What Is an Expense Center?
Expense center or cost center is a term that refers to departments, services or machines within organizations that are considered to be of no direct financial benefit to the organization, even if they offer some other forms of indirect benefit. What this means is that such departments do not generate any direct revenue, and for this reason they are considered to be something of a drain on the finances of the organization. Expense centers are usually maintained in an organization due to some sort of value or benefit to the organization, which may not necessarily be financial, or in order to fulfill some sort of obligation or expectation.
The exact definition of an expense center is unique to various organizations, because what one organization may consider an expense center may be of more value to another organization. An example of this is an Information Technology (IT) department within an organization. While some companies may consider the contribution of such a department to be minimal, others may view the department to be of more usefulness in their operations.
Another example of an expense center is a customer service center that may be one of the services perceived to drain the finances of a company. Such a company might view the money spent on paying the salary of customer care representatives and other costs needed to maintain the department to be more than the benefits derived from the returns. This is perhaps the reason why human customer service representatives are often replaced with computerized systems wherever possible in a bid to reduce the perceived drain on resources. Some companies even outsource customer service to other countries where the customer service representatives are not native speakers, making it somewhat inconvenient for customers who may have a hard time communicating with them. This is a result of the perception of such services as expense centers and a bid by the companies in question to reduce the money spent on such services at all costs.
One common denominator linking expense centers in various companies is the fact that they are usually one of the very first departments or services to be withdrawn, scaled down, or even shut down completely in the event of any financial crisis within the organization. The reason for such an action is the fact that these departments do not contribute revenue, and they are considered expendable at a time when the company is trying to block all avenues of leakages. On the other hand, the departments that are considered essential — especially the ones that generate revenue — will still be maintained.
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