Design, Bargaining, and the Law
Chapter 11: Cost-centers, profit-centers, and human capital provider autonomy
Joint ventures are classified as either cost-centers or profit-centers. Cost-center joint ventures are typically organized to serve a cost-cutting or risk-aversion role through cost control in a segment of at least one of the partners’ value-chain functions. Merely reducing or minimizing partners’ operating costs may serve the partners’ objective to maximize profits. In contrast, profit-center joint ventures are organized with the aim of earning profits from third parties and sharing those profits between the JV partners. Profit-center joint ventures aim to increase profitability for both partners. Cost-centers’ and profit-centers’ key performance indicators are expenses and profits, respectively. JV partners use very different means of controlling these two types of joint venture to ensure effective fulfillment of the respective functions and purposes. For example, in cost-center joint ventures, control mainly revolves around relatively simple cost-cutting pressures. In profit-center joint ventures, in contrast, incentives such as autonomy granted to the joint venture’s management team are typically a key means of control. During the business-planning process, both partners should distinguish between cost-centers and profit-centers. In cost-center joint ventures, managers are generally only given responsibility and authority for cost control; profits are beyond the purview of their authority. Thus, the primary management objectives are cutting costs, establishing cost-control systems, and subsequently conducting required operations at minimal cost. Autonomy and incentives are generally not required in this setup.
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