Managing A Cost Centre Vs A Profit Centre

The nuances of managing a profit centre could be a lot different than managing a cost centre. Having experienced working in traditional "off-shore" teams in banking captives as well as revenue generating entities, the experience is worth a share.

The major responsibility running a Cost Centre (CC), especially a captive, is to ensure the operations are run at a cost that has been outlined by the headquarters. The KRAs are measured in terms of cost incurred vs productivity delivered. It usually boils down to managing the "projects", meeting the "deadlines", delivering the "scope" — within budget (agreed number of "resources") and meeting the "quality" standards.

The most significant cost contributor in a CC is the resource cost that includes salaries, recruitment cost, relocation costs, cost resulting due to unplanned attrition, weekend or late evening working related cost, entertainment costs (to keep the employees engaged and happy), travel costs etc... Most often, the real estate cost and / or the site cost gets embedded with the resource cost and averaged out for ease of calculations.

In a typical CC, most of the costs rotates around the resources. The key deliverable is productivity (more for less).

The strategy to optimise the costs in a typical CC is to ensure you are not top heavy (expensive resources), the critical resources are well engaged and motivated (to avoid unplanned attrition) and there is a good balance of complementing skillsets among the team members. Too many specialists in the team could create a cost-inefficient monotlithic org structure. You will run into situations where you cannot let go of the resource(s) and at the same time cannot fully engage them all the time (A UI layer specialist Vs a Full-Stack Developer). The recruitment strategy needs to be well laid out to ensure good balance and productivity.

In some scenarios, managing a CC also involves managing contractors/ consultants to meet the resourcing needs and to provide a cushion for the Full Time Employees during ups and downs.

When contractors/consultants are involved, there are certainly more levers to pull but at the same time, it involves finding the right balance between FTEs and Contractors; possibly having multiple contractor options in place etc... It is very important to measure the productivity across the board and having the same yard stick for both contractors and FTEs. It is also important to have a good understanding of the various ways to engage contracting firms (fixed price, staff augmentation etc) that will help optimising the costs.

Be wary of contracting firms designating a Jr. resource as a highly experienced specialist and charging a bomb or manipulating the resource mix to optimise their own margins! Remember while you might be running a cost centre, they are running a profit centre :)!

The budgeting process in a CC usually is an annual process that happens towards Q3/Q4. Identifying the resource needs for the next year, projecting the various costs (travel, recruitment, entertainment etc) and vendor/FTE mix is an involved process which could lead to multiple intense discussions with the stakeholders. At the end of the day, how many projects can be delivered at the identified resource levels is what it boils down to.

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Managing a profit centre involves twice the amount of work compared to managing a cost centre for the simple reason that you are not only managing the CC within (all of the above) but also responsible for the top line revenues.

More often than not, the KRAs involved in managing a profit centre is meeting the EBIDTA, which covers revenues and costs holistically rather than on individual basis.

In essence, it is left to you to either increase your topline (if you know the ways of growing the revenues) or reduce the costs to meet the EBIDTA targets. The expectation here is to measure the delta of revenues vs costs in a timely manner and take corrective actions to meet the targets.

The levers of managing a profit centre becomes that much more complicated when there are multiple sources of revenues and the revenue potential of investment made in any one source is not directly attributable. It becomes a judgemental call involving some amount of analytics but tons of guts (and inner calling) to take the right decision and stand by it.

While most of the time, the revenues and costs are and have to be forecastable, there will be times when they are not. A good example would be a new product idea or feature that can potentially increase the topline in the future but involves heavy investment in the present. So, while you are building the product/feature, your capex/opex goes up and if the product tanks at the end of the development, the revenues are left unrealised.

Thats where the balancing act comes into play as well as the mindset of the people running the profit centre (high-risk-high-return or low-risk-low-return or medium-risk-medium-return). Either ways, a good cushion is required to meet the targets in a predictable way and any thing extra should be considered a bonus.

Meeting the EBIDTA targets can be daunting but there can be a bit of respite with the help of some good tracking and measurement tools. If you are unable to measure your revenues and cost on a regular basis (at the max — weekly or bi-weekly), you will be running into a disaster. It will be obvious to mention that impulsive decisions should never be taken but a frequent checkpoint is necessary to take any course-changing decisions (preferably Monthly; Quarterly at max).

In most cases, the staff incentives are directly linked to EBIDTA targets and it is the right thing to do. Though market dynamics, attrition, competition, individual performance, inflation etc all are matters to consider for salary revisions and bonuses, one absolutely critical factor should be the performance of the Company / BU directly correlating to the EBIDTA. Being transparent with the staff on the EBIDTA targets and company / BU's performance against those EBIDTA targets is also equally important.

While meeting EBIDTA is important, it is equally important to keep the other costs in check or avoid them completely. Those include the

  • Legal Costs
  • Penalties on non-payments / late payments
  • Interests on taxes (not paid in time)
  • Non-compliance costs (expired memberships, license renewals, Corporate non-compliance costs etc)

After all, why pay for something that you can clearly avoid! Money saved is money earned!

Irrespective of whether you are heading a cost centre or a profit centre, it is absolutely critical to have targets (either externally driven and mandated or internally arrived) and have an equally good measuring tool to measure the progress against the targets.

Set Targets, Measure, Achieve, Repeat! Simple. Isn't It?

Hope you had a good read. Please do let me know your thoughts and of course I would be happy to hear the challenges you face during your operations and help out if I can! Thanks for reading!



I like blogging about Indian Politics, Management and other interesting things in general. My political opinions are typically biased towards right of centre.

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Rajasimha Karanam

I like blogging about Indian Politics, Management and other interesting things in general. My political opinions are typically biased towards right of centre.