What’s a cost center?

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Expense centers, also known as cost centers, are departments or services within organizations that do not generate direct income and are seen as a financial burden. Examples include IT and customer service centers. They are often the first to be scaled back or closed during financial crises.

Expense center or cost center is a term that refers to departments, services, or machines within organizations that are not considered direct financial benefits to the organization, even if they offer other forms of indirect benefits. What this means is that such departments do not generate any direct income and for this reason are seen as a burden on the organization’s finances. Expense centers are generally held in an organization because of some type of value or benefit to the organization, which may not necessarily be financial or to fulfill some type of obligation or expectation.

The exact definition of a cost center is unique to many organizations, because what one organization may consider a cost center may be more valuable to another organization. An example of this is an Information Technology (IT) department within an organization. While some companies may find the contribution of such a department minimal, others may find the department more helpful in their operations.

Another example of a cost center is a customer service center which can be one of the services perceived to drain a company’s finances. Such a company could see the money spent paying customer service representatives’ salaries and other costs necessary to maintain the department outweigh the benefits derived from returns. This is perhaps why human customer service representatives are often replaced with computerized systems wherever possible in an attempt to reduce the perceived drain on resources. Some companies even outsource customer service to other countries where customer service representatives are not native speakers, which is inconvenient for customers who may have difficulty communicating with them. This is the result of the perception of such services as cost centers and an offer by the companies in question to reduce the money spent on such services at all costs.

A common denominator that links expense centers in various companies is the fact that they are usually one of the first departments or services to be pulled, scaled back, or even closed entirely in the event of any financial crisis within the organization. The reason for such action is the fact that these departments do not bring in revenue, and are considered expendable at a time when the company is trying to block all avenues of leakage. On the other hand, the departments that are considered essential, especially those that generate income, will still be maintained.

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