Should Corporates Continue with Cost Centres or are They Unnecessary White Elephants


What are Cost Centres, Why Have They Been Setup, and what is the Double Benefit

Cost Centres or the in house units setup to exist independently and yet on a not for profit motive have been in existence for a few decades now.

Cost Centres help corporates by being Low Cost Manufacturing or Service units that help them reduce costs associated with outsourcing work to expensive Third Party Vendors.

Moreover, Cost Centres are typically located offshore leading to a Double Benefit since they solely exist for the parent firms and hence, help maintain security and confidentiality of the processes and at the same time save costs as they often work on low wage models.

Of course, given that most Cost Centres operate in low wage countries, there is much Cost Arbitrage as this helps the parent firms to outsource work and at the same time, enjoy the Double Benefit as explained above.

Indeed, this was the reason why many Multinationals such as Citibank and other Financial Services firms setup Cost Centres in countries such as India where there were large pools of low wage yet qualified professionals who could get the job done for them.

Moreover, the Tech Boom helped spur this model.

Why Cost Centres are Being Viewed as White Elephants in the Wake of the Pandemic

Having said that, over the last few years or so and especially in the wake of the Covid 19 Pandemic induced lockdowns and the subsequent squeeze on revenues and profits, Cost Centres are no longer attractive to Multinationals.

This is mainly because such firms now are more focused on cutting costs and increasing profits in the absence of revenue growth.

In other words, when revenues are falling or stagnant, profits can only be increased by cutting costs and this is where the Cost Centre Model with its emphasis on working on a No Profit, No Loss Business Model does not make sense.

Indeed, Cost Centres are primarily In House Entities that are setup as Vehicles for Cost Arbitrage and not for making profits.

When the focus shifts away from such motives and towards maximising profits, the only way Cost Centres can survive is by following a Drastic Reduction in operating costs so that the overall strategic and operational goal of Cost Arbitrage is met.

In other words, the Pandemic has made Multinationals Think Twice about Cost Centres as they are now Unnecessary White Elephants that are past their prime. Of course, there are ways in which this model can survive.

How the Future of Cost Centres is to Shape up or Ship out and How They Can Survive

For instance, let us take the example of the various Cost Centres that Multinationals such as Fidelity and Goldman Sachs have established in India.

These in house units thrived as long as the focus was on serving the Parent Firms with Dedication and Low Wage and Low Cost work.

As soon as the focus shifted to making profits, these cost centres become unattractive as they then have to cut costs drastically.

Going by the present reports in the business press, there are quite a few Multinationals who are insisting on a Strict Cost Control regime and are tightening the screws on their Cost Centres.

Indeed, the message being sent out is that Shape Up or Ship Out which means that Cost Centres can only be allowed to operate as long as they provide more Cost Arbitrage.

In times when all countries that are the base for outsourced operations are providing a Race to the Bottom Cost Advantage, Cost Centres can no longer be the Plum and Laidback places to work for professionals.

Of course, while this is true of all Outsourcing Vendors, this is more the case with Cost Centres since they are increasingly being seen as Dead Weights.

The Case for Continuing the Cost Centre Model and the Double Benefit Even Now

Having said that, there are many advantages to having Cost Centres even in the present times. For instance, as they are dedicated in house units, they are better placed to operate in the Work from Home and Virtual Working model since concerns over Data Security and Confidentiality are assured.

Moreover, the Parent Firms have Tight Operational Control over them that guarantees reliability and failsafe modes of working.

In addition, employees can be moved between the parent firm and the cost centres leading to flexibility and at short notice, filling up of vacancies.

Indeed, there is a case to be made for Cost Centres in the present times wherein they evolve to a More Value Adding and at the same time, Low Cost Model, thereby continuing the Double Benefit motives for which they were initially setup.

At the same time, Cost Centres can also continue to thrive provided they make their employees work hard and not take the perks and luxuries that they provide for granted.

For instance, perks such as Cab Pickups and Drops, Free Lunches, and Luxurious Outings have to be foregone in these Belt Tightening Times.

Apart from this, it is also possible that pay cuts are necessary.

Business As Usual Doesn’t Work in the New Normal

Last, the Pandemic has forced Businesses worldwide to re-evaluate their Business Models and Cost Centres are no exception to this trend.

At the same time, there is also a realization that the New Normal is radically different from earlier conditions and that the Business as Usual Approach no longer works.

It is for these reasons that Cost Centres are being viewed as White Elephants by their parent firms.

Therefore, there is a need to innovate and be creative as far as how Cost Centres operate if they are to retain their existence.

To conclude, the Cost Centre model needs evolution.


❮   Previous  Article


Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.