopedia)?

A profit center is a branch or division of a company that is accounted for on a standalone basis for the purposes of profit calculation.  A profit center is responsible for generating its own results and earnings, and as such, its managers generally have decision-making authority related to product pricing and operating expenses.  Profit centers are crucial in determining which units are the most and least profitable within an organization.

A cost center is a department within an organization that does not directly add to profit, but which still costs the organization money to operate. Cost centers only contribute to a company's profitability indirectly, unlike a profit center that contributes to profitability directly through its actions. This type of department is likely to be one of the first targets for downsizing because, on the surface, it has a negative impact on profits.?

When I headed up two different service businesses, I was lucky.  We were profit centers. While I had oversight (too much for my liking), I had control over pricing, services, employee training, and staff levels to a large, but not total, extent.  I remember debates with our CFO about the incremental revenue I would produce if I added another Field Engineer.  I showed how she could track the results over time and calculate when we hit the breakeven point.  But those debates were never enjoyable.

 I never tried talking about customer satisfaction or the benefit an additional engineer would create for the local sales people – they were too soft. But I was also pretty free from layoff pressure when the rest of the company, primarily the cost centers, felt the breeze from the swinging hatchet.

What is a value center?

Since profit centers get less grief then cost centers because their results are quantifiable, I realized that some cost centers directly contribute to both the service business, and the total company’s, outcomes.  In other words, some overhead jobs are there to directly help the customer (think manufacturing, product development, product management, sales).  These organizations can and should be measured and judged on how well they achieve their objectives, (including budget).

What is a fair way to measure overhead performance?

Since the only reason a B2B customer will buy a product or service is because it adds enough benefit to exceed both its tangible and intangible costs, then why can’t we use this as a basis for measuring and comparing all internal organizations?  

I know this is a change from how we work today, but as I have heard Nick Donofrio, Retired IBM Executive VP for Technology and Innovation say:

  If nothing changes, nothing changes

What if each organization, department, and team leader was required to calculate how much value they added to the company’s prospects and customers at each stage of the customer interaction?  And what if this value was correlated with overall company sales?  What if we could show that the recruiting group in HR was responsible for 10% of the value created by the Sales organization or 15% of the value created by the service group?  And what if the lawyers who reviewed and approved every response to RFP’s added less than 1% to the company sales?  Wouldn’t this kind of information foster a new kind of discussion around the role and size of the non-value creating teams?  Shouldn’t we be growing the value adding pieces of the business and shrinking the non-value added groups?  And don’t the shareholders deserve a uniform approach to managing investments and expenses instead of the way we do it today?

 I started a discussion on the CVCI (Customer Value Creation International) website.  So,  join and participate in a discussion with like-minded people.