20 Dec 2006  Working Papers

The Demise of Cost and Profit Centers

Executive Summary — The Balanced Scorecard has proven to be a general and powerful performance management framework for units previously treated as profit and investment centers. The management control literature, however, identifies other organizational forms for decentralized units, including standard cost centers, revenue centers, and support units treated as discretionary expense centers. Starting from the example of a classic teaching case, Empire Glass Company, Kaplan explains how strategy maps and the Balanced Scorecard transform cost, revenue, and discretionary expense centers into strategic business units in their own right. Key concepts include:

  • The foundation of management control systems has been enhanced by applying strategy maps and Balanced Scorecards to motivate, align, and evaluate the performance of diverse organizational units.
  • The leading paradigm of organizational structure and control of just a generation ago—based on cost, profit, investment, revenue, and discretionary expense centers—is replaced by a framework in which every organizational unit can be considered a strategic business unit.

 

Author Abstract

The Balanced Scorecard offers a previously unrecognized benefit: a new way of looking at the traditional organizational structure of cost and profit centers. Every unit, by contributing to effective strategy execution, has the opportunity to support and create profit. This capability has important implications for specifying objectives and evaluating the performance of all organizational units.

Paper Information