Decentralization and alignment

Without exception, business executives understand the importance of agility: identify opportunities and threats and act upon them quickly and effectively. When redesigning the organization structure, one central question is the decentralization of decision making. We are doing business in a world where new systems are challenging the systems upon which trust is based. Decentralized organizations will be one of the primary drivers of these changes and have a variety of social, organizational, and business implications.

Decision rights are handed over to those who are close to customers, competitors, and other stakeholders. In this way, they avoid the delays associated with information and approvals traveling up and down the organizational hierarchy. Knowledge from complex decision making situations is also often better in front-line employees than in middle and top management.

The institution of power

The question of centralized versus decentralized authority – who has the right and ability to make choices, is not new. We now know that building more decentralized organizations can create a competitive advantage over existing models. A highly centralized system accumulates control to a small group at the top of organizations, maybe to even a single individual in the hierarchy.

An extremely decentralized organization gives every employee, team and/or group, own autonomy. Possible risks causing anxiety, and hindering implementation, are disorganization, inefficiency, and even anarchy. Most organizations are a balancing act and are not at one extreme or the other and solve these challenges with novel ways. In brief, we have the tools and methods to address the most significant concerns with decentralized organizations, addressing efficiency, safety, and trust.

When given the choice, most employees will be driven to participate in more decentralized organizations to maintain more control and authority over their work. Consequently, organizations that enhance autonomy will have an advantage due to higher motivation and self-efficacy of their people.

Already partially decentralized organizations will become more efficient than their centralized counterparts, as measured by the costs, ability to innovate and soft aspects of work such as trust, commitment, support, and cooperation. Also, the overhead costs associated with centralization are high. Now that the decentralized systems are maturing, it will be possible to utilize each person’s unique skills and match them to situations where that skill has the best value.

The cost of communication is one of the critical dimensions of a decentralized organization. When an interaction is complex and costly, the best way to share knowledge may be to have centralized managers find and spread the concepts organization-wide. When communication is cheap and easy, and even when subjects are complex, it’s better to have employees share knowledge directly through various channels.

Finding the right balance

Large organizations face challenges in finding the right balance between centralization and decentralization. On one hand, pressures to cost-cutting, streamlining existing business, and respond to new legal requirements, risks, or sustainability all prefer more centralization. On the other, expectation to reduce bureaucracy, encourage intrapreneurship, respond rapidly to customer needs, and improve agility in the business environment of fast-changing markets seem to prefer decentralization.

The old slogan “think globally, act locally” may sound good, but it doesn’t provide much concrete guidance. Decentralization is a type of organizational structure in which daily operations and decision making responsibilities are delegated by top management to almost every employee. Decision making is not delegated just to middle and lower-level managers, but to everyone in the organization.

Focus and empowerment

Decentralization of decision making frees up top management time and focus to more significant decisions, which require experience and views from different stakeholders that front-line employees don’t have. A growth company may need to decentralize to continue efficient operations, but to give up control may be difficult for a business owner, who is accustomed to making all the decisions.

In decentralized organizations, employees are empowered by having the autonomy to make decisions, giving them power and making them feel an influential part in the direction of the organization. This allows them to make better use of their knowledge, experience, and new ideas. Empowered employees can cut the official rules and processes that seem unnecessary and delay the results by taking the initiative to get the job done with a minimum of managerial approvals.

Decentralizing takes some load of business operations and related decisions from the top and middle management. When the management delegates decision making to others, it frees them to spend more time on strategic issues, such as planning for international expansion or meeting with potential investors. A decentralized organization provides a better chance that the organization will maintain self-sufficiency because managers and employees are used to working autonomously.

A decentralized organization can make decisions more quickly than one with a centralized structure. An employee is often able to decide without having to wait for all information to go up a chain of command, allowing to react immediately to situations where fast action means better customer experience or even keeping a customer.

For a growth business, decentralization facilitates the process of expansion. For example, if expansion results in opening a new business in a different geographic area, decentralization allows operating as an independent entity, reacting quickly to the specific needs.

Establishing the proper alignment

When you have created a sound strategy and decentralized organization structure, you now face the challenge of alignment of daily decisions and actions with the strategic direction of the company. Strategic alignment is the ability to design appropriate business processes, IT, resources, and capabilities supporting the execution within the business environment. The decisions and collective actions of employees towards the strategic goals of the organization determine whether the strategy will be successful or not.

Fundamental to strategic alignment of decision making in different parts of the organization is the concept of decision rights:

  1. Who makes decisions; 
  2. What data, information, constraints, tools, and incentives affect the way they evaluate those decisions?
  3. Which decisions are the employees allowed to make themselves

Another prerequisite is for the employees to understand the strategic principles for decision making in the company. Alignment is materialized in the execution, affected by everyone in the organization. With decentralized decision making, common understanding of the strategy is essential for alignment. Strategy needs thus to be understandable for everyone in the organization.

This is the second installation in our blog series for Work 4.0. Read the previous instance here:
Paradigm shift of internal communication

Jaakko Pellosniemi – My driving vision is to invent something which everyone needs every day. The pursuit of this goal has led me on an interesting journey beginning in the corporate world and including adventures pioneering eBusiness, innovating digital TV software and inventing a medical diagnostic product.

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