in the last decade,Companies struggle with organizational designs that vary wildly in how centralized or decentralized they are across functions. These organizational transformations are often driven by the person creating them, rather than objective, fact-based decisions about what maximizes value. For example, when function heads design functions, they are often more centralized (to achieve economies of scale and capabilities); When line-of-business leaders step in, functions tend to become more decentralized (in the quest for responsiveness and control).
In large, global, multi-business organizations, this dynamic can lead to a battle between functional leaders trying to achieve standardization and scale and business leaders who feel they are paying for a high business expense that does not adequately meet their needs. Underlying these issues are two issues: the lack of a strategic rationale for the current project, and an unclear division of decision-making rights and roles between line-of-business and functional leaders.1For more information on our decision-making research, see Andrea Alexander, Aaron De Smet, and Leigh Weiss, “Decision Making in Uncertain Times,” March 24, 2020; and Aaron De Smet, Gregor Jost, and Leigh Weiss, “Three Keys to Faster, Better Decision Making,” May 1, 2019.Common symptoms of this dynamic are:
- Roles in an organization are constantly shifting between centralized and decentralized modes, first becoming centralized for efficiency and then devolving power to business units to encourage responsiveness and accountability.
- Organizations implement fragile, collaborative "we can both" models that result in rich and expensive functionality, with business units finding ways to log off and act independently. This approach creates an end state that leaves an organization lacking in efficiency and effectiveness.
- Functional organizations follow an agenda that is not tailored to the needs of the business units, so the business units create secondary functions that add even more costs to the organization.
- Patchwork fixes are applied to resolve issues with specific functions and business interactions, resulting in reduced clarity and coherence across the enterprise, undermining accountability for service delivery and increasing complexity.
Towards a new approach
With this in mind, we believe organizations need a new approach to deploying capabilities that maximize business value and successfully serve business units. This approach is based on three core beliefs.
- Organizations should detour from traditional role value assessments and define roles by first looking at business unit requirements or “BU back”.By definition, centralized functions burden the organization because they can slow down activities at the edge of business units. To ensure they add value, an organization must set a high bar on when to focus on resource ownership and also clearly articulate the benefit of centralization to lines of business.
- The definition of "enterprise" does not mean that functions must be uniform.Lines of business may have different needs, so an organization may need multiple business models or centralized functions to meet these needs. Trying to impose a unified approach to developing and defining business functions will only lead to frustration and exacerbate existing problems.
- Not all corporate functions are available.Some basic principles can help leaders narrow down the list of eligible roles. While business units should always be accountable for executing on the value agenda, the following types of roles are out of the question due to the types of decisions and activities they involve.
- Organization protection (almost exclusively "corporate"):Security features include those that protect the organization against existential threats while maintaining basic controls. These functions are almost always managed by a legal person. They often involve decisions that are inappropriate for an individual business unit and often involve legal, risk-related, regulatory or investor-related issues.
- Shaping the Value Agenda (more often "Corporate"):Shaping functions include those that support the implementation of the organization's strategic priorities and require a voice across the enterprise, such as: B. Branding, Strategy and Business Development, Communications, R&D, and Centers of Excellence (CoEs). The core team should always set the value agenda, but corporate functions and, to some extent, business units should help shape it. Business units, in turn, must always be accountable for implementing the value agenda.
- Sharing economies of scale, skill and scale (ranging primarily from line-of-business ownership to full ownership by "Companies"):Role sharing meets requirements across all areas of the business (eg payroll, IT and accounting). These functions can sometimes be aggregated to achieve economies of scale. In other cases, they may be distributed within business units for different needs. Sharing functions must be highly responsive to the day-to-day needs of business units.
The core team should always set the value agenda, but corporate functions and, to some extent, business units should help shape it.
Addressing the last two categories can often be the most difficult for organizations that have not established a clear strategic direction or defined the respective decision-making rights of functions and business units.
Using a BU Rear Lens
To put these core beliefs into practice, organizations must follow three key steps: define organizational strategy and develop how roles deliver value across the enterprise and line of business, adopt a BU-back approach to role design, and act quickly on how to define decision rights and assigned responsibilities.
