Saturday, February 27, 2010

The Demise of Cost and Profit Centers

Harvard Business School has this paper authored by Robert S. Kaplan. In high-tech industry, the classic profit and cost centers do not make sense. This Balanced Score Card state of the art management style is not used widely. Instead, like primitive dentists-barbers, a saw tooth is extracted and not treated. By laying off knowledge workers because their salaries can be saved,  the strategy is badly hurt and mid term the company looses both competitively and money that will nor longer earn,
When Dave Norton and I introduced the Balanced Scorecard in the 1990s, we
described the limitations of financial metrics, such as profits and ROI, for motivating and
evaluating the performance of profit and investment centers. We claimed that financial
metrics were no longer sufficient for measuring the annual performance of the managers of
these units in creating long-term value. We advocated that the performance of such
managers must include a variety of nonfinancial metrics designed to capture how well the
unit’s intangible assets built and expanded relationships with targeted customers; improved
the quality and responsiveness of operating processes; created and introduced new products
and services; enhanced the motivation and capabilities of employees; leveraged
investments in data bases and information technology; and aligned the culture and climate
linked to the unit’s vision, mission, and strategy.
The BSC soon proved to be a more general and powerful performance management tool

I wish the conclusion of the Robert Kaplan paper will be true for all companies. IMHO it only applies to a handful of companies:

Just as operating units must work closely with the firm’s external customers,
support units must understand their (internal) customers’ strategies and align their service
offerings to contribute to their customers’ success. These objectives typically appear in
the support unit’s BSC customer perspective. Many support unit scorecards therefore
include an objective to become “their customers’ trusted adviser” and measure this
objective with metrics from service-level agreements and from customer feedback. As
with revenue and profit in the financial perspective, some support units may even
incorporate external customer metrics in their scorecards to recognize how they can
directly create value for the operating units’ customers. For example, an IT shared
services unit can create new platforms and new capabilities for servicing customers that
help strategically differentiate the company’s operating units.

Riffs  are a  brutal, primitive way of improving short term the profits. They work short an mid term, likea  Ponzi investment scheme when acquiring next company is the source of immediate revenues and their long term potential is discarded. The cure is an elegant, intuitive Management Control Systems (MCS) applied intelligently.

If not , imagine single income families that should divorce their spouses, to get rid of the cost centers. Everyone can see the absurdity.

Reference: http://www.hbs.edu/research/pdf/07-030.pdf

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