Profit Centers vs Cost Centers at Tech Companies
Profit Centers vs Cost Centers at Tech Companies
Why the difference between them matters for career growth, and how to determine which one you work in
Q: “When choosing which company to join, how can I balance impact, career growth, and job security? Are there principles I can use to find companies and teams that tick all three?”
A useful comparison I find myself thinking of frequently is the concept of working at a profit center, versus working at a cost center. The implications of which one you’re in are wide-ranging; it frequently impacts compensation, career growth speed and job security. In this issue we dive deeper into this topic:
Profit centers vs cost centers. The differences.
Engineering as a cost center. Which companies treat it as such, how can you recognize if this is the case where you work and what you can do about it.
Engineering as a profit center. Which places operate like this and what are the telling signs?
When cost centers are called what they are. Investment banking, back offices, and what happens when people know which teams are cost centers.
Traditional companies and the digital transformation struggle. Why do so many older companies struggle with transforming into tech companies, and will this ever change?
The gray areas. Where do platform teams, SRE, R&D, or security engineering sit?
Implications at large companies. What impact does working at a profit center or cost center have on promotions, performance reviews or internal transfers?
We’ll also touch on whether it could be a coincidence that in the top 10 most valuable companies in the world, based on market cap, those founded in the past 30 years all treat software engineering as a profit center.
1. Profit centers vs cost centers
I was talking recently with a software engineer working at Bolt – the one-click checkout platform – right as the company laid off around 30% of its staff on 25th May, as covered in The Scoop #12. I asked if they were affected and this person was not, and they were also not too worried, despite the layoffs:
“I’m safe because of the team I work on. We are building a tool to automatically onboard merchants, instead of manual intervention. We’re a key part of reducing costs and scaling up onboarding: without us, Bolt would have little hope to get to profitability.”
This engineer was working at a profit center, and this fact made their team’s position more safe, even during large layoffs. Indeed, I’ve learned no person from this organization was let go.
So what are profit centers and cost centers?
A profit center is a team or organization which directly generates revenue for the business. A classic example is the Ads organization at Google, which is directly responsible for generating the majority of Google’s income. There are many teams that help with this effort; for example, the Search team brings visitors to the site and therefore also contributes heavily. But without the Ads team building the tools for advertisers to spend their ad budgets, Google would see much, much less revenue.
A cost center refers to teams or organizations which do not directly generate revenue, but are still needed for the company to operate smoothly. A good example is an engineering team working on compliance; for example, ensuring the company is GDPR-compliant in Europe. Their activities are required, but by themselves generate no revenue, and are pure costs from the point of view of the business.
Even when a team does not generate revenue directly, they may still be perceived as a profit center by leadership. For example, sales organizations are typically seen as profit centers, even when they cost much more to operate than the revenue they bring in. At Google, the Search team is most likely seen as a profit center, as it’s clear this team enables Ads to generate as much revenue as they do, since the more traffic Search generates, the more adverts the Ads team can sell.
So, how do you figure out if your team or organization is a profit or a cost center? We’ll go into more detail on the characteristics of both. Meanwhile, here are some exercises to help answer this question:
Does your team or organization report on revenue generated during every period? If yes, then you are likely in a profit center.
How does your company make money: which organizations are attributed to bringing this revenue in? Does Sales get all the credit? Or does Front Office, if in a bank? Is Tech credited for generating revenue? Which teams within Tech get the credit?
Look at the org chart. How high up is technology represented in the organization? Where does engineering and product report into? How many VPs are there in engineering, compared to e.g., Marketing, Finance, Operations and other groups?
Which teams get frequent callouts from the CEO as strategic teams during All Hands, and are credited with increasing revenue? Is your team or organization among them?
Is your company traded publicly? Read the quarterly reports if so, for a sense of where the company places its focus.
If you work at a publicly traded company, reading the quarterly reports is an underrated way to understand which areas the business cares about – and to discover things never mentioned at work. Let me give three examples.
