This document outlines the key considerations, benefits and risks when centralizing or decentralizing functions of an organization. The purpose is to help inform leaders and their teams of the variables at play and possible impacts associated with each option.
What do we mean by centralized and decentralized?
- Centralized: When a function is managed through the central office – typically the headquarters.
- Decentralized: When a function is managed at the local level – an office or department outside of central management.
An organizational function, which is anything that the organization performs repeatedly or in an ongoing manner, can be centralized or decentralized. Some common organizational functions are IT support, engineering, scheduling, research and development, marketing, finance, sales, development, human resources, operations, and manufacturing.
What parts of the function get centralized or decentralized?
Every function has two parts: decision-making and execution. Each part can be centralized or decentralized.
1. Decision-making – Determining how the work gets done, processes to follow, budget allocations, schedule, quality, and other factors specific to the function.
2. Execution – Completing the work, which often means receiving the resources (monetary and personnel) to do so.
The following example will outline the four permutations of centralizing and decentralizing these two parts of a function.
Example: ABC Training Company centralizing/decentralizing their “content development” function
ABC Training Company provides professional training and has two major training programs: Leadership and Team Building. Each program requires specific content to be developed for their training services. Should each program own the decisions around content development (what topics to include, format, length and tone of the content) or should a central office decide? Should each program or the central office execute the content creation (selecting their own publishers, printers, and designers and having control over the process)? Table 1 outlines the four permutations of centralizing and decentralizing the two parts of the content development.
Benefits and Risks of Centralized and Decentralized Approaches
What is the right choice for each function in your organization? The answer depends on factors such as your short-term and long-term strategy, culture, environment, and leadership and management styles. Table 2 outlines the common benefits and risks to centralizing and decentralizing. As you read through the list, think about which items are most important and least important given the strategy and direction of your organization. You can use this list with your leadership team to “get on the same page” when assessing trade-offs during your decision.
The benefits and risks are listed as potential because choosing to centralize or decentralize does not automatically create these outcomes. For example, you can have a fully centralized customer service function, but enable local offices to make decisions and take actions up to a certain threshold before getting permission from the central office, which helps the function remain more nimble (one of the benefits of being decentralized).
Which benefits are most important to you? Which risks cause most concern? Regardless of whether you choose to centralize or decentralize, what processes, expectations, and mechanisms can you put in place to help mitigate the risks?
Thank you, Margit Jochmann, David Fisher, Iliana Alvarado, and Lisa Mangkankorn, for input and advice on this paper.
Author: Tip Fallon, MSOD. firstname.lastname@example.org