Topic for Discussion - "Is HR cost centre or profit centre?"

Dear Members,

On one of the WA groups, the Administrator of the forum brought up a topic for discussion on "Is HR a cost centre or a profit centre?" The following are the questions that were raised:

- Is HR a cost centre or a profit centre?
- If it is a cost centre, what should HR leaders do to convert it into a profit centre?
- Do organizations need to provide HR leaders with opportunities to actively participate in the strategic decision-making process and help them develop as business leaders?

This discussion is not recent but rather a bit old. I have provided responses to the questions. My replies are as follows:

---

Dear Rajaram,

The replies are as follows:

Q. 1 Is HR a cost centre or a profit centre?
Reply: It depends on the type of company. If a company continues to view HR as an erstwhile personnel manager, then obviously HR will remain a cost centre.

Q. 2 If it is a cost centre, what should HR leaders do to convert it into a profit centre?
Reply: Until proven otherwise, HR is often seen as a cost centre. Therefore, it is HR's responsibility to showcase its value as a profit centre. HR should measure the business impact of their interventions, such as competency mapping and talent management, and demonstrate how these interventions contribute to the company's profitability.

Q. 3 Do organizations need to involve HR leaders in strategic decision-making processes and help them develop as business leaders?
Reply: Setting aside strategic decisions, HR should be involved in tactical decisions if they are sufficiently mature for such involvement. For HR to participate effectively, they must have a solid understanding of how the business operates. How many HR professionals comprehend the financial ratios outlined in the company's balance sheet? If some HR professionals acknowledge that they struggle with numbers, should they be included in strategic decision-making? Some HR professionals openly display their lack of knowledge regarding the business costs. Should they have a role in the decision-making process?

Final comments: On one hand, HR claims to be more than just HR—it professes to be an HR Business Partner. If this is the case, why does it struggle with a fundamental question like whether it operates as a profit centre or a cost centre? There is much for HR to learn from this contradiction!

Thanks,
Dinesh Divekar

I agree with Dinesh Divekar Sir. The traditional view was that HR was a service or staff function, rendering the supply of the required hands to carry out the tasks. So, these tasks anybody with some flair for human dealing could handle. With unionization and consequently IR issues cropping up every now and then, the human side of enterprises got some attention. Coupled with this was the compliance of various statutory requirements. All this required some knowledge and expertise, so some semblance of professionalism crept in.

Towards the second half of the last century, the realization dawned on many business and industry leaders that HR is the only resource that can multiply output, and the human factor is the central pin of the organization. So, started the concern for talent management, and various tools and techniques took shape aimed to channelize the creative energies of employees into productive areas of the business unit. This signified the change from the traditional Personnel Department - cost center approach to the modern Human Resource Approach, which is profit center-oriented.

Now the question depends on whether the HR departments are positioned as such. This is to be answered by the respective HR functionaries as to where they see themselves to be—as mere dispensers of certain services like recruiters, wage & salary administrators, or welfare administrators, or sensible professionals as business partners.

Indeed, the situation is exemplified by the typical answer given by the three people who were into constructing a building, to the question put to each one of them as to what they were doing. The first one saw only the task he was performing, that is placing brick over brick with cement, while the second one saw the result, that is building a temple, while the third saw his action holistically with a purpose and answered that they are building the finest temple of the world to serve the needs of the people.

So, if the HR functionaries are able to view themselves as business partners, they have to have a clear precept of their role and functions. For this, it is the HR group that has to take the onus and prove themselves to be competent and capable to do so.

A cost center is a subunit of a company that is responsible only for its costs. Often a division of a company is a profit center because it has control over its revenues, costs, and the resulting profits. Cost centers and profit centers are usually associated with planning and control in a decentralized company.
The cost centre and profit centre are two different aspect of the revenue generation. Whereas, the HR department is seen mainly as an overhead that did not directly generate revenue, but having the hypotheitcal contribution to the profit of any organisation.
Nowdays a trend is imerging to consider HR’s as profit centre. The consideration of HR Management as profit centre will be paradoxical nature. Can any expenses under welfare (canteen, hospital, housing, guest houses, transport and others) is considered against profit? Only thing can be done comaparative gain can be brought-up between projected expenditure aginst actual expenditure.
The HR will loose is essence when to be considered as a profit centre than of a cost centre. Infact, this profit centre concept will not be for all types of establishments but for few those who are of different natures & cultures

Every job or profile is a cost center for the company. The key is that the employee should prove himself, or the employer should assign roles that can transform the job into a profit center.

Dear colleague,

It depends on which side HR wants to belong. If he/she is driven by the inner strength of grit and determination to make a difference by wanting to contribute to bottom lines through employing innovative ideas in achieving substantial cost reduction, such as reducing talent turnover, hiring time cost, absenteeism, productive time wastages, self-paying incentive schemes, productivity-enhancing wage settlements, and many other possible areas, then he/she is surely not a cost center but a profit center.

Regards,
Vinayak Nagarkar
HR Consultant