Many organizations right from MNC’s who are financially and technically equipped to small time enterprises where cost effective budgets prevail, there has been a paradigm shift, especially over the last 20 years from a empirical organizational structure, which is centred for authority to a diversified and decentralised structure, where span of control is widespread in order to resist global and domestic competition. We categorize structuring to be an HRM issue as it primarily involves re-forming people and making sure co-ordination and control is restored at their work. The perception about traditional rigid organizational structures which are criticized for monotonous activities and transactions is paving way to a agile environment formed by the way of decentralising and creating a dynamic platform for innovation and change. This paper would critically discuss and debate the various motives behind such a ‘need’, drawing examples from firms operating in different industries. Functionally arguing that organizations felt the urge of getting transformed to knowledge-based economy where young professionals with high expectations are employed and where HRM policies are amended. There has been numerous organizational studies which has been under way in the last decade which resulted in some of the more prevalent developments such as delayering, team based networks, alliances and partnerships, and a new employer-employee settlement. Being in an era where managing cross-unit projects and bridging the gap to reduce time-to-market, many firms are increasingly reliant on multi-functional teams. Over the last decade usage of terms such ‘self-managed teams’ and ‘groups’ have become parts of management dictionary because of the fact that these can be easily formed, re-formed or even disbanded according to the creators need, this transformational effect has given rise to complex organizational structures and intricate corporate relationships. An excellent example would be the gradual political and organisational changes that have occurred in European history during the rise and fall of the Roman Empire which was considered as the ‘Golden Era’, where the centralised factor played a major role in weakening the power of the secular kings and as the middle ages wore in the ideas began to slowly strengthen the secular powers and bring together the extremely decentralised society.
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Though on one hand there is a need for the structure to remain loose, decentralised and differentiated in order to accommodate creative initiatives and be responsive on the other hand in order to maintain a strategic value and reduce a time lag between decision and action, a tight centralised structure is essential. Alfred Chandler and his studies in the 1960’s developed new models of organisation to manage increasing diversity in their business, where a much looser multi divisional form replaced the traditional functional form of organisations in America. There are a number of reasons why firms have pushed for decentralisation in recent years and it is partly because of increased diversity and other being with an aim of reducing costs. The influence of decentralisation has progressed through four main criteria’s which are listed below:
There has been a alleged shift from ‘industrial’ to ‘post-industrial’ society since 1970’s where there was a notable shift from mass production of standard products to ‘niche’ products and a demand for flexibility and autonomy by employees triggered the development of a new organisational form called ‘post-bureaucracy’. Though there are significant and reasonable criticisms towards post-bureaucratic forms we cannot ignore the reality that majority of workplaces started adopting it. According to contributions of Hecksher on post bureaucracy, where he quotes that the death of bureaucracy was predicted 40 years before where a need to shift to ‘flexible specialisation’ and ‘rise of the network society’ emerged. Weber whose regarded as the father of bureaucracy, his contributions have been phenomenal in this regard draws out difference between ‘substantive rationality’ and ‘instrumental rationality’. He argues that post bureaucracy would concentrate on ‘doing the thing right’ rather than ‘doing the right thing’.
Centralised organisations rely on a governance structure where information management reports up through a single chain of command. Decentralised organisations, on the other hand, distribute the management of information through a multitude of functional and regional command chains. Advantages of decentralised management structure are it should provide a better match of expenditure against local priorities and preferences. The workers have a local knowledge especially when selling in overseas market. There should be clear kinks in terms of the benefits to the local area in utilising their resources in a more efficient manner, it would be motivating and builds more trust. If the managers are more in control of their destiny then this would show the worth of the manager to the organisation, increasing empowerment and innovativeness. It also helps organisations to be more flexible as decisions can be made quickly according to ever changing local needs. Most countries especially the developing ones around the world are facing external as well as internal pressures to decentralise and are actually becoming a part of the trend which if not universal is nonetheless the dominant trend. The overlapping issues of fiscal federalism and decentralisation that had earlier received little attention on part of political scientists and economists has now become of international professional interest by 1990’s and have continued to attract attention of the specialists and policy makers ever since. Paul smoke (2001) asserts that during the 1990’s decentralisation has become the most widespread trend in development. Central governments around the world are decentralising fiscal, political and administrative responsibilities to lower level governments and to the private sector.
