In the words of Larry Myler, a former Forbes Magazine contributor,
“If you work in a cost centre within an organisation you might be feeling a little like an ugly stepchild”.
In some companies, cost centres are accused of everything from being a drain on profits to being an overhead with no value. You’d be told that the rock stars work in profit centres, and the back-up singers work in cost centres.
But we know that this way of thinking is absurd, because if you’d eliminate just one cost centre from any given organization, that company would eventually grind to a halt. This is because well-run businesses make sure that every function contributes to the whole, even if it does not actively make money.
The thinking around cost centres and profit centres came up in the 1970s as a way of trying to isolate and optimise the profit-making parts of a business. This approach has changed somewhat over the years, and cost centres are given more due. But the thought still exists that there is a hierarchy and that some departments are more important than others. You’d only have to look at whose budgets gets cut when times are tough.
As marketers we know that, depending on the organization, we exist in a grey area of not quite being a cost centre, but also not quite a profit centre.
We don’t have to accept this position. By making our contribution clearer to the business, we can grab hold of the mantle as a profit centre. In this article, we share some ideas on how we can achieve this.
But first, let’s define: What is a cost centre?
A cost centre is a department in an organisation that does not measurably add to its profits but still costs the organisation money to operate.
Cost centres contribute to a company’s profitability indirectly, by helping the profit centres do their jobs. Traditionally, the only way cost centres can receive recognition is when they increase operational efficiencies and find ways to do things that better utilise resources.
It’s not hard-hitting is it? This is why cost centres can never truly escape the reason they were called cost centres in the first place. A company CEO can say, “Yes, I can accept that they do some good, but how much money do they make?”
It can be tough to escape this kind of attitude if you can’t show your worth in measurable ways.
What is a profit centre?
A profit centre is a department in a company that directly and measurably adds to the bottom-line profitability of the organisation. Profit centres can be tracked easily by number of units sold or hours billed, and so are a proxy for the health of the business. If the profit centres are performing well, the busines is doing well.
When it comes time to decide the allocation of resources, you’d find that profit centres get priority because they are considered to be the most important part of the business.
If we think of a large retailer, the different departments selling goods could be segmented into profit centres. Home goods, clothing, food, and electronics are all profit centres because they sell products and bring in money for the company.
So, in a business, a profit centre is most often the department that makes the sales or drives the engine that carries out the primary function of the company. Even though a business is typically made up of many complementary departments, profit centres are relatively few. In a survey of 684 manufacturing companies, 83% of them had no more than three designated profit centres. Another survey of 1000 Fortune 500 companies found that 93% of these companies used only two or three profit centres.
We point out the low number of profit centres to highlight that so many associated functions are considered somehow inferior. This means that it is often hard work for a department to shake off its reputation as a cost centre.
Why marketers need to act like profit centres
All cost centres are useful because they perform a role. They all offer something which could be of value in the open market. Your IT team could theoretically sell their services independently. Your HR team could be a head-hunting company.
This is exactly what happened when the US office automation firm XEROX had an internal logistics and distribution arm that performed so well it ended up as another product line for XEROX, serving external customers.
Now, marketers don’t have to do anything this radical, but it is important to understand that they can find ways to be more valued by their company leadership.
How to build marketing programs that act as profit centres
Here’s a vision for you; What if your marketing department was removed from your company and turned into an independent firm trying to sell to B2B clients? You’d have to up your game in many different ways.
This principle should apply when you consider how marketing departments can transform their reputation internally. Building a marketing program that puts you in the high seat as a profit centre takes hard work. Here is where to start:
- Decide exactly how you will change and nominate your change champions. You wouldn’t engage a serious project in half-hearted manner, so if you want to truly make a difference you need to approach it like a real project, with accountability and deliverables.
2. Be aware of your costs. You can make an impact on your company’s bottom line by streamlining your processes. This could be by renegotiating with suppliers, or just generally adopting more cost-efficient ways of working. Marketing budgets are already stretched thin, but it might be instructive to imagine how you could do more with less. If you achieve some wins, turn them into quantifiable numbers and broadcast them to all parts of the company.
3. Put yourself in the shoes of your company’s leadership. Look at your marketing performanceKPIs. They might be measures linked to creativity and output, measures that you hold dear to your heart, but what do they mean to a hard-nosed business leader? Be realistic with your own measurement metrics.
4. Quantify your impact. You have changed your measurement metrics, now you’d need to quantify the results. This is why, as marketers, moving to digital channels is a no brainer. In a Covid-19 world, consumers are already consuming more media online and so, finding them in a digital space is easier.
In our own business we are driven every day to operate by our principles, which mean we must be accountable and results driven, and we must be agile data-driven.
Old habits marketers must discard to become profit centres
- Branch out of your bubble. Be part of the team. Publicise what you do to the rest of your business. Try to understand what other departments are doing. Create spaces for cross-pollination.
2. Don’t ignore company strategy. You may have been more invested in your department strategy, but the two are interlinked. Play a more active role in supporting the company’s strategy and you will help the company sell more of its products and services.
3. Accept the challenge. Understand the concept of the cost centre as we highlighted above and why it was introduced. Appreciate that in difficult times you’d need to communicate in the language of quantified return on investment.
Conclusion
Noted business scholar Peter Drucker says,
“Inside an organization there are only cost centres. The only profit centre is a customer whose check has not bounced.”
It is important to understand then that your efforts are only part of the whole. But you owe your place in the company to continued sales and profits. So, re-calibrate your efforts and broadcast your measurable wins as you go along.