The Profit Center – a “doll in a doll”? (Part 2)

(Here the link to part 1:

I cannot list all the problems that can arise with the introduction of a profit center organization, but for the interested reader here is an example of the hidden pitfalls of this system. The whole thing packed into one simple question:

Is a profit center manager, who, due to the “considerable” internal transfer price for the use of a meeting room of the “internal facility management”, capitalizes on a cheaper external room…

a. … stupid, because he does not realize that this leads to unnecessary payments by the entire company to a third party and thus weakens the liquidity of the group, while at the same time the internal room is unoccupied or …

b. … clever, because he improves his own profit center profit, which does not distinguish between internal allocation and external costs, or …

c. … Entrepreneurial, because his actions demonstrate to the Facility Management profit center that their prices are not in line with the market?

The pivotal basis for answering this question is only the respective role or perspective of the observer. On the one hand, the agreed goal of the profit center manager (optimization of the PC results), on the other hand, different perspectives from the company. In reality, all this has usually been decided long ago, by means of targets and the variable salary component. The learning curve takes its course.

With questions like these and closer examination, the supposedly simple and motivating profit center concept turns out to be not at all easy to implement. In practice, many of the advantages listed again and again require relativization and permanent adjustment at the highest level. For many of today’s profit centers in companies are rather well-intentioned empty phrases, as they neither have the necessary autonomy nor a realistic possibility to create results independently. Here, too, one learns quickly.

After the transformation of a former cost center and the motivating pat on the back by senior management with an appeal to act like a real entrepreneur in the future, the disillusionment of the freshly selected young entrepreneur follows promptly. Internally he is too expensive and externally without his own sales department he is not visible, employees may not be replaced, it is not possible to move out of the building and even with the completely overpriced corporate services there is hardly any chance of switching to external providers. In this case, what entrepreneurial freedom remains?

Yes, even the profit center is not the final solution to all organizational problems, shortcomings and problems everywhere. But compared to other forms of organization, it is simply the lesser evil. The isolated, misaligned creation of profit centers by the finance department will always arouse the PC’s survival instinct and egoisms adapted to the respective business. This may be intentional, but it is playing with fire.

Much more promising are coordinated actions together with the HR department and corporate organizational development on the company level. The foundation of a successful profit center organization must be created by a common, identity-forming corporate culture. The key to success with a profit center organization is to align a significant portion of the bonus arrangements with the results of the company as a whole, comprehensive training programs, personnel rotation and, in particular, the example set to the unit by corporate management. Without active support at corporate level, PCs are used time and again to initiate the development of a Russian doll organization.

We have already introduced the Russian doll with our illustrations. And a Russian doll organization? These are half-hearted profit centers, formally entrepreneurial – but somehow trapped, like a doll within a doll.

Original text: UTO
English translation: BCO


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