1) Define organizational strategy and determine how functions add value at the company and business unit level.
At the heart of this exercise is defining how business functions can help maximize value for an organization. An organization's corporate functions do not exist in a vacuum; They exist to support the business. The form of that support, in turn, depends on how you visualize what an organization needs to maximize value creation.
Organizations must first determine what type of executives they need to consult to understand the design requirements of a specific role. To gain that perspective, leaders must step back andConsider the organization’s value narrative. The big picture ensures that all leaders are aligned with value creation and business strategy, and enables them to make the necessary trade-offs and decisions to design an effective and efficient organization. The value creation narrative of a business function should depend on the organization's strategy. Conversely, leaders must also consider how business units differ in their contribution to the values agenda.
Companies must identify the unique characteristics of the markets they operate in and the competitive dynamics within them. How do companies meet the needs of their main customers? How do lines of business differ in their response to these demands? What products do the business areas offer, what distinguishes them and what processing times do they need in each case?
When done correctly, this exercise creates a solid narrative of value for the organization. Once defined, the next step is to determine how the features best fit into that narrative. Organizations must answer the following questions:
- What are the key decisions business unit leaders need to make and what do they need to control? For example, if IT business application development is a key factor in a business unit's growth strategy, how much control does your leader have to ensure projects are executed correctly? And how different are this line-of-business manager's needs compared to those of others in the organization?
- What markets, products, and customer bases might require targeted resources? What common needs could be more effectively or efficiently addressed if they were interconnected across the organization?
- For roles that leaders argue should be more centralized (by ownership, by responsibility, or by resources), organizations should ask, “Why are these resources better placed at the center? How will business units that donate these resources benefit from the rule? And what is the benefit to the company?”
Organizations often have difficulties in defining their organizational strategies. They create a response that looks good, but results in a bloated, inefficient organization that often provides inferior service. Other times, they resort to pure functional analysis, which is time consuming and lacks organizational clarity and coherence. This dynamic can lead to constant push-pull dynamics as no one understands the logic behind centralized decisions.
We believe the reason organizations struggle to define core roles is that they are too quick to define how roles can add value, rather than basing decisions more fully on business unit needs.
2) Use a BU-back approach to role design.
Organizations should adopt a business unit lens or BU back approach when designing functions. Since most value creation takes place within business units, the activities of corporate functions must reflect the needs of the business units. Capabilities should only be implemented when a business unit absolutely needs them; Functions must then ensure that they deliver on their promises to these business units. In other words, if the business function treated the business unit as a customer, would that business unit continue to do business with the function? Or would you try to join another company that might offer a better service?
To more easily determine where business functions should be implemented and how they can maximize value creation, an organization should start by identifying what type of line of business leaders it needs to maximize value and how skilled and focused they are in the context of the business. the bigger picture should be strategy (exposure). A natural consequence of this approach may be that companies need multiple categories of business unit leaders because of the diversity of their markets.
In our work with companies, we've observed four main lines of business manager archetypes. Each archetype has different resource requirements and the level of control needed.
The Strong Trading Guide
This business unit manager has little or no control over most functions. Instead, this type focuses on business development and sales and often plays a small role in product development and adapting products to local customer bases. This market leader works well with fully centralized functions and clearly defined service level agreements. For example, companies with similar products across all lines of business often choose this model. This approach allows the line-of-business manager to focus on selling products in a low-margin, highly competitive environment, with centralized functions taking over more non-core functional administration.
The industry integrator
This type of leader has control over roles, often those that require more localized oversight. Strong centralized roles best support this type of leader. For example, business unit heads at Procter & Gamble are responsible for a range of functions such as product development, branding, advertising and product positioning, but they also leverage global business services groups (e.g. , IT support and accounting). because the needs in these areas are similar across all lines of business and highly transaction dependent.
the authorized manager
The delegated general manager controls most profit and loss (P&L) functions and plays a prominent role in shaping and executing the value agenda. However, this market leader has centralized resources to support a limited range of shared needs. There are two ways to configure functionality to support this archetype: a lightweight CoE, where resources can report directly to the business unit, or aModel Helixwhere the business units form the value line and the functions form a capability line that the business units can exploit. For example, Samsung is a diversified company with general managers overseeing the business. However, because design excellence is so important to creating value in all of these areas of business, it maintains a central design hub that promotes best practices and specifications.
