Redefining Profit Center

I prefer the term responsibility center to profit center. A responsibility center is a discrete segment of business (a specific geographic area, specific product or service) served by mostly common resources (from the same organization) managed by a single manager. The responsibility centers need to be mutually exclusive and collectively exhaustiveall business and all business resources must belong in just one responsibility center.

In terms of the definition above, the entire company could be perceived as one responsibility center. However, this grouping is not very meaningful, because only a very small fraction of the group s resources would be involved in the activity related to any customer or service line. The objective in determining responsibility centers is to identify the smallest discrete group that fulfills the definition above. Each responsibility center is charged with optimizing the business performance within its designated segment. Each center can focus on the unique conditions of its specific market area (such as customer needs, competitive presence, cultural issues, and so on) and thus concentrate and adapt its own resources to be effective in its respective environment.

The primary business of our company is providing specialized maintenance and construction services related to the pressurized piping systems for the refining, petrochemical , electric power, pipeline, and heavy manufacturing industries. A workforce of about 1,000 provides 7 different service types to over 2,500 plant customers from our 40 service locations. The key responsibility centers in our company are the branch locations, each managed by a branch manager. This is the appropriate designation for our company because both the sales and service activities for our business are generally branch-level activities. While we review sales and margin data by service line overall and within each branch, it would not be appropriate to designate a service line in general or a service line within a branch as a responsibility center. This is so because most service lines utilize the common network of service technicians. Since the bulk of the resources needed to provide the service are not dedicated to the business segment as defined in this example, it is not a meaningful responsibility center. A single manager does not drive the business at this level, nor are there dedicated resources to support the business segment at this level.

With the proper identification and designation of the responsibility centers, the performance of the company, in large part, becomes the sum of the performance of the individual responsibility centersor economic engineswithin the company.