Cost vs. Profit Center Mindset

ursusminimus
Tue, 21 Apr 2026 22:37:32 GMT

In 2016, Volkswagen became the world's largest automaker, overtaking Toyota by number of cars sold. VW held that title until 2019 with a narrow lead, selling nearly 11 million cars at the peak. When Corona hit in 2020, both companies were disrupted, as was everybody else. The paths diverged - Toyota returned to form in 2021, beat the all time record in 2023 and again in 2025. I have no special insight how they did that - seems like straight lines on a graph to me.

On the other side, VW sales kept falling until 2022. After a brief recovery in 2023, they are trending downward again and VW sold 2 million fewer cars in 2025 than it did in 2019.

Consequently, they fired the CEO Herbert Diess in 2022. The new CEO, Oliver Blume, started the biggest cost cutting campaign in the history of the company, setting cost cutting target after target. On the 21st of April, he announced in an interview that VW is reducing the production capacity by closing plants and production lines by another 1 million cars per year (presumably after already having it reduced by over a million from the 12 million cars/year peak in 2019). Presumably this is an admission that they see no path to increase sales any time soon.

Unrelatedly, Jensen Huang went on Dwarkesh's podcast a few days earlier. A quote went viral: "That loser attitude, that loser premise makes no sense to me.". Clearly you don't become number one by closing plants. I might not have insights into Toyotas success, but I am right in the middle of Volkswagen's struggles.

All opinions are my own and have no relation to any of my past or present employers.

Cost Centers and Profit Centers

Patrick McKenzie writes in Don't call yourself a programmer:

Peter Drucker [...] came up with the terms Profit Center and Cost Center. Profit Centers are the part of an organization that bring in the bacon: partners at law firms, sales at enterprise software companies, “masters of the universe” on Wall Street, etc etc. Cost Centers are, well, everybody else. You really want to be attached to Profit Centers because it will bring you higher wages, more respect, and greater opportunities for everything of value to you.

[...]

Nobody ever outsources Profit Centers. Attempting to do so would be the setup for MBA humor.

Originally an accounting abstraction, cost centers leak first into orgchaits and then into physical reality itself:

Let's say you start making widgets and selling them online. Business is good. You keep paying shipping costs both for in- and outbound shipments. To keep track, you meticulously note them in your spreadsheet and assign them the category "Shipping". Business is still really good, so you hire Alice to handle the shipping for you. Soon, Alice is joined by Bob. You group their wages into the same "Shipping" category, because... well they take care of shipping, right?

Your IT department (where did they come from? Do you pay them? Let's note these guys down as "IT" in the spreadsheet) rolls out SAP to manage all your finances. Suddenly your nice "Shipping" category is replaced by an integer code, you think it was "1234"? Your consultant says this is fine.

Either way, you hire Charlie as "Head of Logistics" and tell him Shipping costs seem to get out of hand and eat 40% of your margin and he should take a "holistic" approach to reducing them, meaning he is now in charge of whatever "1234" is and should keep a lid on it. He splits it into "1234" for inbound and "7890" for outbound logistics because these are completely separate things, obviously. Coincidentally now Alice and Bob, promoted to sub-department-heads have one cost center to manage each. Also Charlie really wanted to have "1235" for the second cost center but this was taken by the IT already, and now they are enemies for life. Anyway.

One day you walk into your warehouse and a worker yells at you: "Kein Zutritt in die Kostenstelle ohne Sicherheitsschuhe!" (No entry into the cost center without safety shoes!). You look at the floor to see "7890" printed in large yellow letters on the floor.

When cost centers operate, they provide some kind of good or service to the company at a certain cost. The demand for this is usually inelastic - the number of required shipments are determined by the sales of the widget, not by how well run the logistics cost center operates. Passing through efficiency gains to the end customer is indirect at best and the gains might be captured elsewhere (ideally company profit margins, but usually the cost center one level up in the orgchart. For logistics, this is usually called "Operations").

To get more budget, for example to invest in some improvement, cost centers usually need to argue front of some decision committee that manages the money, as they have no direct income.

In contrast, Profit Centers can just earn more money by being better at what they do. No need to argue in front of anyone.

When times are tough, the only lever cost centers have is to cut costs. Worst of all are situations where the cost center itself is well run, has done nothing wrong, but still has to make painful cuts. In our example, Alice, Bob and Charlie are world-class experts and approach the platonically ideal logistics team. Still, you, the founder, design widget V2.0 that sells really badly - your shipment volumes drop by half, and you have to let Bob go to "cut your fixed costs". If you survive, the root cause is still out of your control, nobody is happy.

In contrast, profit centers can go on the offensive. A slump in sales can be counteracted by investing in a huge new marketing campaign! Widget V2.0 is beloved by Influencers! If you succeed, you can hand out promotions like candy.

Cost Center Mindset vs. Profit Center Mindset

I argue that this concept generalizes beyond financial topics and scales from individuals to giant corporations with 700k employees. When faced with a problem, both individuals and organizations default onto the cost center mindset of "cutting your losses" or "damage control". Just get through somehow, then we will see. However, many problems have an alternative solution space that can be thought about as profit center mindset: actively looking at the gap that is causing the pain and seeking ways to fill it with something valuable.

In initial example, VW seems to have settled on the loser premise that there is no way to return to the 11 million cars per year around 2022. Consequently, the "Cost Center Mindset" kicked in and the entire organization is now pushed to cut costs anywhere and everywhere, Goodhart's law be damned.

Is it feasible that VW could have challenged Toyota instead and sold 11 million cars again? They overtook them once before, not so long ago. At least, when Diess was fired, he was planning a new factory for a new vehicle architecture to set new standards in manufacturing and product features. This was promptly canceled to save costs. Unfortunately we have no way to test the counterfactual.

The reason why the cost center mindset is the default mode is that it doesn't require foresight or strategy - one can simply react to the situation and chose a locally useful step in the right direction. The profit center mindset requires first formulating a goal or direction - especially since, depending on the magnitude of the problem at hand, it might seem ridiculously ambitious. It also requires a more detailed gears-level understanding of the problem to come up with the right solutions.

As usual, beware of the law of equal and opposite advice.

A small scale personal example

I recently started applying for a new job and initially had zero positive feedback. After trying for some time, my hypothesis is that my CV has become less legible over time for my core job description (what used to be called data science) - and putting "I read and understood all of Zvi's posts" will not get me through an HR filter.

My initial thoughts centered around the idea taking a step back and working my way up again:

"which lower level positions would I be willing to accept?"

"how much of a pay cut can I afford?"

"which compromises would I be willing to endure regarding commuting or relocation?

After the thought process that I tried to capture in this post, I am now instead looking into higher level positions:

"Which positions would actively benefit from the experiences that made my CV less legible?"

"What do I understand about value creation now that I didn't when I was a pure Data Scientist and how can I use that in my job?"

"What would the next level up look like in a perfect world, regardless of perceived available opportunities?"

The answer is a completely different set of jobs. And, at least so far, they have a much better response rate. Coincidentally they involve less HR filters and no pay cuts.

Discuss