Dear Members, On one of the WA groups, the Administrator of the forum brought up a topic for discussion on "Is HR a cost centre or a profit centre?" The following are the questions that were raised:
- Is HR a cost centre or a profit centre?
- If it is a cost centre, what should HR leaders do to convert it into a profit centre?
- Do organizations need to provide HR leaders with opportunities to actively participate in the strategic decision-making process and help them develop as business leaders?
This discussion is not recent but rather a bit old. I have provided responses to the questions. My replies are as follows:
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Dear Rajaram,
The replies are as follows:
Q. 1 Is HR a cost centre or a profit centre?
Reply: It depends on the type of company. If a company continues to view HR as an erstwhile personnel manager, then obviously HR will remain a cost centre.
Q. 2 If it is a cost centre, what should HR leaders do to convert it into a profit centre?
Reply: Until proven otherwise, HR is often seen as a cost centre. Therefore, it is HR's responsibility to showcase its value as a profit centre. HR should measure the business impact of their interventions, such as competency mapping and talent management, and demonstrate how these interventions contribute to the company's profitability.
Q. 3 Do organizations need to involve HR leaders in strategic decision-making processes and help them develop as business leaders?
Reply: Setting aside strategic decisions, HR should be involved in tactical decisions if they are sufficiently mature for such involvement. For HR to participate effectively, they must have a solid understanding of how the business operates. How many HR professionals comprehend the financial ratios outlined in the company's balance sheet? If some HR professionals acknowledge that they struggle with numbers, should they be included in strategic decision-making? Some HR professionals openly display their lack of knowledge regarding the business costs. Should they have a role in the decision-making process?
Final comments: On one hand, HR claims to be more than just HR—it professes to be an HR Business Partner. If this is the case, why does it struggle with a fundamental question like whether it operates as a profit centre or a cost centre? There is much for HR to learn from this contradiction!
Thanks,
Dinesh Divekar
From India, Bangalore
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8047- Is HR a cost centre or a profit centre?
- If it is a cost centre, what should HR leaders do to convert it into a profit centre?
- Do organizations need to provide HR leaders with opportunities to actively participate in the strategic decision-making process and help them develop as business leaders?
This discussion is not recent but rather a bit old. I have provided responses to the questions. My replies are as follows:
---
Dear Rajaram,
The replies are as follows:
Q. 1 Is HR a cost centre or a profit centre?
Reply: It depends on the type of company. If a company continues to view HR as an erstwhile personnel manager, then obviously HR will remain a cost centre.
Q. 2 If it is a cost centre, what should HR leaders do to convert it into a profit centre?
Reply: Until proven otherwise, HR is often seen as a cost centre. Therefore, it is HR's responsibility to showcase its value as a profit centre. HR should measure the business impact of their interventions, such as competency mapping and talent management, and demonstrate how these interventions contribute to the company's profitability.
Q. 3 Do organizations need to involve HR leaders in strategic decision-making processes and help them develop as business leaders?
Reply: Setting aside strategic decisions, HR should be involved in tactical decisions if they are sufficiently mature for such involvement. For HR to participate effectively, they must have a solid understanding of how the business operates. How many HR professionals comprehend the financial ratios outlined in the company's balance sheet? If some HR professionals acknowledge that they struggle with numbers, should they be included in strategic decision-making? Some HR professionals openly display their lack of knowledge regarding the business costs. Should they have a role in the decision-making process?
Final comments: On one hand, HR claims to be more than just HR—it professes to be an HR Business Partner. If this is the case, why does it struggle with a fundamental question like whether it operates as a profit centre or a cost centre? There is much for HR to learn from this contradiction!
Thanks,
Dinesh Divekar
From India, Bangalore
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I agree with Dinesh Divekar Sir. The traditional view was that HR was a service or staff function, providing the necessary personnel to carry out tasks. These tasks could be managed by anyone with a flair for human interaction. With unionization and the emergence of industrial relations issues, the human aspect of enterprises gained attention. Compliance with various statutory requirements also became necessary, requiring knowledge and expertise, leading to a semblance of professionalism in HR.
Towards the latter half of the last century, business and industry leaders realized that HR is the only resource that can multiply output, with the human factor being central to the organization. This led to a focus on talent management, with various tools and techniques developed to channel employees' creative energies into productive areas of the business. This marked the shift from the traditional Personnel Department's cost-center approach to the modern Human Resource approach, which is profit-center oriented.
