As a business grows larger, a question always crosses the mind of the business owners and stakeholders – is the conventional style of centralized management and decision making ideal in today’s scenario?
To begin to explain our take on this, we would first like to share that there isn’t any one-size-fits-all solution. This is simply because of the fact that like virtually any management decision that insinuates dilemma, even the decision to decentralize naturally comes with its pros and cons.
Decentralization is Not a Destination
As we go ahead with this discussion, it is important firstly to throw light on the fact that a business can never be wholly centralized or wholly decentralized. Decisions of just about any sort, along with their implementation, would always have some degree of a blend of both. What a stakeholder of a business here may like to understand then, is that how much decentralization is good for their company’s situation.
At the roots of it, decentralization is simply the delegation of decision making to middle and lower subordinates, within an organization. Decentralization flattens hierarchy and companies supporting it as a trend, would often believe that it leads to quicker customer-centered services. Decentralization is great when there’s a need of immediacy in decision making as the front-line team members can be more responsive to customers when they enjoy more authority.
Decentralization can however be less ideal in some circumstances. For example, let’s say that a small hotel that has limited capacity to employ highly trained staff at their reception. This might lead them to hire staff with less experience and qualification and these staff members shall be the ones who interact most with the hotel guests. The hotel still may be able to hire one well experienced and qualified manager to head this team. If however the hotel owner chooses to practice complete decentralization of decision-making, the staff members with limited exposure, could end up taking quite drastic decisions at times, which can jeopardize the business heavily. With a little less decentralization, if most critical decisions were left in the hands of the well-experienced manager, the practice would tend to have better outcomes.
Now let us take a very similar example, and bend it to see why a dynamic balance of centralization and decentralization, is becoming a go-to practice in the modern business environment.
Let’s now say that after a few months of working in the hotel and having gained fair experience, the staff members are in a better position to make decisions, but the hotel owner still chooses to keep strict control and ensure all decisions have to be made by the manager at any cost. The people directly in contact with the guests are the staff members, however the decision maker in any situation, is the manager. In a matter of few months of not being in direct guest contact, the knowledge and understanding of the ground realities, can often get outdated and this is eventually going to be the case with the manager who takes decisions on behalf of staff while not doing the exact work that the staff is doing.
What was a luxury a few months ago, could turn into an expectation in the market today and without being the one in direct contact with the customer, the manager is likely to have not learned this. Being the decision maker now, may not be as ideal as it was before. This is exactly the kind of scenario where a flatter hierarchy makes a great difference.
In any aspect of a business where responsiveness is key and the market changes are best known to the front-line employees, decentralization can have great results and would be the right way to go.
There are however some decisions which are better left centralized – most of these however can benefit from inputs that team members in closer contact with guests can provide. For example, decisions related to branding, the vision, mission and core values of an organization, investments, budgeting and forecast, etc. – these are decisions that typically cannot be decentralized beyond a point. Nonetheless the decision makers that are behind laying these foundations of an organization and maintaining them, can benefit greatly when they take inputs from their front-line team members to understand certain ground realities of the current market. This in essence, is a step towards decentralization versus the conventional ways of strategic management.
Categorizing Decisions to Blend in the Right Amount of Decentralization
Until now, we have established that it is ideal to have a blend of centralization and decentralization in any organization. When moving from a conventional, centralized decision making environment towards any degree of decentralization, would be a good practice to list what decisions are made, and then categorize these decisions into broad generalizations. For this purpose, companies can categorize them in way like:
- Operational Decisions: Day-to-day decisions that immediately affect operational outputs but do not have a long-term impact in policies of a company, eg. A decision to maintain a particular amount of liquid cash with each cashier at a store.
It is generally more ideal to keep operational decisions decentralized as much as possible, provided the front-line team members are adequately trained and equipped to take such decisions and implement them.
- Tactical Decisions: Short to medium term decisions that have a broader impact than a typical operational decision, but would not necessarily be intended towards a lasting impact towards the organizational values, standards, budgets or policies, eg. A decision to add a training module in the induction process of new staff members.
It is generally more ideal to main a blend of central control and decentralized implementation of such decisions.
- Strategic Decisions: Decisions that are aimed to impact the direction in which the organization is heading or to streamline its future in some way, eg. Adding a core value to a company’s existing core values, or writing core values for a company.
These decisions shall essentially remain centralized while it is important for the strategic management of any company, to frequently welcome feedback and other inputs from all other team members who get impacted by these decisions.
Once the various decisions made in a company are categorized this way and it becomes easy to see which decisions can benefit most from decentralization, and which can be best left centralized, to what degree, it is important for the strategic management to understand that a more dynamic market shall call for a farther degree of decentralization while a less dynamic market may not necessarily need that.
In the end, decentralization in itself is also a strategic decision and understanding and implement the right amount of decentralization of the right decisions, has helped many companies in the modern business environment, reach levels of success that they believe would otherwise not be achievable.
- Combining central planning and decentralization to enhance effective risk management outcomes – Journal Article by Torben J. Andersen
- Making the Decision to Decentralize – Thomas W. Malone for the Harvard Business School