Archives for 2008

A profit center is a unit of an organization that generates both revenue and expenses. Its goal is to have revenue exceed expenses.  A cost center is a unit of an organization that generates expenses and has no responsibility for generating revenue. Its goal is to adhere to expense budgets. – AllBusiness Business Glossary

Not much wiggle room in that definition which is why I never trusted people who start blog posts by quoting dictionaries to make their points.  Ahem, anyway, IT is a cost center in the hearts and minds of many excellent business people that I have worked with over the years.  This has not changed much and the reason is thanks partially to and adherence to the canonical meaning of revenue and expenses that accounting teaches today.  I have a different view of IT which comes from my own experiences with departmental revenue and expenses.  I believe that IT can generate departmental “revenue” for a non-tech focused company by allowing that company to reduce expenses and increase sales.  Let me explain by revisiting our definitions.

Here is my modified definition of cost center.  A cost center is a unit of organization who’s costs of operation are not offset by the combination of both revenue and savings allocated to the organization.  Revenue allocation is something I will discuss in the next post, so lets table it for now.  Savings allocation sounds fishy, I know, but hear me out.  All departments have an operations cost associated with them which covers the salary overhead, equipment, training, etc.  For a fictitious department X, lets say operating costs are 100K.  Now, believe it or not, there are whole companies dedicated to doing from the outside what department X does for you internally.  They represent the real costs of having a need but not filling that need internally.  Lets say company Y can do what department X does for 75K.  Now, department X is a cost center because it has no savings for the company.  Fact is, this company may be looking at calling company Y in this case.

Now here comes IT to the rescue because they are able to write an application that drops the cost of operations of department X to 70K.  IT looks like a hero, department X is back in black and the company can keep 30K more next quarter thanks to automation.  This is what IT can bring to the table, the ability to find labor saving technology, processes, systems, services and solutions that make internal departments cheaper to operate.  Since in our definition of cost center we dealt with ‘allocated’ values, we can now see that 30K in savings is allocated to IT as way of saying ‘this is money that we saved because we have invested in our IT department’ .  The beauty of an good internal IT department is that the automation options exist throughout the company in all departments.  Savings allocations, even when conservatively estimated, can add up to huge sums in favor of classifying an IT department as a profit center.

Photo by uberculture