The Profit Center – a “doll in a doll”? (Part 1)

Many readers will have worked or are still working in a profit center. It is possible that some of them have not been introduced to any other form of organization and therefore could not see any difference for “their work” at all. For this article I originally wanted to comment on a few personal experiences as ironic anecdotes. But since only few people know the phenomenon of profit centers (short PCs) from the perspective of management or finance, I decided to report a little more about the background and history of the PC.

The original idea of the profit center was revolutionary for the strictly hierarchical management of the last century – but noble and good. Because at its core it says: “freedom!” You make the oppressed department head an entrepreneur in the company and success comes practically by itself – because profit center means precisely what is says, no trace of additional costs or new problems at first.

The profit center manager is enabled to plan and act independently in clear structures and –THIS IS IMPORTANT: “… the performance of the new service area regarding customer orientation, flexibility and quality is improved!”

But before we deal with the inconsistencies and misunderstandings about the profit center, I would like to raise my glass to this form of organization and thank it for these problems. It has not always been easy, but on balance, the entrepreneurial freedom it has brought me has given me much more joy than sorrow.

The profit center organization model can look back on a remarkable success story and had already established itself in many large companies in the last century. Here and in general, the term profit center usually refers to a largely self-controlling system within a company. Even if the freedoms (and responsibilities) are not always the same – please imagine a PC as a company within a company.

In Germany, this form of organization was successfully tested by Siemens as early as the 1940s, but as late as 1965 only a few innovative entrepreneurs were willing to embark on such “gimmicks”. However, the success of the new form of organization proved the courageous ones right and only 10 years later, in the 70s, almost 60% of all companies had one or more profit centers. Finally, with ABB, profit centers became a de facto standard, which allowed even business units far removed from the market to be given a certain dynamism and customer orientation. ABB managed to set up almost 5,000 PCs in a very short space of time and reduce the former corporate headquarters to a necessary minimum – the ponderous tanker was already transformed into a modern fleet of speedboats. At least in the early days…

Even if this idea of independent action is usually readily accepted by those concerned – a new form of organization is not necessarily a way of dealing with old problems, but rather the beginning of a new learning curve, as here too. Because the profit center system develops not only a remarkable dynamic but also completely new problems within a very short time.

Many of today’s managers in large corporations have now gained their own practical experience with the profit center concept. This experience with the profit center system and the specifically communicated goals of the board members usually not only stimulates the desired energies of the executives, but also leads to the implied side effects, which are not necessarily in line with maximizing the overall well-being of the company.

It is also true that many profit center organizations do not lead directly to the desired profits, but first of all to new, sometimes extremely creative costs. This may be appropriate from the point of view of the new profit center manager, but not always in accordance with the wishes of the higher-level unit. After all, every PC is a company within the company and its boss, the new entrepreneur, now gains access to “his” relevant success factors. After all, it is all about its particular customers, employees and success. This is understandable and, within the framework of the profit center organizational form, somehow intended. The learning process takes its course…

In case he has not taken over the profit center from a predecessor, the motivated PC manager realizes after only a few weeks that the success of his new PC is actually only made up of numbers – numbers that somehow arise in corporate accounting, mostly – no, actually always – established with various allocations. Without his own controlling, he sees himself helpless in the face of the interpretation of these figures by others. What do “that lot in head office” know about his commitment, his customers and his employees– his success? 

In no time yesterday’s colleagues, those from the head office, become a challenge. Sometimes the preferred “bogeyman”, as corporate IT, the corporate purchasing department and other corporate “overhead” also “inflate” the cost allocations of his PC. It doesn’t take long before at the very least we need to have our own controlling so that our young entrepreneur can finally get his figures under control. But this is only the beginning of the structural change to the company within the company.

Because even corporate IT doesn’t understand your problems and requirements, you need a few computers – and then of course a few programmers too. HR is not really playing along with the recruitment? Then you have to do that yourself too.

Customer contact and the staffing of projects also gain a new dynamic. Every PC now has HIS customers who are jealously guarded and courted. If another PC wants to do business with these customers, then only with tolls by means of internal billing. Even large projects suffer from the fleet concept of the new profit centers. They are now more flexible and faster, but no company unit is able to plan the necessary resources for large projects in a practical way. Acquiring a major project from a PC that requires more employees than the PC manager has direct access to can quickly become an offside trap thanks to internal competition and the new rules of the game.

Former profit center managers will confirm this development, with the profit center not only the former department manager is (made) an entrepreneur – the whole former department acts as a company within the company over time.

Original text: UTO
English translation: BCO

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