There are a lot of positive effects which decentralisation and post-bureaucratic forms have brought an ideal framework for corporate growth. Its structure enables an organization to be flexible and react quickly to the demands of over changing market conditions. Decentralised structure also has a positive effect on a company’s growth by striking a balance between entrepreneurial activity on the part of the managers and the staff who operate under them. They also improve the conditions for transparency and communication, which are considered as building blocks on the way to build a culture of trust within an organisation. Organisations should be keen in exploiting the advantages of the new decentralised structure to the full in order to form a effective framework. Organisational structure plays a key role in avoiding diseconomies of scale; it acts as a key ingredient in preventing cultural and administrative diseconomies or to say the least they help in keeping a check on these. There are a whole series of reasons as to why ‘decentralisation’ has such a positive impact:
Market proximity: Decentralised units are closer to the markets they serve, irrespective of the region and the structure in which they operate i.e. product or customer lines. This enables the organization to formulate their growth strategies to match with that of their own particular markets. As these units enjoy decision making powers, which means decisions can be taken locally, where the best information about the relevant market can be taken locally.
Speed and flexibility: decentralised units are made up of short decision channels, which makes not only the decision making process shorter and less complex but enables the implementation of decisions to be quicker too. This is briefly because small units enjoy much better conditions for communication. Since, decentralised units generally have flat hierarchies, this reduces the probability of information being lost and distorted. Therefore adapting to changes in business environment is both quicker and less problematic.
Motivation: As Decentralised units are usually responsible for specific process, these structures provide a perfect framework for increasing the intrinsic motivation of managers and staff. Especially in small, homogeneous units it is easier to motivate staff to work together rather to be a part of a anonymous work environment of a large company. This makes it much easier for them to feel motivated and to identify the company.
Integration of other companies: Decentralised structures allow their units to be easily re-grouped as they are generally responsible for complete processes. For instance in a merger or acquisition scenario it becomes easy to integrate individuals and in the event of portfolio streamlining, it is easier to dispose of a self-contained unit. Therefore in general decentralised companies exercise a higher level of adaptability.
Freeing up Top management capacity: Decentralised structures are a boon to strategic management as they no longer have to concentrate on day-to-day operations of the organization. In contrast a centralised structure would only help bring up all sorts of issues to the top managements table, making it difficult for them to concentrate on strategic issues.
Transparency: Decentralized structures are good for transparency both within the company and in its relationship with the outside world. Devolving responsibility for individual markets to different units gives top management an excellent overview of developments in these markets. This allows them to identify their high-growth and low-growth areas, and consequently manage growth through the structure of their business portfolio. Transparent organizational structures are also essential for accountability within the company. In companies with complex, matrix-like structures, it is often very difficult to pinpoint the responsible person when things go wrong.
P&L responsibility: Delegating the decision-making process allows the managers of decentralized units to act largely independently. This means that they become, as it were, entrepreneurs within the organization. They are responsible for the results of their decisions, both in a general sense and in terms of the actual profit and loss of the unit. This form of independence raises managers’ motivation levels and unleashes their entrepreneurial potential – an effect that is even stronger if managers’ pay is linked to their unit’s performance. In order to delegate P&L responsibility, a decentralized structure is required. Decisions must have their cause and effect within the unit so that it is clear who is responsible for their success or failure. This means placing the decision-making process and competence firmly within the decentralized unit.
Freedom and Incentives: Because managers of decentralised structures are much closer to the employees than the top management, they are able to create the necessary degree of freedom more swiftly with less bureaucracy. This freedom allows staff to develop their creativity, which leads to innovation. Managers of these units also have a better understanding of what actually motivates their employees compared to their head office.
In order to justify this, we need to look back to the contributions of Alfred chandler where he says “structure follows strategy” and a classic example of DuPont. The company originally produced explosives, but expanded its product range to include paint, varnish and other chemical products. However, it soon became apparent that its traditional functional structure could not cope with this diversification. DuPont’s structure collapsed. The reason, as Chandler shows, was that the company was no longer in command of its complex offering and was unable to manage resource allocation in its heterogeneous product portfolio. DuPont couldn’t bring the crisis of coordination under control working within the confines of the framework of the company’s functional structure. So it took what was, at the time, a radical decision. In the face of considerable opposition from within, DuPont decided to create five independent divisions for the main product categories, plus central functions such as Legal, R&D, Purchasing and Advertising. It was a bold approach – but it paid off, the reorganization was a complete success. As a result, many other diversified companies adopted the principle of divisional organization. And this approach also spread to European industrialized countries but the major wave of divisionalization hit Europe only after the Second World War.
