Contemplating the best structure for your business operations? Wondering whether decentralization is right for you? Here’s what you need to know.
To decentralize or not? According to McKinsey and Co - writing on the pros and cons of different corporate structures - it’s a question as old as time. A ‘tug of war’ between the desire for control and the need for agility.
In recent years, the rapidly evolving world of work - and volatile economic conditions - has made the question seem more pressing and pertinent. Which business model paves the way for higher profit and growth?
According to research from consultancy firm Egon Zehnder, decentralized companies outperform non-decentralized companies in performance and revenue. But decentralization isn’t without its risks and challenges.
As a successful operations director in a professional service business, you know that organizational design can make or break a service business.
So is decentralization the answer? What are the pros and cons? And how do you practically move away from a centralized organization?
A decentralized organization is a business structure that distributes decision-making authority throughout the entire company, rather than concentrating it at the top.
In a traditional hierarchical - or centralized - structure, decision-making is concentrated at the top level of the organization. Decisions are made by a small number of people at C-suite level. This ensures consistency and control. But it can lead to decision-making bottlenecks, lower agility, and stifle innovation.
A decentralized organization - on the other hand - sees decision-making power shared between the teams and divisions closer to the frontline. This fosters faster decision-making, adaptability, and agility. Plus, it can result in greater customer-centricity.
In politics, this idea is known as ‘subsidiarity’ - the idea that a central group should only perform tasks that can’t be performed at the local level.
But make no mistake, decentralization doesn’t mean disorganization. A decentralized structure is still a structure. It is just flatter and has fewer layers of bureaucracy.
Decentralized organizations often have a flatter structure, with fewer layers of management between employees and senior leaders. There are typically fewer managers at intermediate levels and more self-management.
This democratizes and diversifies decision-making processes throughout the entire organization, and encourages the free flow of information and ideas.
Related: Leading from Within - A Guide to Self-Managed Teams
Another key characteristic of a decentralized organization is how decisions are made. When an organization is decentralizing, some decision-making is removed from the C-suite and entrusted to team members at lower levels of the organization. Employees at departmental or team levels - or in specific branches - are empowered to make their own decisions without reference up the chain of command.
Ed Frauenheim, author and Senior Director at Great Place to Work US, rates decentralized, collaborative decision making as one of the most crucial benefits of decentralized organizations. In his view, it is piece in the vital puzzle of what makes a company a truly great place to work:
The assignment of work in a self-organizing company, if you will, is like co-creation. It's not necessarily that the employee alone is choosing things, and it's not that the manager alone is choosing things. The conversation and shared decision-making removes the issue of people feeling demoralized because they are being bossed around without any input or control.
Related: 5 Effective Decision-Making Models for Better Results
A decentralized organization is more agile and responsive to local challenges and opportunities. Decentralized decision-making allows teams to quickly adapt to dynamic market conditions and customer needs. This ensures people can use their initiative to respond to and resolve issues as they arise - providing they align with the company's overall vision and values.
Individual teams or departments have a higher degree of autonomy, allowing them to operate independently and respond rapidly to changing client requirements and market trends. The many benefits of autonomy at work can be found in decentralized organizations - including a culture of ownership and accountability, innovation, and higher employee engagement.
Decentralized organizations often rely heavily on data and analytics to make informed decisions. Centralized data systems provide indisputable insights to decentralized teams. This enables confident decision-making at all levels, without the need to reference upper management.
Let’s dive a little deeper into the pros and cons of decentralized organizational structures - especially for professional services firms and project-based businesses.
Greater agility and innovation
Bottom-up decision-making reduces bureaucratic bottlenecks, increases agility, and stops rigid structures from stifling innovation. Ideas can be quickly actioned, iterated, and assessed. It is the epitome of the ‘fail fast, learn fast’ mentality.
When team members are given the freedom to experiment, and take risks, they are more likely to come up with novel solutions. This can lead to innovative new products and services that set you apart from competitors.
Distributing decision-making also diversifies the process, rather than restricting control to a small (often uniform) group of individuals at the top. This brings new voices, experiences, and opinions into the business, which can make them more responsive to their diverse customer base.
Enhanced employee engagement and retention
Employee engagement and retention are both crucial factors for the long-term success of professional service businesses. Your success is built on your ability to get the best from your consultants and knowledge workers.
Decentralization gives employees more autonomy, which is proven to increase engagement. Employees who feel valued and have the opportunity to influence the company's direction are more likely to be committed to their work.
This helps support higher performance, productivity, and job satisfaction. And reduces the cost of disengagement and involuntary turnover in your business.
