This video explains how leaders financially categorize the various internal operational activities, and how learning is seen as a cost center.
- What comes to mind when you hear the word costs? Not surprisingly, many people get a negative feeling. They equate it with reducing or eliminating something. It's not surprising learning practitioners cringe when leaders refer to them as a cost center. When leaders refer to you as a cost, they're not trying to disparage your efforts. They're categorizing you based upon how your budget is allocated. Let's define each type of financial center and explain how the learning function applies to each one.
First is the cost center. A cost center is a business unit that incurs expenses or costs, but does not generate any revenue or money from selling goods and services for the company. Learning is a classic example, along with accounting, human resources, production, and IT departments. Leaders evaluate the learning function's performance based on how well costs are managed. Practitioners immediately think that they have to reduce costs.
But managing costs also implies how well you're using the money to positively affect performance. This is referred to as a cost-benefit relationship. Your primary role is often to onboard new employees and support the knowledge needs for existing staff. These items are costs, and don't generate any revenue when you support other departments. That said, without learning support, your organization wouldn't be able to function effectively.
The second is the profit center. This is a department that also incurs costs, but also earns revenue by selling its goods and services to customers. Managers of profit centers are evaluated on their ability to control costs, as well as their ability to generate revenue and profits in their departments. Rarely is a learning function within an organization considered a profit center. But there are instances when some successful internal learning initiatives are sought after by external sources.
General Electric is known for their management development programs. It's so well-respected that competitors request GE to train their future managers. This successful internal employee development program has become a profit center for GE. Typically, companies that sell learning are the only ones considered profit-centered. The final type is an investment center, which also incurs costs and earns revenue. But an investment center also has control over the investments that it makes to earn profits for its department or division.
For example, GE's management development program is probably structured in two parts. One part as an internal function, their cost center, and the other as a profit center or even an investment center to sell the program. Depending on how successful GE's external learning division becomes, if it's an investment center, it'll operate independently from the main company. This new learning division would control their costs, revenues, and investments, allowing it to be an independent and autonomous business.
Now that you have an appreciation for how your leaders categorize internal business activities, you don't have to cringe when they call you a cost center. Embrace the cost center label, but also appreciate how your cost affects other internal activities. Show how your learning costs justify the benefits of your efforts.
- Learning in a modern organization
- Essential business skills for L&D
- How business leaders see learning
- Developing a training strategy
- Developing a lean learning approach
- Maintaining your training budget
- Making training that employees want
- Aligning with performance expectations