Platt Perspective on Business and Technology

Turning the functional units of a business into value centers

Posted in strategy and planning by Timothy Platt on June 1, 2015

I often refer back to the fundamentals as a starting point, when developing a line of discussion in my postings and series in this blog. In a fundamental sense this posting is all about the fundamentals, and about more fully thinking through basic assumptions if nothing else.

At least as a starting point, let’s consider medium sized and larger, established and competitively effective for profit businesses. If you were to walk into such an enterprise as a consultant tasked with evaluating and reporting on their operational and strategic systems –giving you an in-depth review of essentially all of their systems, and if you took a strictly standard approach in how you would organize what you saw, you would see an array of departments and services that carry out the various functionally defined areas of activity that make that organization work. So you would see their Financial and Information Technology departments, Human Resources and Marketing and Sales and other performance teams. And some of them would directly support revenue generation and some would only indirectly do so.

Manufacturing and Sales in place would very clearly fit into the “directly supporting revenue generation” side of this for a business that produces, markets and sells physical item products. A product-oriented arm of Information Technology, quite possibly split off as a separate department from in-house Information Technology would be a comparable revenue generating unit in a software development company. And for an information systems security consulting business where risk identification and remediation are at least a significant component to their marketed and sold offerings, a more Risk Remediation department would be among their key revenue generating business units.

Back office services that manage and process paperwork and its digital and telephonic equivalents, and that provide internal support for the business are not generally seen as revenue generating, and are often viewed more as cost centers, even if as necessary and even essential cost centers. And the overall profitability of a business is viewed, from this perspective, as the overall aggregate sum of all costs generated and all incoming revenue generated across the entire business organization and for all of its cost centers plus all of its revenue generating centers.

This is not necessarily a bad way to organize and think about a business and how it assembles. Ultimately, the overall finances of a business and its resulting capacity for competitive strength come from this overall cash flow summation, and how the business performs as a whole. But I would take a somewhat different view of the business and its overall functional area by functional area structure here. And I would set aside this often binary, cost center versus revenue and profits center model, to place the functional units of a business along more of a continuum of cost and profit generation potential. And to clarify that, I begin with two of the more common functional areas of a manufacturer, set up as working case study examples:

• A product manufacturing department that actually produces the finished products that would go to market represents what is perhaps the clearest possible example of a revenue generating, profit producing department within such a business. But let’s consider a business that is in the process of completely revamping and upgrading its production line and its overall production systems, in order to introduce essential new technologies that would be needed to keep this business competitive in its industry and in its markets. And even if it can keep its current-technology production systems up and running as it undergoes this transition, it is still expending funds in its production systems at a faster rate than it is bringing in new revenue from them – tapping into reserves built up specifically to address these capital expenditure needs to limit any outside business loan funding required for this. So here, at least through this phase of that business’ history its product production systems become an overall cost center for it.
• A back office service such as a Call Center that provides post-sales customer support is not generally considered a revenue generating service. These systems, in fact are usually thought of as entirely cost-generating in nature, adding to the overall expense of offering products or services already sold. That is, among other considerations, why so many businesses do everything they can to automate these customer facing systems, taking what they see as more expensive human points of contact out of them, and even at the risk of alienating a reliably predictable percentage of their customers because their calls do not fit the automated scripts that their more cost-effective systems are built to address. But what does this mean if irate customers that would have brought return business to this company choose not to do so because they feel frustrated by the outcomes of a current purchasing experience? And what does this mean if they offer their negative experience online through social media review sites, and their cautionary tale accounts of trying to do business with this company turn others away so they never even make that first purchase from them, turning to their competitors for that instead?

In my first example, a profit center becomes a cost center, at least while going through this technology upgrade and for the period afterwards during which these capital expenditure costs are being paid off. In my second example, a well-run and agile, customer friendly Call Center is in a position to leave customers ready and even eager to offer repeat business opportunity, while a cost-cutting, “streamlined” version might even actively turn customers away and towards the competition.

• Even a Call Center that customers love and rave about for its, and for that business’ customer friendliness might not bring in money directly, in and of itself. But it might prove essential for making that business’ Sales department as effective as it is in generating sales and repeat business sales and for it to be able to bring money into the business.

My second example there, is in fact in large measure why I am offering this posting here. Cost and profits centers fit along a continuum, and with the continuity that this involves coming from how different functional areas and functional teams impact upon each other, limiting or enabling opportunity. A failure to both perceive this and to explicitly plan for maximizing the profit-supporting potential for every service in a business, creates avoidable inefficiencies and avoidable loss of competitive potential and profitability for it.

Returning to my Call Center example, automated systems have become better and better, but at least now and through any foreseeable future, real-people customers do and will need to be able to connect with real-people company representatives too, and certainly when they have problems or issues that for their details, do not fit into a standard top ten or similar list of what can be developed into canned response patterns. And businesses need to be able to respond effectively to customers who simply prefer to deal with other people, and certainly when they have what to them are complex problems to resolve (e.g. “I will be away so ring my neighbor’s bell to deliver this package to their apartment as they have agreed to take delivery of it for me, and here is their cell phone number which you will only need to use for this one order, if you need to call anyone about it.”)

When you think of services and departments, and functional units in general in a business as offering both cost center and profit center value, and as fitting on a continuum for that, and when you think in terms of being able to shift their position on that continuum by better aligning how they work with other parts of the business, and by better aligning them with overall business processes and systems, you build greater agility and business performance strength into the organization as a whole. And that makes the business more effective, competitive and profitable as a whole. And all of its functional units in effect become more value centers than they were before.

You can find this and related postings at Business Strategy and Operations – 3 and also at Page 1 and Page 2 of that directory.

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