Improved customer-centricity
In a professional service business, happy clients create repeat custom and positive word-of-mouth - which leads to better stability, predictability, and growth. And decentralized decision-making can help your business become much more responsive to customer needs.
Customer-facing teams can respond directly to client feedback, address concerns, and implement improvements promptly. It can lead to highly individualized customer service.
The teams closest to the customer can use that grassroots knowledge to improve services and products, without needing to refer them up to senior leaders (who typically grow apart from the customer as they climb the corporate ladder).
This client-centric approach builds trust, loyalty, and competitive advantage.
Efficient resource allocation
Effective resource management is a high-challenge, high-reward process in project management. Get it right and you’ll increase operational efficiency and ROI from your investment in staff.
Whilst there is an argument for centralized resource management (for example, via a Project Management Office), decentralization can also be advantageous.
Decentralization can make resource allocation more streamlined and optimized. Autonomous and self-managed teams can assess their specific needs and allocate resources accordingly. This avoids wasted spend on under-utilized resources. And ensures projects get the right people - at the right time - to deliver cost-effective client success.
Continue reading: 8 Resource Management Best Practices to Fuel Growth and Profitability
Economies of scale
One of the main drivers of centralization is that organizations can achieve economies of scale by centralizing services. This is seen in the growth of Shared Service Centres and PMOs, for example.
A centralized structure can be more cost-efficient. When you decentralize your organization, you run the risk of individual business units duplicating work or costs, which eats into your overall profits.
Reduced control
Another challenge associated with decentralization is that central control and overall consistency are reduced. Whilst this may be a benefit for some businesses, in others it poses a significant risk.
For example, businesses that need to be compliant with strict regulations - such as product safety or construction standards. In these circumstances, centralized management and oversight make more sense.
Consistency concerns
Decentralized management can result in reduced consistency. Without proper guidelines and guidance being cascaded from a single senior point in the company, decentralized teams might make decisions that conflict with the company's core strategy, or change the fundamental offer to customers.
This is an example of how a decentralized structure is still a structure - just a different shape. Decentralized organizations still need to find ways to communicate expectations, monitor performance, and maintain strategic alignment.
Organizational silos
Another risk of decentralization is that teams or units become siloed from the rest of the business.
Rather than engaging in cross-team collaboration and the pursuit of shared goals, teams become isolated from the bigger picture. When organizational silos form, teams become so focused on their own objectives that it becomes detrimental to the organization as a whole.
Decentralized organizations still need careful management to ensure teams are pulling in the same overall direction - even while optimizing their own systems and procedures to maximize local efficiencies.
In reality, neither centralized nor decentralized management is the perfect solution. {Does such a thing even exist in the corporate world?]
As a result, many organizations adopt a hybrid approach that combines the best of both structures, to suit their specific needs and goals.
The key is to understand the organization's objectives and to choose the most suitable structure to optimize its performance.
‘Striking the right balance between decentralized functions and centralized control starts with addressing the needs of business units,’ advises McKinsey and Co. See below for expert tips from Harvard Business Review and MIT on how to do this.
Decentralization might be a buzzword but few companies can survive with a wholly decentralized business organization. Most businesses need a hybrid approach where a central function maintains control and consistency in key matters - albeit in a much-reduced format.
According to Gartner, ‘There are different degrees of centralization. It is not an all-or-nothing proposition. Some degree of centralization is necessary as organizations need a structure from which to extract value from the interactions of its members.
Whilst this hybrid approach can be beneficial, there is a risk that you’ll end up with an unsatisfactory halfway house that alienates everyone. McKinsey and Co outlines the issue as follows.
Over the past decade, companies have struggled with organizational designs that vary widely in how centralized or decentralized they are across functions. These organizational redesigns are often prompted more by who is designing them than by objective, fact-based decisions about what maximizes value. This dynamic may result in a struggle between functional leaders trying to achieve standardization and scale, and business leaders who feel they are paying for a large corporate overhead that is not sufficiently responsive to their needs.
McKinsey advises that while decentralization is often beneficial, ‘not all corporate functions are up for grabs’. They recommend that a central function maintains control of the following non-negotiables ‘because of the types of decisions and activities they involve’.
Safeguarding the organization - Safeguarding functions include those protecting the company from threats to survival by maintaining basic controls. These decisions are inappropriate for a single business unit to make and often involve legal, risk, regulatory, or investor-related topics.
Shaping the value agenda - Shaping functions that support the implementation of the organization’s strategic priorities and require one voice across the enterprise, such as branding, strategy and business development, communications, and R&D. ).
