Centralization—Weighing the Benefits Against the Risks

CEOs of companies that had undertaken centralization or regionalization initiatives (i.e., activities and decision making are concentrated to a single location globally or within a region) were interviewed to learn from their experiences.

Benefits—not only reduced costs

The most frequent argument in support for centralization is scale economics. Reducing costs is the primary motivator for organizations undertaking centralization. However, there are many other advantages, as well as disadvantages.

One common goal of centralization is to make it easier for customers to do business with the company through less complexity, clearer lines of responsibility, and knowing whom to contact.

According to many of the interviewed CEOs, one of the largest benefits is the ability to provide higher quality of services—both to local organizations and customers.

For example, one global company had centralized certain areas of their marketing functions into a European marketing center. They can now provide marketing services to their retail customers at a very high professional level, which provided them with a significant competitive advantage. This helps them win new business and revenue.

Another benefit is security related to information technology. Several companies achieved higher security across the entire organization as they were able to invest more in a central location, in expertize, equipment and software. They are able to provide higher security to their local companies that would not have been able to make that investment on their own.

Centralization can also provide new career opportunities and more interesting work environment for employees. It provides the ability to specialize, enhance competencies, work in a more international environment and manage a larger scope of responsibilities.

Weighing benefits against risks

There are also risks with centralization. The potential gains must be weighed against those risks. One-time costs related to implementation is frequently under estimated. A temporary loss in productivity is another risk, e.g., distractions from regular work, reduced motivation, increased bureaucracy and increased politics within the organization before new positions have been allocated.

For example, one organization announced a centralization initiative too early, already six months before implementation started. As a result, productivity fell; sales people spent less time with customers and much more time in the office. It’s not surprising that the financial results temporarily fell.

These are a few examples of benefits and risks with centralization. Many others exist. To summarize, centralization should not only focus on cost cutting. It can improve companies’ competitive advantage. Risks should be carefully assessed and mitigation plans developed for each identified risk.

A litmus test should be that if centralization does not add significant value (e.g., at least 10 percent to profits) and the risks are relatively low and manageable, then one should generally not initiate a centralization project. An assessment upfront helps management decide by determining potential benefits, economic return and risks. And much can be learned from other organizations that have undertaken similar initiatives in the same industry.

 

Rickard Alfredéen is founder of Oneforce, a management consulting firm focusing on growth strategies, pricing and sales performance improvement. Previously he worked at Booz & Company (now Strategy&) and Bain & Company in Europe and the US. 

 

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