The autonomous division manager
This type of leader controls almost all functions (except the core hedging functions responsible for risk mitigation), has to manage income statements, and is critical to driving the value agenda. For example, these executives are often found at private equity firms that need separable businesses that can be independently valued and easily sold. (Strong corporate headquarters bind business units together, making them difficult to separate.)
3) Be quick to determine how decision rights and responsibilities will be assigned.
The BU-Back approach provides a starting point and ultimately leads companies to make more direct connections to the value creation narrative. While the organization still makes individual determinations for each function (and sub-function), each business unit leader model implies a different way of supporting and interacting with the functions. More importantly, this approach results in a simple and coherent guiding principle to refer to when making sub-function-by-sub-function determinations, making execution easier.
Once organizations have a clear view of what type of business function is required, they can choose from nine different options. These templates are designed to help functions and sub-functions meet the diverse needs of business units.
- Fully centralized:Centralized roles lead the team, setting the organization's agenda and driving it forward. Common functions in this model include Legal, Risk, Treasury, and Investor Relations.
- Fully centralized shared services:Resources report to the core team, but services are delivered to the business units by the core team or through an outsourcing agreement. Common functions in this template include payroll or indirect purchasing, for example B. Travel.
- Strong CoE, with some execution resources informally allocated to business units:Resources report to the central team, with some execution resources located or associated with business units. Common roles in this model include public and government relations and human resources.
- Strong CoE, with some execution resources managed by the business units:There is a large core team, but some execution resources reside in the business units linked to a CoE. Roles that are common in this model include business planning and development and controller roles.
- Arrangement of the propeller:Resources have two solid reporting lines for the business unit and center - in other words, a solid line for one and a thick dotted line for the other. A common feature in this model is HR Business Partners. Note that this model can create role clarity issues if not implemented correctly.
- Lean CoE with assertiveness:There is a lean core team with most resources reporting to the business units. The CoE has the mandate and authority to define and enforce standards (eg, audit functions). Common features found in this template include security and process security.
- Lean CoE to promote sharing and adoption of best practices:Most resources report to the business units, but their roles differ in that they only focus on sharing and adopting best practices (often providing a group of subject matter experts). Features commonly seen in this model include networks and manufacturing executive boards.
- Decentralized with formal networks:Resources report fully to the business units, which establish and guide their work agenda. However, intercompany functions are coordinated (and small budgets are allocated to encourage coordination) through formal networks. Among the functions that frequently appear in this model are the technical-disciplinary networks.
- Fully decentralized:Resources report to business units, which set and drive the agenda without being formally shared across business units. Local sales teams often have this setup because they don't need to coordinate.
Any of these business function options can be effective as long as they are linked to the business model and value creation narrative. Aligning with a value creation narrative, a BU-back approach, and determining a business role archetype can seem complicated, but the process is worth the effort. It accomplishes two important goals that can save an organization time and eliminate frustration.
First, the process speeds up centralized versus decentralized role mapping. Whatever decisions need to be made regarding the heads of business units and corporate functions, the organization must go through a sub-function assessment by sub-function. But selecting the type of business unit and determining which business functions are required provides a point of reference for business leaders to know where sub-functions are likely to end up.
Second, the process aligns leadership from corporate functions, business unit heads, and senior executives with a coherent narrative to describe how functions and business units together can maximize value creation. This shared narrative encourages leaders to adopt a values-based perspective and reduces the risk of future disputes.
The balance between centralization and decentralization is a frequent and ongoing negotiation between business units and functions. A BU-back approach grounds functional design in the needs of business units and allows business leaders to align to a shared vision. Investing time in this holistic assessment upfront can help ensure that functional decisions best meet business needs and maximize the organization's value proposition.
Aaron DeSmetis a senior partner in McKinsey's New Jersey office,Caitlin Hewesis a senior specialist in the Atlanta office,Elisabeth Mygattis a partner in the Boston office andKirk Rieckhoffis a senior partner in the Washington, DC office.
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