Sharing economies of scale, skill, and scope - Sharing functions serve needs across business units (for example, payroll, IT, and accounting). Sometimes, these functions can be aggregated to provide efficiencies of scale. Other times, they can be distributed within business units when needs are dissimilar.
From McKinsey and Co, Redefining corporate functions to better support strategy and growth, Jan 2022
Another way to determine which functions you can safely and useful decentralize is to assess the qualities your business needs. That’s according to Harvard Business Review.
The theory is that by decentralizing control, you can make your organization faster and nimbler. But you can’t do that with every decision, so how do you decide which decisions to keep centralized? It can be useful to start with four qualities most executives want their organizations to have: responsiveness, reliability, efficiency, and perennity (e.g., the quality of continuing reliably in perpetuity). Think through which of these is most important to each aspect of your business.
HBR recommends the following approach depending on your key qualities.
Responsiveness - decentralization
‘Responsiveness is all about taking the right action quickly in response to opportunities and threats. Decentralization allows immediacy in time and place.’
Reliability - centralization
‘For some tasks, it is desirable or necessary to have common rules across the operating units: policies, standards, methods, procedures, or systems. For some tasks there is not even a choice: they must be done by law or statute by a central independent unit.’
Efficiency - centralization
‘A centralized unit can serve as the home for a task that is carried out more economically when aggregated in one unit than when all operating units take care of that task separately. For example, economies of scale, minimum efficient scale, and avoiding duplication.’
Perennity - centralization
‘There are certain tasks which, left to the discretion of the operating units, might not get done - particularly tasks that are essential to the company’s long-term wellbeing, but do not serve the business unit. A central unit with detachment from front-line operations may be required.’
Decentralization isn’t about an absence of leadership, it’s about a different type of leadership. ‘A decentralized company needs leaders who are comfortable being coaches, teachers, and pressure-testers,’ writes Olli Lauren.
In a decentralized organization, the focus is less on senior leaders proving their impact and more on proving - and improving - the efficacy of the business ‘operating system’.
Lauren identifies some key traits that leaders of decentralized organizations need, including:
Researchers from MIT concur, saying ‘Leaders in organizations driven by decentralized decision-making should support teams by removing impediments to team success [...] and focus on providing context rather than exacting control.’
In a decentralized organization, business leaders need to establish clear guidelines, foster a shared vision, and communicate core values to ensure that decentralized teams remain aligned with the organization's objectives.
Related: What is a Democratic Leadership Style?
While autonomy drives innovation, too much independence without accountability can lead to chaos. Striking the right balance between autonomy and accountability is essential. ‘Decentralization is a structure. It is not chaos,’ reminds Gartner.
Organizations can achieve a balance between autonomy and control by implementing a ‘minimum viable policy’ approach. This is where you actively seek to reduce your centrally prescribed policies to the minimum needed to function effectively.
According to MIT’s Centre for Information Systems Research,
The aim of the minimum viable policy guardrail is to guide teams and safeguard business continuity with the least amount of policy required. Organizations committed to this aim pursue the power of subtraction: their leaders eliminate impediments to team progress, such as excessive or complex policies that increase bad complexity, and instead implement high-level foundational principles that define collective constraints and guide teams’ decision-making. This cuts the average time to make complex or high-stakes decisions in half. Teams, in turn, can challenge existing policies and deviate from established norms—so long as they share their motivations for deviating to surface opportunities for further policy minimization.
While one of the benefits of a decentralized organization is the ability to innovate, you don’t want people reinventing the wheel. That’s not efficient.
MIT research suggests organizations that enable the re-use of their peers’ tried-and-trusted solutions can speed up innovation. This is made possible by using a central repository to record processes and share knowledge with colleagues.
Leaders can [...] foster habits of reuse, by setting expectations for teams to consolidate solutions in a centralized repository and to reuse their peers’ solutions when practical. Our survey data showed that when reuse becomes an organization-wide habit, teams can analyze opportunities and experiment with solutions more than twice as quickly as teams in organizations without this habit.
In a project-based business, this idea can extend to sharing knowledge that improves project forecasting. By providing all PMs with historic data on how long different projects actually took - for example - future forecasts and client quotes can be more accurate.
You can empower data-informed decision-making - and reduce the risk of organizational silos - by centralizing tech, tools, and data that support cross-team communication and information sharing.
Runn is a resource management platform that makes it easy to manage resources across your decentralized or hybrid organization.
It centralizes your resource and project management information, so you can confidently decentralize decision-making processes. Start your free 14-day trial today.
