Post written by Gaurav Gupta, Principal at Kotter International.
The last few decades have seen many waves of centralization and decentralization in functions from HR to product management to quality and compliance. A lot has been written on how to make the “right” decision. Far less advice exists on how to ensure success in each scenario. Success for a highly-decentralized function requires a different organizational design and leadership skill-set than a highly-centralized function.
Centralized functions are often challenged by an apparent efficiency vs agility trade-off. In addition to sacrificing agility, efficiency gains are often not fully realized. Consider the following when centralizing to greatly minimize the trade-offs and maximize the efficiency gains:
1. Anticipate and address the cultural impact of the centralization through effective change leadership
While the rational for centralization may be driven by a desire to provide more consistent and effective service, such as in the case of compliance, often the reason to centralize is cost reduction. These efforts are invariably accompanied with layoffs and if not led well, can erode trust in management and damage the business culture. The resulting drop in productivity, increase in anxiety, and loss of talent is a death spiral that weakens innovation and improvement and eliminates anticipated cost improvements. Leaders can help their teams effectively navigate this change by articulating a holistic view of the true opportunity – one that goes beyond the burning platform of cost reduction and addresses how the new function will serve the broader business, operate more efficiently, and create opportunities for the team. Articulating this “Big Opportunity” provides a compelling reason for moving to a centralized function and employees will more readily engage in achieving something more than just cost savings by striving towards this vision of a better future.
2. Ensure you have the right leadership in place
For the highly complex global organizations of the 21st century, centralization is almost always accompanied by increased diversity of ideas, cultures, and geographies. Leading such a function requires a different skill-set than the leadership of more decentralized operations. A greater focus on leadership skills (particularly through the transition), in addition to management skills will be required. Leaders of these increasingly complex functions cannot be successful only by effectively managing budgets and project plans but instead will need to set goals and direction and inspire others to want to achieve these goals. You may find that even the highest performing managers of the previously decentralized function do not have the right skills to lead these large, diverse teams.
3. Cultivate curiosity to stay aware and connected with the business
When the director of HR sits in the office next to the business unit head, she is aware of the businesses’ current challenges. This does not happen organically in a centralized model, hence the oft heard complaint “Corporate has no idea what we need.” To combat this, adopt an active strategy to recruit for, develop, and promote curiosity in your functional team – curiosity that will prompt people to reach out and learn more about the other aspects of the business. In addition to nudging individual behavior change through recruitment and development, consider what your incentives systems and structure are rewarding. In a centralized function, you may need to explicitly recognize and reward cross-functional collaboration.
So, what about decentralized models? How do you maximize efficiency and ensure alignment to the broader business strategy when the resources are spread out geographically and between business units?
1. Create collaboration forums
The challenge in a decentralized model is how to share best practices and benefit from the knowledge of many, not just the few who happen to be in the same office. By deliberating creating internal forums for teams from different business units to collaborate and share best practices, organizations can still realize the benefits of scale and diverse opinions even without physical collocation.
2. Support and develop informal networks
In addition to the formal collaboration forums, businesses can encourage informal networks and information sharing. These networks can be cultivated by actively seeking out opportunities for individuals to work on joint projects that are relevant to multiple business units. In our work with clients, we have seen organizations develop a strong “volunteer army” that comes together to execute against specific opportunities and in doing so builds relationships that strengthen this informal network. Engage people in initiatives related to, but not traditionally part of their role. Additionally, rotational programs and various technology solutions can help create and sustain these links between people.
3. Align decision making by establishing the right incentives
Blended incentives that incorporate individual business unit performance and overall functional performance will encourage decentralized resources to stay aligned. The result will be actions that enhance local performance while supporting the global strategy.
The decision to centralize or de-centralize is not a binary one. You may be able to achieve the best of both worlds. Continuous improvement groups often centralize the development of the overall strategy and approach but decentralize the execution. When done well, local action supports global strategy.
There are various reasons for deciding on the right structure for your organization but whether moving towards a more centralized or a more decentralized model, start by articulating the “Big Opportunity” presented by the change, ensure you have the appropriate leadership skills in place for your chosen structure, engage the many not just the few, and be very deliberate about aligning monetary and non-monetary incentives with the desired behaviors.