It seems that organizations oscillate between being centralized and decentralized and back again. A cynical person might say that when the executive team doesn’t know what to do, they restructure.
First of all, we need to unpack what we mean by centralize or decentralize. Do we mean organizational structure or decision making?
For organizational structure the common practice is to centralize. That is, to think of the world, a region or a country, as one single market and to have vertical reporting lines for common functions. For example, sales will all report into one Global Executive Vice President, the same for service, production, development, marketing, human resources, and finance. The next step is to consolidate into head office, where possible, functional teams. This is typically teams like, development, production, support, finance, human resources and marketing. What is left in the field are the customer facing teams that cannot be consolidated, sales, professional services and “outposts” of marketing, finance and human resources. The organization figurehead in the region is typically the local sales executive, although only the sales team reports into this role. Sometimes parts of the consolidated teams are outsourced like, customer support call centers, production and development. The result is a vertical functional silo structure with chains of leadership/management that stretch around the globe, and in the case where outsourcing is used, across multiple organizations.
With the vertical functional silo structure in place we turn our attention to decision making. The level to which decision making is consolidated depends on the current results of the organization and the capability level of the senior management. If the organization is on target decision making is left within the layers of the organization. But as soon as the results are below budget the move to centralize decisions starts. Discretionary spend such as travel, headcount, training or marketing is frozen and must have senior executive sign off. This creates additional administration work and meetings to gain approval. The amount of centralization of decision making increases the lower the capability level of the senior executive responsible for that vertical silo. Organizations are very complex and if the senior executive is unable to handle this level of complexity they manage by ignoring it, and try to make things more simple by centralizing all decisions to one person, usually themselves. This changes the vertical leverage we are wanting to achieve in an organization into vertical bureaucracy.
After a while the issues with the centralized approach appear. Often this is the lack of being able to make decisions across departments as they don’t come together until you reach the CEO, reduced customer service levels, attrition of the good people, because they can leave, as they lose motivation and retention of the lower performers, because they can’t leave. This leads to even poorer results which means its time to restructure again and the swing back to some form of decentralization starts again.