The paper seeks to prove that decentralisation is occurring in today’s organisations, making them more decentralized than in the past. Looking at evidence from contemporary business trends and happenings at specific organisations, we will try to connect management theories with real-life situations. The conclusion states that modern business environments demonstrate characteristics that will further contribute to the decentralisation of organisations.
Decentralization of decision-making frequently surfaces in today’s discussions about managerial techniques and methods. Most authors contend that decentralized decision-making is the way of the future and point out that decentralization is usually conducive to superior patterns in decision-making.
In a centralized organization, all decisions come through a single chain of command. The manager always knows who to report to and in what hierarchy this or that question will be resolved, at least ideally. This clear pattern is fuzzier at a decentralized organization where decision-making is dispersed through a number of different channels and occurs in a less strictly regulated manner. This difference has also to do with information management as information can rise up a single line, as in centralized organizations, or flow according to a more complex pattern, according to the decentralized one. Centralization is connected with “a narrow span of control and a tall hierarchy”; in contrast, decentralization is associated with “a flat hierarchy with a wide span of control” (Simon 1994, p.34).
This paper will argue that decentralization is a visible trend in modern organizations, although it cannot be expected to replace all centralized organizations in the short run. Corporate revamping is a slow and painstaking process, and centralized governance does have advantages. However, the ‘fashionable’ customer focus and the need for flexibility that come to the fore in today’s business as well as other trends give managers reason to switch to decentralized patterns. The first sections deal with advantages brought by decentralization and the factors that lead to the emergence of this trend, and the final section looks at examples from specific companies.
Decentralization emerges because there are factors that spearhead its development. Today’ reality suggests that centralized organizations will often be at a disadvantage as compared to decentralized ones. True, organizations “benefit from a strong, unifying sense of direction” (Kadzban, Motwani, 1995). Integration of resources with the help of one clear goal is a great help for the organization as it helps to mobilize all forces to serve common objectives. However, this approach is flawed in many ways. First, it fails to account for problems that arise in a specific location of a large organization. What can the Chief Executive Officer know about the specificities of, for instance, bank clients in a particular locale? Most probably nothing or little at best. On the contrary, the local clerk attending to the needs of these clients every day will be in a better position to make a decision that will satisfy the clients.
Thus, decentralization gives the company flexibility, enabling managers to make more decisions on the spot, without going through the lengthy process of consulting upper-level management (Sloan 2001). This increases the ability of the organization to respond to rapid changes in the external environment which acquires increasing importance today when managers have to react to a wide array of changing factors. This is exactly what is needed in today’s business environments and points to the increased probability of decentralization in today’s organizations.
In today’s business environment, there are a number of factors that increase the incentive for top management to initiated change that would entail the decentralization of organizational structure. These trends affect organizations to a different degree – thus, there is certainly less stimulus for a small local store to decentralize its operations than for a large multinational company.
Thus, globalization makes companies decentralized, creating geographically dispersed multinational organizations. Globalization is among the most important trends in contemporary environments and one that is most contributing to decentralization in modern organizations. Globalization has led to the creation of a new generation of multinational companies that function in a way unknown to most domestic companies and have to cope with a different array of organizational challenges. Building coherence and integrating operations of a multinational company with a vision shared across departments is one challenge. However, after successful coordination strategies have been implemented, the organization has to think of “differentiation and decentralization of tasks, thus allowing flexibility in the management of one business operation to the next, depending on the particular role each partner plays” (Kadzban, Motwani, 1995). Thus, at the time when Microsoft, for instance, was a young start-up consisting of a bunch of people, centralization was surely easier to enforce than at today’s multinational giant.
The next factor contributing to decentralization is the emphasis on teamwork and employee empowerment so prevalent in today’s organizations. Modern companies have realized that employees no longer want to be cogs in the machine; instead, vesting them with new, challenging roles can result to a rise in productivity and open the way to innovation. In this sense teamwork has been highly beneficial for the development of organizations.
To realize successful teamwork, managers have begun to shift some of their responsibilities toward teams. There appeared an understanding that “to control the critical steps in a business system, you don’t necessarily have to own them yourself” (Kadzban, Motwani, 1995). Thus, the manager can relegate some of the powers to teams that later make decisions on these issues. Team work can parallel top-down management structures and result in improved decision-making. To empower teams, some of the decisions have to be left to them, and this necessarily leaves the organization less centralized than before as the previous vertically integrated system is altered. Instead of hierarchic management, the organization develops a totally different approach that makes decision-making closer to rank-and-file employees in cross-functional teams.
Outsourcing non-core functions that has ‘come into fashion’ at modern organizations also leads to decentralization as some functions are transferred to other entities. Understanding that construction of a leaner structure more clearly focused on the core competencies can be the way to success, today’s organizations have begun to outsource their functions. Outsourcing involves “the process by which an organization ceases to provide these services internally in favor of procuring them through autonomous, if closely linked organizations” (Cooper, Johri, Prokopenko 1998). The trend in question is not just offshoring of supporting business functions to remote countries in search of lower labor costs; the discussion embraces also the outsourcing of processes to ‘next-door’ companies that can more effectively and quickly accomplish the same task, perhaps even for a lesser cost. Before outsourcing, organizations tended to create a number of peripheral divisions that engaged in the provision of services like Human Resources, Logistics, Legal Counseling, Public Relations etc. Now companies often find that “the resources of organizations thus became dissipated across such functions and away from the core mission” (Cooper, Johri, Prokopenko 1998). In consequence, many prefer to outsource, and in this way the decision-making inevitably becomes less centralized as some of the functions previously performed inside the organization are now done in other companies and locations.
The appearance of knowledge organizations and increase in the level of knowledge of particular workers that leading to specialization also brings about their increasing decentralization is (Cock, McQueen, Baker). A knowledge organization is an innovative type in which knowledge workers exchange information and data, not goods and services. Combining received portion of information with previously accumulated expertise and knowledge, the educated worker creates greater value with the help of his/her expertise. An example can be the work of a restaurant chain franchisee who, by working with a large, reputable, chain absorbs an immense amount of knowledge about the company’s products, ways of doing business and other aspects. This accumulated knowledge allows the restaurant manager who runs the franchise operation to make more independent decisions and thus leads to decentralization.
To see evidence that knowledge organizations involve decentralization, one can look at AT;T’s Workplace of the Future planning unit that creates a link between the doers and operational leaders. Michael Maccoby (1996) explains the changes occurring in knowledge organizations through redefinition of three basic organizational levels: doing (e.g. soldier), operational (tank commanders) and strategic (generals). While in traditional taylorist hierarchies, the flow of communication was one-way top-bottom when the commands flowed from strategists to operators and further to doers. In today’s knowledge organizations, this uniformity is impossible since “each level owns different kinds of knowledge” (Maccoby 1996). In this way, knowledge organizations become more decentralized thanks to the greater knowledge present at doing and operational levels.
The accelerated pace of organizational change also triggers decentralization. Quite a large number of business and other types of organizations become aware of the inadequacy of their business systems and of the need to attune their operations and offerings to the needs of the contemporary market. Therefore, they want to implement wide-ranging changes in organizational structure and operations. Cock, McQueen & Baker point out that sometimes managers of these organizations are under a delusion that this can be accomplished through the work of a single group of experts, proceeding from the assumption that “knowledge can be concentrated on the top of the organization pyramid, while the bottom should concentrate on operating optimal processes designed by a group of management experts”. However, such top-down approach misses the fact that qualified workers in knowledge organizations “hold specific knowledge that is not held by managers” (Cock, McQueen & Baker). The dispersion of knowledge among a wide range of employees in knowledge organizations leads to decentralization of many processes that have to be organized by workers possessing knowledge.
An important trend that facilitates the transition to decentralized decision-making is increased emphasis on the technological component of business, in particular introduction of new IT technologies. Research performed by F. Li of Strathclyde Business School (1997) suggests that when the need arises to reconcile the controversy between centralization ad decentralization, “information and communications technologies (ICTs) can be innovatively used to resolve such compromises, and an organisation today can become more decentralised with improved central control”. Relying on evidence from 22 large UK companies, the author asserts the important role of communication technologies in redesign of organizational structure.
New technology opens new possibilities for decentralization. The examination of the trends of Swedish Social Insurance Board (SSIB) performed by Kerstin Grundin (2001) points to the fact that old technology was a hindrance for the successful functioning of the organization due to the fact that the old systems are for the most part centrally structured. The author’s proposal hinges on the suggestion of an innovative CSCW (Computer-Supported Co-operative Work) technology that has the power to alter the nature of employees’ responsibilities and tasks as well as organizational design.
For instance, using the terminology of Mintzberg developed in 1983, the Swedish Social Insurance Board at this point can be described as an organization combining the features of a machine and a professional bureaucracy. The difference here is within a professional bureaucracy, “the workers have more influence on their work situation, based on their professional knowledge, than in a machine bureaucracy” (Grundin 2001). The introduction of the new computer technology, namely CSCW, can help increase the scope of individual decision-making at the Swedish Social Insurance Board and thus contribute to the decentralization of important functions.
Arcelor, Luxembourg-based steel giant, is a vivid example of a company that was forced to implement decentralization thanks to changing nature of business that has become more international in the wake of industry consolidation. The mammoth company, formed in 2002 through the merger of three top European steel makers French Usinor, Luxembourg –based Arbed and Spanish Aceralia, has to integrate the operations of all three companies in an effective way. Most specifically, the Finance Department faced the challenge of bringing together three different structures of various finance operations at these three organisations.
Arcelor’s finance managers started with the “rollout of new consolidation software and a business performance management system using a single data warehouse” (Durfee 2005). After centralizing certain vital functions like cash management and global capex allocation in order to accelerate reporting and improve the quality of forecasts, the company managers began to think whether further centralization through shared service centers (SSCs) will be an effective tool in managing Arcelor’s finance.
The conclusion reached at the CFO office was as follows: “It’s important that processes are defined by the CFO office, but daily decision-making is decentralized”, in the words of Arbed’s former CFO Michel Wurth (Durfee 2005). The reasons given by the company’s finance management are quite convincing. First of all, the bulky centralized structure will not be as responsive to the needs of business as desirable. Steel business is characterized by rapidly alternating ups and downs that can lead to substantial fluctuations in demand and, accordingly, inventory levels. It takes a controller with significant potential for independent decision-making to be able to assess the situation adequately and take action for adjustment. Surely the primary decision-making power rests with the CFO, but the ability of the controller in a specific plant to make decisions on one’s own serves as a safety net in order to prevent crises.
Another advantage of decentralization of finance function at Arcelor is the ability of the local controllers to respond more effectively to the demand of particular businesses. The matter is that different plants within Arcelor group have different scope of challenges and methods of coping with them. For instance, some of the plant managers are mostly worried about adequate cash flow; for these plant managers, the main emphasis is on the collection period, which is a greater priority than cost. Another unit may see error rates as they greatest problem “because its customers have been upset in the past about incorrect bills” (Durfee 2005).
Evaluating all advantages and disadvantages of centralized vs. decentralized approach, Arcelor’s CFO has decided to leave the company’s finance largely decentralized. The evidence of the fact is in the statistics of Arcelor’s finance department structure. Out of about 800 employees concerned with the steel manufacturer’s finance function, 600 report directly to plant managers.
At Henkel, German-based consumer goods manufacturer, its CFO, Lothar Steinebach, also agrees to the advantages of decentralized finance function. As a result, the company’s finance function has become more decentralized than in the past. The company needs to respond to increasing globalization of its buying partners. For this purpose, Henkel implemented a serious reorganization effort in 2000 (Durfee 2005).
As of 2005, Henkel’s finance management was structured around eight shared service centers (SSCs) located throughout Europe. The CFO stated that his awareness of the pitfalls of centralization made him retain the eight centers instead of merging them into one unit. The presence of several centers will let the company keep “local know-how”, while at the same time uniform flow of information will be realized through the implementation a “single SAP platform” (Durfee 2005).
Today’s organizations are becoming more decentralized for a variety of reasons. Thus, they often pursue organizational change aimed at making their operations more efficient and cost-effective. More often than not, this implies decentralization that allows companies to raise flexibility and motivation of their employees and to strengthen customer focus.
Trends in environments triggering changes in companies’ operations lead to popularity of organizational reforms including decentralization. Globalization of operations at many companies makes decision-making dispersed at a variety of locations, and outsourcing takes this dispersion of operations even further. Decentralization of decision-making logically stems from the trend toward employee empowerment and teamwork, and the need for thoroughly planned organizational change projects further increases the need for qualified specialists able to make their input in organizational activities. This rise in personnel expertise contributes to the creation of knowledge organizations that need new, flatter hierarchies. Finally, innovative IT system designs allow managers to reshape the organizational pattern dramatically, effectively combining adequate control with dispersed decision-making.
European giants Arcelor and Henkel are only two examples of companies that implement reengineering projects involving relegation of many important functions to operational and doing levels. In the future, as the above trends are not likely to disappear, more and more organizations are likely to embark on a decentralization course to make their functioning more effective.