
The Cost Center Trap - nikolasavic
http://www.leanessays.com/2017/11/the-cost-center-trap.html
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tboyd47
This is a really profound point about software.

The ironic thing is that this "cost-center culture" has even affected the
mindset of individual software developers and how we think of our own work.

Most developers ONLY look at their work in terms of cost. ALL pros and cons
arguments are really about ways to reduce cost. Consider the term "tech debt"
\-- nothing could be clearer. Yet discussions rarely ever take place among
engineers at a company about how to maximize profit or increase revenue. In
fact, I would argue there is a heavy cultural bias on most engineering AGAINST
optimizing for revenue, as it is seen as something that motivates sales or
product people to rush timelines and sabotage sound engineering practices.

The obsession with cost is baked into programmer culture in such a deep and
foundational way, I'm skeptical will ever change, even if the accounting of
software projects changes. If you perform a search for the word "cost" on the
eBook for the Principles of Object-Oriented Design in Ruby by Sandi Metz, you
will find it dozens of times in various sentences about the urgency and
critical importance of reducing costs, but the words "profit," "income," or
"revenue" appear not even once. I'm not trying to make a point about POODR in
particular, because this bias is only reflective of the culture as a whole.

You can certainly make the argument that it has to be that way, and
engineering should be separated from revenue. I find it very interesting that,
as a culture, we are only willing to speak about the monetary value of our
work in negative terms.

~~~
aeorgnoieang
This is a really good point.

Something I've realized, tho it's, as you write, seemingly against my nature
as an engineer, is that there are lots of situations where it's reasonable to
'assume' technical debt to reach a more important goal.

We absolutely should continue discussing technical debt, but also in the
context of 'technical revenue' and 'technical profit'.

Interestingly, 'technical debt' works _amazingly_ well as a concept. I suspect
it's not even really a metaphor. Consider that probably the most important
pragmatic consideration about whether you should assume a debt (of any form)
is whether you can expect to make all of the 'scheduled payments' that it
requires. And even if you can, will you still have sufficient slack to be able
to pay-off or pay-down other currently un-expected debts or expenses that you
might incur between now and whenever it is you finally pay off all of the
original debt?

~~~
subwayclub
I don't think there is a "technical profit" to be had, though.

The output of the effort put into technology is a new process or workflow,
rather than raw "tech stuff". It's a multiplier to a different input, some
other task or application, and so the creators of the technology are
frequently disconnected from feedback about its actual use.

For tech to be useful it has to succeed at creating enough leverage that you
would use it over what was there previously, and plenty of technical projects
get stuck on that point: they show an immense engineering effort but are
solving the wrong problem because they don't optimize the desired workflow, or
they expect everything to change around the product's workflow.

In that light, in a universe where most of these designs are bad and misguided
and deserve to be put out to pasture, the cost-center mentality makes total
sense because it asks the design to prove itself as early as possible. And the
outcome of that in turn is the familiar rushed, unmaintainable prototype-in-
production scenario.

New technology efforts always have this element of being a judo match: if you
can find just the right time and place to strike and take the problem off-
balance you can get an instant win, but the same strategy at a different
moment doesn't work at all, no matter how hard you flex your coding muscles,
and would leave you better off not attempting any new tech.

The balance-sheet model doesn't explain when and where to strike, though. It
just says whether or not you're trying to do so this quarter, and any benefit
will most likely show up on a different business unit's balance sheet.

~~~
snoman
> I don't think there is a "technical profit" to be had, though.

Ostensibly, every net-new feature increases the pool of people for whom the
software, as a whole, solves a problem. The performance and usability of that
feature further adds to that.* I'd argue that is technical profit, and is
realized into real profit when it converts to purchases/subscriptions/whatnot.

[1] For the sake of argument I'm assuming a scenario where the feature and its
performance/usability is positively received.

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chasedehan
This whole thing goes back to the accounting process of measuring "throughput"
rather than some fixed number such as inventory.

This book "The Goal" was incredibly beneficial for me in understanding the
concept of throughput. While the book is a parable focused on manufacturing,
it can be easily applied to companies in tech. [https://www.amazon.com/Goal-
Process-Ongoing-Improvement/dp/0...](https://www.amazon.com/Goal-Process-
Ongoing-Improvement/dp/0884270610)

~~~
Jtsummers
That book is next on my reading list, but also worth checking out is "The
Phoenix Project". It applies the concepts of "The Goal" to IT (operations to
start, but it gets extended to development through the book).

