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« Advice for Entrepreneurs (which Corporate Executives Can Use) | Main | Employee Performance: Measuring to Reward Success »

July 22, 2007


Rob Kremer

I witnessed incredible mispricing of cost centers when I worked at a money center bank in the 1980's.

As you say - if it has no price, it gets overused and then is scarce.

I'm glad to see that there are rational solutions being devised that use intra-company market principles.

One interesting aside: It's important to keep intra-company markets intra-company. Otherwise you might turn a cost center whose real mission is to serve the company into a profit center that goes into a business the company has no expertise or comparative advantage in.

For instance, let's say a big company has an internal printing center which charges corporate profit centers for the printing jobs. At times the center has excess capacity, which the enterprising manager utilizes by doing print jobs for outside customers.

A dollar in indirect expenses he charges a profit center looks the same as a dollar from an outside customer, so his incentive is to keep the equipment busy.

But then the inevitable conflict happens: a big outside print job crowds

The lesson being: don't allow the internal market to extend outside the firm. The cost center's role is to serve the core business of the firm - it should not be in the position of being a business in and of itself!

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