The movement from bureaucratic hierarchical forms of organisations to decentralised forms have led to a variety of inter-organisational relationships like subcontracting, outsourcing, strategic alliances, unilateral agreements etc which has a significant impact on the HR paradigm. ‘Subcontracting’ usually occurs when the contracted work requires a variety of skills which the principle contractor does not possess. In order to analyse this particular relationship, the contributions of Robert Mackenzie would be most appropriate. In this classic example of ‘British telecom’ UK’s largest telecommunications firm which had highly integrated bureaucratic systems, with employment relationship regulated by structures and rules associated with the operation of a classic internal labour market. The utilisation of telecom contractors was founded on an operation of a flexible market for operational level labour. The hiring and firing of labour according to the workflows was a key feature of this system, even though it was performed by someone else in the form of a subcontract firm. ‘BT’ found this system of subcontracting had the ability to attract labour within a flexible and competitive labour market and reclaim the control over labour that was associated with the internal labour market. Subcontracting was analysed with three different dimensions. Firstly, in terms of reorganisation of production. Secondly, in terms of the deregulation of the employment relationship and thirdly, issues of trust and power must be considered. The problems that ‘BT’ faced within this framework were associated with the lack of regulation over labour supply and skill reproduction. Firms have to keep in mind the extent to which skills are available in the open market in the absence of some form of regulation to ensure their reproduction.
‘Outsourcing’ is subcontracting a process, a practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. The only difference between ‘outsourcing’ and ‘subcontracting’ is the control which the parent company has over the process which is outsourced or subcontracted, incase of subcontracting parent company has the hold on the process contracted, whereas in outsourcing the third party or the agency has full control over the process or the operation outsourced. Both these have gained to have significant impact on HR functions of organisations as these functions are the mostly outsourced or subcontracted ones. For examples AT & T has a seven year deal with Aon human capital services to provide end to end human resource administration, signed in 2002. After aligning the deal’s structure, expectations and its 45 metrics, they have seen ‘double digit’ savings. In this scenario it has proved to be cost effective and as ‘Aon’ has significant years of consulting experience, a synergy had build with the parent company resulting in positive outcomes. But we need to remember this need not be the case always. Organisations need to taken into account the strategic, contractual, operational and cultural risks involved during outsourcing.
In order to overcome the above illustrated drawbacks it is essential to pick the appropriate non-core functions to outsource/subcontract, finding the right service provider to cater to the needs of the process, and framing up a good structure for the offshore operation.
As I had mentioned earlier that organisations should exploit the advantages of the decentralised structure while designing it to suit their requirements. At the same time they must consistently avoid potential disadvantages. The undesirable side effects of decentralisation can include problems arising with ‘coordination’ and the loss of a unified corporate culture. Adding to these another major drawback would be to use resources less efficiently compared to a centralised structure. Below mentioned are possible drawbacks which arise from operational level management.
Operational level managers may take decisions without understanding the ‘broader picture’. While strategic level managers possess less detailed information about local operations compared to the operational level, since they usually have more information about the organisation as a whole and a better understanding about the corporate strategies of the organisation too.
Decentralisation makes redistributive policies, whether interpersonal or inter-jurisdictional, more difficult to implement.
In a strictly decentralised firm there are higher chances that a lack of coordination would arise among autonomous managers.
There would be a conflict between the natures of objectives between the operational levels compared to the entire organisation.
Decentralisation may not be efficient especially for standardised services, it may result is the loss of economies of scale.
Weak administrative or technical capability at lower level may result in services being inefficient and ineffective.
Decentralisation can sometimes make coordination of national policies more complex and may allow functions to be captured by local elites.