[https://www.amazon.com/Phoenix-Project-DevOps-Helping-
Busine...](https://www.amazon.com/Phoenix-Project-DevOps-Helping-
Business/dp/0988262592)

~~~
konpikwastaken
Was just going to recommend reading this book, glad someone did already. Being
in tech/IT, you will be able to identify each of the characters in your work
environment at one point or another.

~~~
Jtsummers
One of the best things about reading these books, IMO, is that I finally have
the vocabulary to speak to management. Before I'd say the exact same thing,
but I didn't know they had a term for what I wanted (value stream maps, for
instance) and we couldn't communicate. Now that I can speak in management
terms, they're listening to my inputs because we understand each other.

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rat_1234
"However, accounting systems count inventory as an asset, so and any
significant reduction in inventory had a negative impact on the balance
sheet...successful JIT efforts tended to make senior managers look bad"

This shows a poor understanding of managerial accounting.

High "working capital" requirements, of which inventory is a big part, are a
huge drain on free cash flow. Any company that sees its inventory as a % of
assets go DOWN would view it as a positive by both its management and
investors.

~~~
bluGill
You are confusing what the business leaders of today think with what they
thought in the 1920s. In the 1920s and before nobody could think of a reason
why large inventories would be bad: they were a buffer against surges in
demand, and you got to build them at today's prices. A large inventory just
meant you need to hire more salesmen (literally men, it was a sexist time),
and/or hold a sale.

Of course now management theory knows of many reasons the above is wrong, it
is entirely accepted that you want inventories low because of the advantages
it brings.

~~~
kgwgk
The article is talking about the 80’s, not the 20’s. The importance of working
capital management was well understood by then.

~~~
bluGill
In the 1980s it was well understood in universities. However senior management
in real companies were catching up. Some companies understood at and were
executing well (mostly Japanese companies who started early). other companies
had figured out how important it was, but were still trying to figure out how
to apply it. Other companies were just waking up to the fact that their
competition doing something else was beating them, without knowing why.

------
pixelmonkey
IT being a cost center at a modern information/product company is similar to
doctors being a cost center for a hospital.

Only a deranged accountant thinks the cost center is the scarce talent that
delivers outsize customer value, and that the profit center is the back-office
filled with billers who "monetize" a relationship that wouldn't otherwise
exist.

In tech, this flipped around in 2004-2008, I think. From 2001-2004, people
thought IT was "over". Now, they realize software is "eating the world".

I am hopeful a similar realization will eventually come to medicine. Doctors
deserve Google-style work perks and competition for their scarce talent.
Insurance, back-office, and billing deserve to be turned into the AWS of
medicine -- outsourced commodity.

~~~
Hextinium
I think it will actually reverse in the coming years ( 2-3 decades ) as the
education programs that mold programers over compensate for supply and people
in medical fields decrease to where they are valued again.

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stcredzero
_Let’s face it, unless there are mitigating circumstances, IT departments that
started out as cost centers are going to remain cost centers even when the
company attempts a digital transformation_

AWS and the Google Cloud are evidence of the possibility of escape. Are there
any writeups for how they came about? (Particularly in the case of AWS.)

~~~
rm_-rf_slash
I don’t know any write ups, but in short, AWS was a solution to the variable
demand for Amazon’s, well, web services. Demand peaked considerably during
holiday shopping months but otherwise remained far too low to justify keeping
all of those peak demand servers running Amazon.com full time, so they were
rented out to companies that actually had similar problems of peak demand. In
particular, the Victoria’s Secret fashion show is a great example of extreme
peak demand and scalability for a web service that otherwise attracts
relatively little traffic most of the year.

~~~
wallflower
Origin of AWS is quite famous.

[https://news.ycombinator.com/item?id=12022915](https://news.ycombinator.com/item?id=12022915)

Yegge's famous rant about Bezo's 2002 mandate
[https://plus.google.com/+RipRowan/posts/eVeouesvaVX](https://plus.google.com/+RipRowan/posts/eVeouesvaVX)

------
sidlls
I'm not sure many IT functions are _not_ cost center functions. Almost none of
them, including software development, are revenue drivers for most companies.

Like anything else in business this seems like a case where some hard, one
size fits all rule is occasionally misapplied.

~~~
cm2012
It's not a clear profit center like sales or direct marketing. But if you can
clearly point to good engineering work leading to more sales (release happens,
it's really good, lots of people buy the product clearly because of the good
work) then it's more on the profit than cost side of the spectrum.

It's really just a matter of how easily can you see that A led to B.

~~~
kgwgk
> release happens

Release of what?

~~~
cm2012
What selllikesybok said.

