Understanding the differences between profit and cost centers in engineering teams is essential for developers. The two have fundamentally different mentalities in the way they operate. As a result, developers must know the difference to determine which would work better for them.
This article examines the differences between profit vs. cost center organizations, including the pros and cons. It will explore differences in team structures, ownership models, and how engineers are assigned to projects, helping you understand the trade-offs between the two.
Let’s begin with some definitions. A profit center is a team or organization that is considered to generate revenue for the company. On the other hand, a cost center is a team that costs money for the company and does not directly contribute to revenue.
For example, legal, accounting, and HR are technically all cost centers. They are not bringing in money, but are still essential to the company. Without them, the company couldn’t hire or train employees or remain compliant with tax laws. They typically have budget limits and have to track their expenses carefully.
On the other hand, an engineering team supporting a credit card application would be a profit center. This team supports a product that brings revenue and customers to the company. Some engineering teams might fall under the umbrella of cost centers – the infrastructure team or tooling – but the whole tech department would be viewed as a profit center.
Nowadays, technical companies consider their engineering departments to be profit centers. They have created a product and treat it as the main revenue generator. When companies have this product-driven tech mentality, investment in the engineering department is seen as beneficial, as it would lead to innovation and revenue.
The structure of the engineering department is typically divided into squads focused on a specific scope of the product. For instance, at a healthcare company I worked at, we had dedicated squads for search, appointment booking, authentication, front-end design, accessibility, marketing, and SEO optimization.
In product-driven tech companies, every part of the product is owned by a squad. Each of them would have five to six engineers and an engineering manager. Some engineering managers may manage multiple squads. The same reality can also be applied to the designer and the product owner. Each of these squads would also have its roadmaps filled with projects to either expand or improve the scope of the product.
This structure empowers teams with clear ownership, incentivizing engineers to continuously improve their domain. For example, I once worked on a team where our front end, for SEO reasons, was half in Slim and half in React.
For one quarter, one of my deliverables was a migration plan to move everything to React. I ended up presenting this plan to the team and CTO, and it was added to the roadmap. We could invest in these kinds of initiatives because addressing technical debts would help us in the long run.
However, this model isn’t without drawbacks. Teams can get siloed. You can get very specialized in one part of the product and miss the big picture, unless there are initiatives to get people to move teams every once in a while, or lunch and learns to learn about another team. Engineers who want to be promoted must demonstrate a higher-level vision and therefore should seek projects that allow them to work with other teams. For example, I once worked on migrating our reCAPTCHA tool, which got me in contact with the booking and login teams.
At my previous company, we also had the “Live My Life” initiative, which allowed developers to spend two weeks with another team to see how they work and their part of the product. It was a great tool for developers who wanted to move but didn’t know where.
After more than eight years of working for startups and scale-ups, I joined a big corporation. I wasn’t sure what to expect at first, as I had worked for a big company before, but it had managed to retain that entrepreneurial mindset. This new one didn’t. Not only was it a big corporation, but it was a financial one.
Gone is the idea that the tech product is the money maker. In this environment, the engineering department is treated as a cost center. The product isn’t the moneymaker: the financial teams are. Engineering exists to support their initiatives, not to lead them.
Unlike squads used in profit centers, developers are resources assigned to a project. These projects can last for a few sprints to a few months or years. Once done, developers will move to the next project.
The methodology is also closer to the waterfall method. While the development phase can use the agile methodology, you typically have a requirement phase before the start of it. Once those requirements are gathered, a budget is created and must be approved before development can start.
There are upsides to this model. You get to work on a variety of projects, which reduces the risk of becoming siloed. The pace is slower, offering a better work-life balance. Tech stacks can be modern, even if not cutting-edge. These companies also tend to offer greater job security, as they’re typically risk-averse and less prone to layoffs.
The negatives are that the pay isn’t great and the work isn’t always exciting. In addition, by not having dedicated teams, there is less of a sense of ownership; developers will move from project to project. In addition, if engineering is treated as a cost center, addressing tech debt needs to be approved, and a budget has to be dedicated to it.
In conclusion, engineering as a profit or a cost center are two different mentalities.
In profit centers, products are divided into teams that own a scope and have their own roadmap. Things move more quickly, but engineers can become siloed and miss the big picture. The pay is good, but the job security is not guaranteed.
For cost centers, developers are resources assigned to projects. The work is slower, and the pay isn’t the greatest, but there is more work-life balance as people leave work on time at 5 pm.
As a developer, what works best for you depends a lot on what you are looking for.
In my opinion, the main differentiator is stability. In profit centers, I found that most developers were in their 20s or 30s, in a relationship but without children. In contrast, in cost centers, the average age is higher, and most seem to be married with children. They are typically at these companies for a long time, and use the benefits offered by these companies, like pension plans:
Whether you’re early in your career or thinking about long-term goals, understanding how your engineering team is positioned within the organization can help you make better career choices.
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