As we have seen throughout, in decentralisation it is critical in embedding a focus on growth within the structure of the organization. But if the strategic managements want to reassure that the resulting growth is profitable, they then need to adopt a mix of both growth strategies and operational excellence. Simply ignoring cost effective advantages arising out of functions organised centrally would only be counterproductive. The solution is to be ‘as decentralised a possible and as centralised as necessary’, organisations should add certain elements of centralisation to their decentralised structures. In former words, to achieve profitable growth, companies should unite the finest elements of decentralized and centralized models, tailoring them for their own needs. This system of combining both structures creates the Bi-model organisation where on one hand organisations remain loose and flexible in order to be responsive and on the other a centralised focus is required in order to manage interdependencies and reduce the time lag between decision taken and action implemented. The critical medium in creating this alignment is dependence on formal and informal bridging mechanisms which establish direct communication channels between the leaders and the doers.
This emerging Bi-model would have the following characteristics compared to its empirical counterpart:
Multiple centres
Steeples of expertise
Interdependent Units
Multiple Alliances
Diverse structures
Cosmopolitan mindset
Emphasis on Flexibility
The organisational structure depends on the business model employed. In other words it is important to tailor the decentralised structure to the organisations specific scenario. It is very optimistic to look at this fascination about decentralisation and post bureaucratic forms of organisational structure transform itself effectively further into the future as this structure is the only available remedy for organisations to make their dreams into reality in a ever demanding society. It would further be appropriate in discussing certain key factors for designing a successfully decentralised organisation in this anti-bureaucratic age:
The organizational structure depends on the business model employed. In other words, it is important to tailor the decentralized structure to the company’s specific scenario. Many different forms of decentralization are possible right from legally independent divisions to a holding company concept or an integrated network of closely linked business units, each with its own special resources and skills.
Decentralization must be tangible in the divisions lower down the corporate structure in particular. The same applies to the devolved decision-making process. Motivation levels blossom if staffs are allowed to assume responsibility for self-contained process steps within their direct sphere of work and get direct feedback on their performance. At the same time, decentralized units must be at least big enough to enable them to take responsibility for their own profit and loss.
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Decentralized divisions with specialist know-how that may be relevant to other business units or to the company in general should be set up as centres of excellence. This makes particular sense where a certain country has especially strong expertise in a particular area, such as the US in regard to product trends. Under the lead country concept, one country develops the corporation’s marketing approach, for example, while another country handles purchasing activities and so on. This approach reflects the idea of integrated networks, but can also be transferred to divisional structures.
The decentralized managers need to be integrated in the management of the overall company. This can be done by including them in a group executive committee, for instance. Top management benefits as they are kept directly informed of the status quo in the business units and can help steer them in the right direction if required. Divisional managers, for their part, are better able to see where their activities come in the overall strategic framework and may have the opportunist to influence corporate strategy.
Decentralized units must focus on their core business activities, such as marketing, production or R&D. As far as possible, they should have their administrative functions taken away from them. Thanks to the outstanding levels of functionality provided by today’s IT systems, bundling administrative functions in this way is quite feasible. But it requires an inevitable standardization of processes and systems. This can represent a mammoth task for companies that have gone down the decentralization road without a centralized point of coordination, as they often have a plethora of different software standards, organizational procedures, etc.
In organizational terms, administrative functions are best incorporated in a corporate service centre responsible for all the decentralized business units. From this starting point, service functions can then be outsourced wherever the market offers cheaper solutions for a service of the same quality. Nowadays this often boils down to off shoring. Service providers in different countries are now in a position to offer higher value administrative services in areas such as HR or accounting, for example. In particular, the new EU countries in Eastern Europe represent attractive off shoring opportunities for Western European companies with great potential. A study carried out by Roland Berger Strategy Consultants in conjunction with United Nations conference on trade and development (UNCTAD) found that companies can achieve considerable savings by means of service off shoring. In many cases, the quality of service also goes up. More than 80% of the European companies rated in RBS consultant’s survey categorised their off shoring projects as “successful” or “very successful”, reporting cost reductions of between 20 and 40%. These savings come primarily from the greatly reduced transaction costs, a large part of what makes off shoring so attractive today. Thus communication costs are considerably lower than even a few years ago, making it possible for companies to exchange huge amounts of production data. Logistics costs and customs duties have also fallen significantly
Naturally, the optimum level of decentralization depends on the sector in which the company operates. Nevertheless, even in industries where the same, standardized products are available all over the world – for example, in fast food or entertainment electronics – it still makes sense for management to allow a degree of freedom at the local level, for example in designing and running regional media campaigns.
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