~~~
kgwgk
The discussion is about IT being considered a cost center for companies in
other industries like banks, car manufacturers, restaurants, airlines, etc.

~~~
Jtsummers
If you're a restaurant chain and you have your own IT, presumably it's for a
reason. You're providing your own POS systems, you're providing a website for
customers to order from. A new release can improve efficiencies in a
restaurant, or wreck them. A new release can mean the difference between me
being able to order from Papa Johns (literally 1 mile from my apartment) or
not (because of my zip code, they think I'm in an area they don't service).

For banks, it's the same thing. It can be external: my bank added a feature
that let me enter and see projected expenditures and incomes so I can see my
future balance, it's an effective aid to my budgeting. It can be internal:
Like a POS system, making it easier or harder for tellers or lenging agents or
others to do their job. Giving them more accurate and up to date information
with reports generated daily or down to the minute, instead of the historic
weekly or monthly batch reporting.

Car manufacturers have control systems developed by IT, same results as above
on a new release.

~~~
kgwgk
Nobody says that what the IT department does cannot be useful. And it is not
about being internal or user-facing. Marketing and customer support are also
considered cost centers.

~~~
Jtsummers
Which is not reasonable in either case. Also, is marketing really considered a
cost center in most businesses? I would see that put more in line with sales.

Customer support is certainly treated as a cost center, but it oughtn't be.
Mary Poppendieck (author of this article) has a good example in one of her
books where the customer support center improved profits by being able to
aggregate and identify the majority of customer complaints. This led directly
to improvements in infrastructure and delivered systems that reduced overall
corporate costs (less rework, customers were happier, more sales).

~~~
kgwgk
Those are valid points. My intention was not to discuss the subject but to
reframe the discussion. I can see advantages and disadvantages in considering
some departments in the company to be providers of services to the rest of the
business. But I guess an appropriate, but cynical, definition would be that
cost centers are the departments where you can slash costs while hoping there
will be no impact on the business...

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uiri
patio11 covered this in his career advice article.[0] I read that article
around the time it was first published. The tidbit about cost centers and
profit centers has stuck with me since. I have, for the most part, been able
to avoid being attached to a cost center. Primarily by working at "tech"
companies rather than more conventional companies which put software engineers
in "IT" departments.

[0] [http://www.kalzumeus.com/2011/10/28/dont-call-yourself-a-
pro...](http://www.kalzumeus.com/2011/10/28/dont-call-yourself-a-programmer/)

------
dsign
Don't see the point of this article. There are accounting mechanisms that
allow to activate money put into IT infrastructure as an asset in the balance
sheet, at least in my cold and dark part of the world.

Some IT expenses are indeed cost centres and should be just deducted from the
profits immediately.

However, other "IT expenses", like creating "back office cost reduction
software" and generally IT infrastructure are no different than acquiring some
fancy machinery that enhances an industrial process. This also applies to
companies whose main revenue model is building software and cloud services.

~~~
jdlshore
The point of the article is "accounting metrics drive company culture, which
leads to damage." It's an important point that senior-ish managers need to
understand.

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rm_-rf_slash
The given “best” solution - change accounting/metrics - is also one that is
most difficult to meaningfully change.

Everybody has a disagreement with metrics until it suits them. Metrics justify
mid-level management to upper management, which then justify themselves to top
management, then the board of directors, then the shareholders. “Look at the
numbers!”

It’s similar to a grumbling slogan of fund managers in the 1980s about the
then-consistently poor stock performance of IBM: “Nobody gets fired for buying
Big Blue.”

~~~
mark-r
I've always heard that phrase used in reference to IBM products, never IBM
stock.

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CamTin
Does anyone know of any further reading about how "software capitalization"
works, with the audience of either a layman or somebody who is only cursorily
familiar with real double-entry accounting? Also, do these rules vary
significantly by country? It seems like the right way of accounting for
software will be a huge structural advantage for countries as software becomes
and increasing percentage of the value produced by the world economy.

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bluetwo
A good read. I believe the basics (internet, email, connectivity) of IT
infrastructure should be a cost center, development of tools that assist the
company in accomplishing their goals should not be.

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gaius
The "cost centre" concept is so silly, and it only ever seems to be applied to
the IT department. Why isn't HR a "cost center"? They don't generate any
revenue. Why isn't _Accounting_ a cost centre? How many sales do they bring
in? It's just a stick other departments use to beat IT with.

~~~
Jtsummers
Sometimes they are, that's why HR and Accounting get outsourced at many
companies (or portions of them).

See what companies outsource, that's what they see as cost centers.

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NTDF9
This is why employees of "cost centers" should just go on occasional strikes.
Just don't work for 3 days, let the execs understand what the cost is of not
having these "cost centers".

