Profit Centers or Not?

Feb 10, 1997

We’re seeing more and more multi-office A/E/P and environmental firms wrestle with this issue: should branch offices be profit centers or not? Or should some other organization units be the place where we measure profits and losses? There’s no simple answer. That’s probably why so many companies continue doing what they have done in the past and don’t make any radical decisions to change to something new. At one time, I used to advocate that all offices be profit centers. But I have learned it’s not always the best way to go about it. Here are some questions you might want to answer to help you decide whether or not to treat an office as a profit center: Does the office need a quick turnaround? There’s nothing like a little financial scrutiny to make a lagging unit work at improving their performance. Continuously monitoring and reporting on the P&L for a troubled office is one way to put this heat on. I have even gone as far as making the manager or managers of the office take a 20-30% pay cut, and then put the office on an incentive plan that rewards them with a percentage of every dollar they bring in over and above their break-even point (with break-even including corporate overhead allocation). Does the company suffer from a lack of a competitive spirit or is there too much internal competition? Some firms seem to be staffed with people who really don’t care whether or not they are part of a money-making operation. If the firm needs an injection of competitive spirit, one way to make it happen is to set up each office as a profit center. Report on the performance of each office to all employees. Make the lion’s share of the incentive compensation program funds flow to the offices that make the most money. Penalize those that don’t make money by exposing their poor performance to the rest of the firm and giving them little or no incentive compensation. On the other hand, if offices are competing with each other, if clients aren’t getting the best staff for their project because the staff required resides in a different office, or if office managers’ petty squabbles are demoralizing the staff, one way to eliminate these problems is to put everybody on the same team. Stop treating the offices as profit centers and look at profits in some other way. Does the office have to share work or people with other offices? This is probably one of, if not the single most important question to address. If there is a lot of sharing of people and projects across offices, or there should be, then it’s probably best in the long run if each office is not treated as a profit center. Why have barriers to doing what’s best for the firm and its clients? Firms that work for many types of clients and do complex multi-discipline projects know how difficult it is to be efficient and give their clients the best of the firm’s capabilities when offices are profit centers. Make the units that have to work together one unit. Many times, the ideal organizational unit for firms in this position is to have either studios or client type units, each of which is focused on serving a unique market sector (i.e., clients with common needs). On the other hand, if the offices in question require very little project sharing, and it’s rare that one office has to lend staff to another, treating each office as a profit center may make complete sense. This approach (offices as profit centers) typically works best for companies that are doing low-tech or single-discipline work where they don’t share staff and projects (e.g., construction inspection outfits, geotech firms, construction materials testing, low-end land surveying, etc.). Does the office serve one particular market sector or client type that no other office does? If so, then treating the office as a profit center may be the way to go. This means it’s unlikely they’ll be required to share staff and resources, and there’s no reason the office shouldn’t stand on its own. Does the office provide one service that no other office in the firm provides? Once again, if the answer is "yes," then it may make sense to treat the office as a profit center. Every job they work on will have a budget for their services, whether the client is inside or outside the company, and it’s unlikely that they will have to share staff with another unit. What will it take to keep a superstar manager? One big advantage to treating offices as profit centers, which may in fact outweigh some of the disadvantages to doing so, is that the office manager job (when offices are profit centers) is typically a coveted job that offers a real entrepreneurial opportunity to a motivated manager. Smart, driven people want "their own thing." An office, with a defined geographical territory that is treated as a profit center, is one traditional way that A/E/P and environmental consulting firms provide this opportunity to their best people. Is the office used as a marketing outlet that sends off projects elsewhere in the firm for completion? If so, it probably should not be a profit center. Perhaps it would be better to include this type of office in another office’s P&L, or else make it part of a market sector unit or studio. A lot of larger engineering-dominated firms that do big projects such as treatment plants or power plants operate this way, and many do not treat their offices as profit centers. As you can see, there are many issues to consider when it comes to making a single office, some of your offices, or all of your offices profit centers. There’s no simple answer. The problem is compounded for firms that have operated one way for a long time and want to change. We often recommend that before you make any permanent changes, you keep two sets of books for a defined period of time, say six months or a year, and look at P&L in both the "old" and "new" way at the same time. This will get people used to the change without turning the particular office or offices that are going to be affected by the change upside down. And that will ultimately help the change be more successful. Originally published 2/10/1997

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