Now, the question is whether HR departments are positioned as such. This is for HR functionaries to answer—whether they see themselves as mere service providers like recruiters, wage and salary administrators, or welfare administrators, or as sensible professionals and business partners.
The situation is exemplified by the typical answer given by three people constructing a building when asked what they were doing. The first saw only the task he was performing—placing brick over brick with cement. The second saw the result—building a temple. The third saw his action holistically with a purpose and answered that they were building the finest temple in the world to serve the needs of the people.
So, if HR functionaries are to view themselves as business partners, they must have a clear understanding of their role and functions. It is the HR group that must take responsibility and prove themselves competent and capable of doing so.
From India, Mumbai
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Towards the latter half of the last century, business and industry leaders realized that HR is the only resource that can multiply output, with the human factor being central to the organization. This led to a focus on talent management, with various tools and techniques developed to channel employees' creative energies into productive areas of the business. This marked the shift from the traditional Personnel Department's cost-center approach to the modern Human Resource approach, which is profit-center oriented.
Now, the question is whether HR departments are positioned as such. This is for HR functionaries to answer—whether they see themselves as mere service providers like recruiters, wage and salary administrators, or welfare administrators, or as sensible professionals and business partners.
The situation is exemplified by the typical answer given by three people constructing a building when asked what they were doing. The first saw only the task he was performing—placing brick over brick with cement. The second saw the result—building a temple. The third saw his action holistically with a purpose and answered that they were building the finest temple in the world to serve the needs of the people.
So, if HR functionaries are to view themselves as business partners, they must have a clear understanding of their role and functions. It is the HR group that must take responsibility and prove themselves competent and capable of doing so.
From India, Mumbai
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Understanding Cost Centers and Profit Centers
A cost center is a subunit of a company that is responsible only for its costs. Often, a division of a company is a profit center because it has control over its revenues, costs, and the resulting profits. Cost centers and profit centers are usually associated with planning and control in a decentralized company.
The cost center and profit center are two different aspects of revenue generation. Whereas the HR department is seen mainly as an overhead that does not directly generate revenue, it has a hypothetical contribution to the profit of any organization.
The Emerging Trend of HR as a Profit Center
Nowadays, a trend is emerging to consider HR as a profit center. The consideration of HR Management as a profit center will have a paradoxical nature. Can any expenses under welfare (canteen, hospital, housing, guest houses, transport, and others) be considered against profit? The only thing that can be done is a comparative gain can be brought up between projected expenditure against actual expenditure.
The HR department will lose its essence when considered as a profit center rather than a cost center. In fact, this profit center concept will not be applicable for all types of establishments but only for a few that are of different natures and cultures.
From India, Mumbai
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A cost center is a subunit of a company that is responsible only for its costs. Often, a division of a company is a profit center because it has control over its revenues, costs, and the resulting profits. Cost centers and profit centers are usually associated with planning and control in a decentralized company.
The cost center and profit center are two different aspects of revenue generation. Whereas the HR department is seen mainly as an overhead that does not directly generate revenue, it has a hypothetical contribution to the profit of any organization.
The Emerging Trend of HR as a Profit Center
Nowadays, a trend is emerging to consider HR as a profit center. The consideration of HR Management as a profit center will have a paradoxical nature. Can any expenses under welfare (canteen, hospital, housing, guest houses, transport, and others) be considered against profit? The only thing that can be done is a comparative gain can be brought up between projected expenditure against actual expenditure.
The HR department will lose its essence when considered as a profit center rather than a cost center. In fact, this profit center concept will not be applicable for all types of establishments but only for a few that are of different natures and cultures.
From India, Mumbai
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Every job or profile is a cost center to the company. The only thing is that the employee should prove him self or employer should give such roles to make his job profit center.
From India, Hyderabad
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From India, Hyderabad
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Dear colleague, it depends on which side HR wants to belong. If he/she is driven by the inner strength of grit and determination to make a difference by wanting to contribute to bottom lines through employing innovative ideas in achieving substantial cost reduction, such as reducing talent turnover, hiring time cost, absenteeism, productive time wastages, self-paying incentive schemes, productivity-enhancing wage settlements, and many other possible areas, then he/she is surely not a cost center but a profit center.
Regards,
Vinayak Nagarkar
HR Consultant
From India, Mumbai
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Regards,
Vinayak Nagarkar
HR Consultant
From India, Mumbai
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