Shifting from "Cost Center" to "Value Center"

Brian Hughes, Vice President

As root cause analysis consultants, most of our clients are considered to be overhead - Safety, Quality, Reliability, IT, Supply Chain, etc. We don't get a lot of sales/marketing people in our seminars. That's because the benefits of our products/services are often cast in the paradigm of future cost avoidance. "If we could just find the root cause of this problem, we could avoid all this in the future..." I'm guessing you can relate.

Someone came up with the concept that these cost centers need to consider themselves as blue-dollar revenue centers with customers, sales, expenses, etc. Their competition? Any market alternative. In other words, if a training department provides the service of identifying training needs and providers, negotiates pricing, provides facilities, conducts scheduling, and keeps track of records, then they need to do this at a price that is competitive. If some outside the company can provide equal or better services at a better price, then the internal training department is potentially at risk of being outsourced.

I've bought into that concept since the first time I heard it, and I still do.  But it's been modified by a professional development session I attended that was led by Dr. George Westerman, a research scientist at the MIT Sloan Center for Information Systems Research. His presentation stood out because he spoke about the value an IT organization brings to the business - and the concepts apply to other departments, too.  He has a new book out on the subject "The Real Business of IT: How CIOs Create and Communicate Value" (written along with Richard Hunter, who is Vice President and Fellow at Gartner).

I'm incorporating the concepts with clients already, and it's resonating with them.

Cost centers are seen as detrimental to the bottom line. The natural inclination is to reduce the cost of the cost center. Hence, downward pressure on budgets, do more with less, maximize efficiencies, hiring freezes, and, oh yeah, don't let service levels slip. But what if this thinking is wrong and the opposite were true? What if cost centers were critical to achieving bottom line goals? That would make them investment centers -- a much more palatable label in my book.  But if this is true, then managers need to change their thinking about exactly what value they bring to the party.

Step one in Hunter/Westerman's book is to change your thinking to avoid what they call "value traps."  A value trap, as I understand it, is an inward focus on the metrics of the department, rather than on the metrics of the business itself. For instance, maximizing critical asset uptime is a metric that maintenance/reliability people love to track. And in their world, it's important. But ask an account manager if he/she has ever even heard the term, let alone what it means to the overall goals of the business. Sure, everyone knows that if the critical machine stops stamping out widgets, no one will get paid. But if you focus on uptime and stop short of relating it directly to bottom-line revenue for the period, you're only a cost at that point -- not an investment.

That actually leads to the second point of the book:  show that your department provides value for the money. Do the math and show it. Don't know how to do this? That's okay - there's a department called "Finance" that does. Get them involved.  Their third party assessment of the return on investment in reliability for the period will be more credible with others in the business anyway. These should be the metrics you share with the world and that drive your department -- not uptime or other "machine" type metrics. Show the cost side as well. By showing the basis of the investment as well as its return, you'll show exactly how your efforts have impacted the bottom line, not just the cost.

Step three. Now that you've changed your focus from cost to investment, and you can actually report metrics showing your impact over time, you need to improve your performance. Set achievable goals to move these metrics in the right direction. At this point, you're no longer managing the IT department, or the Human Resources Department -- you're managing business performance. This has a bottom-line impact -- not merely a reduction in blue-dollar cost.

Finally, once you've moved through the three steps above, you can actually shape the direction of the business itself. Imagine that -- a cost-center leader making a direct impact on the future of the business.

It doesn't happen often, but these concepts struck bedrock with me. I'm always encouraging people, especially during the classes I teach, to look at root cause analysis and problem management as an investment. Spend X on investigation/training and you'll get your money back in the form of a reduction in future risk. And they nod their heads in agreement.

But when reviewing root cause analysis reports, I see that people don't do what they agreed was a good idea during class. They often shortchange documenting the significance of the problem. Well, this is a value trap. The value the investigation provides doesn't stop at solving the problem. The value carries forward to the bottom line for the period. And if you can't or don't calculate it, you're selling yourself short. The business can only pat you on the shoulder and tell you to reduce your budget by 15 percent next year.

Encouraging Safety, Reliability, Quality, and IT to recognize that they have real, measurable bottom-line impact is critical. Money spent on Safety, for instance, is an investment. That's a powerful thought to those in the cost-center value trap.

When visiting a utility client recently, I had the pleasure of explaining this to a new director of HR and her staff.  I could see the light really come on when we distilled it down to this simple statement:

"The goals of this utility are to keep the lights and power on, and to do it at reasonable rates. There is no difference between the goals of the utility and the goals of the human resources department - you need to think of yourselves as keeping the lights on, the gas flowing, and the rates reasonable."

As their RCA/Problem Management consultant - those are my goals too...

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