In their Q1 2022 report, map maker TomTom writes, (emphasis mine):
“We do expect that our increased expenses, which center around investments in our application layer and the further automation of our mapmaking platform, will lead to lower spend levels from 2023 onwards. (...)
We moved forward with the advancement of our core Location Technology business during the quarter, securing key partnerships and further enriching our map and services. We have teamed up with the MIH Consortium to build the next generation of electric vehicle, autonomous driving, and mobility service applications. TomTom is the first and only global mapmaker and navigation supplier to join this partnership, to which we will contribute our extensive knowledge in digital cockpit and navigation user experience for EV drivers.In Enterprise, we have combined forces with Webfleet Solutions to offer an integrated mobile service for professional drivers and fleet managers. Together, we will offer workforce management features, best-in-class navigation for all vehicle types, up-to-date maps with live traffic information, reliable ETAs, and more.
Our expanded agreement with Maxar Technologies, meanwhile, will enable us to integrate high resolution global satellite imagery in our products and services. This provides end-users and our Automotive and Enterprise software platform customers with a photorealistic map.”
Just reading this report reveals which areas the company perceives as profit centers or strategic investments. Automating their mapmaking platform, core Location Technology, integrating with fleet managers and integrating high-resolution global satellite imagery, are all areas the company is doubling down in, and expects to get more sales or less customer churn, as a result.
When the company laid off about 10% of its staff in June 2022, these initiatives were not the ones cut; that mostly happened to its map making platform, as covered in The Scoop #13.
Reading the quarterly report summary for JP Morgan for the same period and the earnings call transcript, there are very few technology-related mentions. The ones I could find were notes on how mobile customers are up 11%, the CEO mentioning “real-time payments, certain blockchain-type things, wallets.” This suggests that while JP Morgan likely invests in these areas, tech is probably a cost center, serving the relevant business units mentioned in the report: Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset & Wealth Management and Corporate.
Compared to JP Morgan, Cloudflare’s Q1 2022 quarterly results transcript paints a different picture. A few quotes, (emphasis mine):
“We continue to see success with our other Zero Trust products. A Midwestern US state bought 75,000 seats in a three-year, $5.1 million deal. The state was replacing legacy hardware and had decided to move to a cloud-based solution when they began talking to us.
It was a competitive deal, but they preferred Cloudflare's tightly integrated approach that gave them a single pane of glass with integrated policies and threat intelligence. They also loved our performance and network that had presence inside their state borders. This was an example of a sale in partnership with a major systems integrator, which we expect will be part of more and more large Zero Trust sales.
On the theme of trust, a large social network signed a $3 million, five-year contract. They are using our global network to authenticate the security of one of their messaging products. They've built the authentication application on Workers, our serverless compute platform, that Workers can up with their tremendous scale and volume is a testament to its effortless scalability.”
The earnings transcript is long, so I’ll stop the quotes. In it, Cloudflare’s CEO highlights products like the Zero Trust solution, Workers, DDoS protection services, Magic Transit, Magic Firewall, Cloudflare for Offices, and others. It’s clear all these are profit centers that drive more revenue, and all of them are engineering-heavy products.
It’s also extremely interesting to compare the two transcripts and the focus of each CEO. The CEO of JP Morgan, Jamie Dimon, is clearly a banker, navigating finance questions at a higher-level. The CEO of Cloudflare, Matthew Prince, reads more like a very technical product manager or engineer, going into much more detail on how these products help the business now, or in the future.
2. Engineering as a cost center
When I joined JP Morgan in 2011, I expected to join a tech-first company. At the time, the organization ran a heavy campaign on how they were making technology central to everything they did. This was echoed during my interviews and also in the technology All-Hands.
However, over the span of the year I spent at the company, I realized most of this was just marketing, and the reality was that technology remained the same cost center it always had been. Tech had no real autonomy: I could never get a request approved to install a refactoring extension, and at performance reviews it was far more important what feedback traders had to share, than any engineering-related work. The profit centers were – and still are – the traders and finance folks who generate the revenue. Tech is seen as a means for making this happen.
Companies where all or most of engineering and technology are considered a cost center are typically: