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. For example, when functional leaders design functions, they are usually more centralized (in pursuit of economies of scale and skill); when business-unit leaders weigh in, functions tend to end up more decentralized (in pursuit of responsiveness and control).
In large, global multibusiness companies, 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. Underlying these issues are two problems: the lack of a strategic rationale for the current design and an unclear division of decision rights and roles between business-unit and functional leaders. Common symptoms of this dynamic include:
- Functions in an organization continuously shift between centralized and decentralized modes, first centralizing to achieve efficiency, then giving power back to business units to spur responsiveness and accountability.
- Organizations implement tenuous “we’ll both do it” models that rely on collaboration and result in large and expensive functions, with business units finding ways to opt out and act independently. This approach creates an end state that leaves an organization wanting in both efficiency and effectiveness.
- Functional organizations follow an agenda that is not tailored to the needs of business units, so business units create shadow functions that add even more cost to the organization.
- Patchwork fixes are applied to solve problems with specific functions and business interactions, resulting in diminished clarity and coherence across the enterprise and undermining accountability for service delivery and increasing complexity.
Toward a new approach
Against this backdrop, we believe companies need a new approach to set up functions that maximize business value and successfully serve business units. This approach is based on three core beliefs.
- Organizations should flip the script on traditional value assessment of functions and define functions by looking first at business-unit needs, or “BU back.” By definition, centralized functions impose a tax on the organization because they can slow down activity at the edges of business units. To ensure they deliver value, an organization must set a high bar for when to pull ownership of resources into the center and also must clearly articulate the benefit of centralization to business units.
- Defining “corporate” does not mean functions need to be one size fits all. Business units may have different needs, so an organization may require multiple models of corporate—or centralized—functions to meet those needs. Trying to force a one-size-fits-all approach in developing and defining corporate functions will lead only to frustration and exacerbate existing issues.
- Not every corporate function is up for grabs. Some basic principles can help leaders narrow the list of functions under consideration. While business units should always be responsible for executing the value agenda, the following types of functions are not up for debate because of the types of decisions and activities they involve.
- Safeguarding the organization (almost entirely “corporate”): Safeguarding functions include those protecting the company from threats to survival by maintaining basic controls. These functions are almost always led by a corporate entity. Typically, they involve decisions inappropriate for a single business unit to make and often involve legal, risk, regulatory, or investor-related topics.
- Shaping the value agenda (more often “corporate”): Shaping functions include those supporting the implementation of the organization’s strategic priorities and requiring one voice across the enterprise, such as branding, strategy and business development, communications, R&D, and centers of excellence (CoEs). The top team must always set the value agenda, but corporate functions, and to some extent the business units, should help shape it. In turn, business units should always be responsible for carrying out the value agenda.
- Sharing economies of scale, skill, and scope (ranging from being primarily owned by business units to being fully owned by “corporate”): Sharing functions serves 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. Sharing functions should be highly responsive to the day-to-day needs of business units.
The top team must always set the value agenda, but corporate functions, and to some extent the business units, should help shape it.
Addressing the latter two categories can often be the murkiest for organizations that have not clearly set a strategic direction or defined the respective decision rights of functions and business units.
Employing a BU-back lens
Putting these core beliefs into practice requires organizations to take three key steps: define the organizational strategy and ground it in how functions deliver value at the enterprise and busines-unit levels, take a BU-back approach to function design, and move quickly to determine how to allocate decision rights and responsibilities.
1) Define the organizational strategy and ground it in how functions deliver value at the enterprise and business-unit levels.
The heart of this exercise is defining how corporate functions can help maximize value for an organization. An organization’s corporate functions do not exist in a vacuum; they exist to provide support to the business. The form this support takes, in turn, depends on how one envisions what an organization needs to maximize value creation.
Organizations must first determine the kind of business leaders they need to consult to understand the design requirements of a given function. To gain this perspective, executives must take a step back and consider the value narrative of the organization. The overall narrative ensures all leaders are aligned on value creation and organizational strategy and enables them to make the trade-offs and decisions required to design an effective, efficient organization. A corporate function’s value-creation narrative should cascade from the organization’s strategy. On the other hand, executives must also consider how business units differ in contributing to the value agenda.
Companies should identify the unique characteristics of the markets they operate in and the competitive dynamics within them. How do companies meet the needs of their core customers? How do business units differ in their response to those needs? What products do business units offer, what differentiates them from one another, and what cycle times does each one require?
When this exercise is done correctly, a solid value-creation narrative for the organization will emerge. Once defined, the next step is to determine how functions best fit into that narrative. Organizations must answer the following questions:
- What are the key decisions that business-unit leaders need to make, and what do they need to control? For example, if IT business-application development is a core enabler for a business unit’s growth strategy, how much control does its leader need to ensure that projects are done correctly? And how different are that business-unit leader’s needs compared to those of others in the organization?
- What markets, products, and customer bases might require targeted functions? What shared needs could be addressed more effectively or efficiently if they were commonly tied across the organization?
- For functions that leaders argue should be more centralized (by ownership, by accountability, or by resources), organizations should ask, “Why are these resources best housed at the center? How will the business units, which are giving these resources away, benefit from the arrangement? And what is the benefit for the enterprise?”
Organizations often struggle to define their organizational strategies. They create an answer that sounds good but that results in a bloated, inefficient organization that often provides worse service. Other times, they resort to a pure function-by-function analysis, which is time-consuming and offers neither organizational clarity nor coherence. This dynamic can result in a constant push-pull dynamic because no one understands the logic behind centralized decisions.
We believe the reason organizations struggle to define central functions is that they move too quickly to define how functions could add value rather than grounding decisions more fully in the needs of business units.
2) Take a BU-back approach to function design.
Organizations should adopt a business-unit lens, or BU-back approach, when designing functions. Because value creation primarily happens within business units, activities of corporate functions should reflect the needs of business units. Functions should be set up only when a business unit absolutely needs them; the functions must then ensure they are fulfilling their promise to those business units. Put another way, if the corporate function treated the business unit as a customer, would that business unit continue doing business with the function? Or would it try to join another enterprise that could offer better service?
To more easily determine whether corporate functions should exist and how they could maximize value creation, an organization should start by identifying what type of business-unit leaders it needs to maximize value and how empowered and focused they need to be in the context of the overarching strategy (exhibit). A natural consequence of this approach may be that companies will need multiple categories of business-unit leaders based on the diversity of their markets.
In our work with organizations, we have observed four primary archetypes of business-unit leaders. Each archetype places different demands on functions and the level of control required.
The powerful commercial leader
This business-unit leader has little to no control over most functions. Instead, this type focuses on pursuing business development and sales, often playing a role with a light touch in product development and in adapting products to local customer bases. This leader operates well with fully centralized functions and clearly defined service-level agreements. For example, companies with similar products across business units often choose this model. This approach allows the business-unit leader to concentrate on selling products in a low-margin, highly competitive environment, with centralized functions assuming more of the noncore functional management.
The line-of-business integrator
This type of leader has control over functions, typically those requiring more localized oversight. Strong centralized functions best support this type of executive. For example, Procter & Gamble’s business-unit leaders are responsible for a range of functions such as product development, branding, advertising, and product positioning, but they also take advantage of global business-services groups (for example, IT support and accounting) because the needs in these areas across business units are similar and highly transactional.
The empowered general manager
The empowered general manager controls most profit and loss (P&L) functions and plays a prominent role in shaping and executing the value agenda. However, this leader looks to centralized functions to support a narrow range of shared needs. There are two ways to set up functions in support of this archetype: a lean CoE in which resources may report directly to the business unit, or a helix model in which business units make up the value line and functions make up a capability line that business units can tap. For example, Samsung is a diversified company with general managers overseeing business units, but because best-in-class design is so important for value creation across all these business units, it maintains a centralized design center that promotes best practices and specifications.
The autonomous business-unit leader
This type of leader controls nearly all the functions (except essential safeguarding functions responsible for risk mitigation), must manage P&L statements, and substantively drives the value agenda. These executives are often found in private-equity companies, for example, which require severable businesses that can be independently evaluated and easily sold. (Strong corporate centers tie business units together, complicating their severability.)
3) Move quickly to determine how to allocate decision rights and responsibilities.
The BU-back approach provides a starting point and ultimately pushes organizations to make more direct ties to the value-creation narrative. While the organization will still make individual determinations for each function (and subfunction), each business-unit-leader model implies a different sort of support from and interaction with functions. Most important, this approach results in a cohesive, simple guiding principle to refer to when making subfunction-by-subfunction determinations, facilitating execution.
Once organizations have a clear view of what type of corporate-function setup is required, they can choose from nine different options. These models should help functions and subfunctions accommodate the diverse needs of business units.
- Fully centralized: Centralized functions lead the team, setting and driving the agenda for the organization. Functions commonly seen in this model include legal, risk, treasury, and investor relations.
- Fully centralized shared services: Resources report to the central team, but services are delivered to business units either from the central team or through an outsourcing arrangement. Functions commonly seen in this model include payroll or indirect procurement, such as travel.
- Strong CoE, with some execution resources informally assigned to business units: Resources report to the central team, with some execution resources sitting in or connected to business units. Functions commonly seen in this model include public and government affairs and human resources.
- Strong CoE, with some execution resources directed by business units: There is a large central team, but some execution resources are located within the business units with connections back to a CoE. Functions commonly seen in this model include planning and business development and controller functions.
- Helix organization: Resources have dual solid reporting lines to the business unit and to the center—in other words, a solid line reporting to one and a strong dotted line reporting to the other. A function commonly seen in this model includes HR business partners. Note that this model can create challenges with role clarity if not implemented correctly.
- Lean CoE with enforcement ability: There is a lean central team, with the majority of resources reporting to business units. The CoE has a mandate and authority to set and enforce standardization (for example, auditing functions). Functions commonly seen in this model include process safety and security.
- Lean CoE to promote sharing and adoption of best practices: The majority of resources reports to business units, but its functions differ in that it focuses only on best-practice sharing and adoption (often through providing a pool of subject-matter experts). Functions commonly seen in this model include manufacturing leadership councils and networks.
- Decentralized with formal networks: Resources report fully to business units, which set and lead the agenda for their work. The functions across business units, however, are coordinated by formal networks (and are allocated small budgets to promote coordination). Functions commonly seen in this model include technical-discipline networks.
- Fully decentralized: Resources report to business units, which set and drive the agenda, with no formal sharing among business units. Local sales teams often have this setup because they do not need to coordinate.
Any of these corporate-function options can be effective as long as they are tied to the business model and to value-creation narrative. Aligning on a value-creation narrative, taking a BU-back approach, and determining a corporate-function archetype may sound complicated, but the process is worth the effort. It accomplishes two important objectives that can save an organization time and avoid frustration.
First, the process accelerates the centralized-versus-decentralized assignment of functions. Regardless of what choices must be made regarding business-unit leaders and corporate functions, the organization should undergo a subfunction-by-subfunction assessment. But choosing the type of business unit and determining which corporate functions are required provide a point of reference so organizational leaders know where subfunctions should likely end up.
Second, the process aligns corporate-function leadership, business-unit leaders, and top executives with a coherent narrative to describe how functions and business units can jointly maximize value creation. This common narrative encourages leaders to adopt a value-based perspective and reduces the risk of future relitigation.
The balance between centralization and decentralization is a frequent, ongoing negotiation between business units and functions. Taking a BU-back approach grounds functional design in the needs of business units and enables organizational leaders to align on a common vision. Spending time up front on this holistic assessment will help ensure that functional decisions best meet the needs of the business and maximize the organization’s value proposition.