In an organization, centralized way of making a decision entails less autonomy to everyone except the central leadership. In contrast, decentralization involves delegation of responsibility and the associated decision-making powers across various levels in the organization. Like any other system, decentralization also has its share of pros and cons.
A central command structure derives from an autocratic style of management. Autocracy is not necessarily an intention and could be incidental. For example, typically start-ups and business that have just been founded are naturally autocratic with the founding members primarily running the show. Gradually, as the business grows and the headcount expands, the organization begins to take on a different structure with departmental heads and other teams. The top management is unable to keep tabs on all organizational functions and prefer to delegate responsibility and distribute the power of making decisions.
Decentralization: Inspecting the Tradeoffs
Decentralization often comes into picture to tackle the disadvantages of centralization. Although a decentralized command structure does help to overcome the cons of autocratic management such as lack of ownership and authority, as you go down the hierarchical organization structure, it has its own unique set of pros and cons.
Let us explore these merits and demerits of decentralization and put into perspective the tradeoffs involved when adopting this management concept.
Advantages of Decentralization
The top management and promoters of the firm have distributed the decision-making authority and are therefore, left with more time to pursue the strategy for realizing the organization’s long-term vision. Day-to-day problem solving is no longer the biggest concern for the higher-ups.
Operational independence makes it easier for the organization to grow overall. Activities such as franchising, diversification and hiring of employees at the departmental levels do not need constant intervention from the top management. Consequently, expansion becomes easier, raising capital and inducting additional workforce become less time-consuming. Decentralization greatly benefits huge organizations spread over several thousand employees and geographic locations.
Increased decision-making power directly translates into greater accountability. Local managers and even other employees further down the corporate ladder are motivated to take ownership of their work.
Leadership qualities find expression outside the boardroom within the silos and cubicles as well. The overall atmosphere tends to boost employee morale leading to greater job satisfaction than the strict confines of a centralized setup. Grooming future leaders is also much easier in such an atmosphere.
There’s no longer just one center of excellence in a decentralized organization but several pockets of excellence full of talented people spread out across the organization. Authority is delegated at the local level, which means decisions are more informed and accelerated though not always strategic.
Decentralized power means greater transparency which in turn ensures that fewer mistakes are made. A decision is usually a democratic and participative outcome and if there’s a goof up in progress, chances are great that someone will spot it. While there’s ownership of success, decentralized authority also ensures that there are fewer scapegoats. A mistake cannot be mapped to one single person (this can be a demerit under some other circumstances).
One of the most powerful outcomes of decentralization is the possibility of open innovation. With talent spread out across all levels and locations and the resulting networking possibilities, bright minds get together with ideas, leading to innovation rapidly. There are no bureaucratic bottlenecks or hindrances to exchange of ideas.
In a decentralized setup, it becomes easy to spot the weak links that are consistently affecting the bottom lines. Therefore, it becomes easier to plug the leaks in time and make sure that the lessons learned are effectively conveyed to all other sub-units within the organization.
The adoption of organizational standards and best practices is also facilitated by a decentralized setup. Transparency in process ensures that it is easy for the various local teams to emulate and adopt the methods and processes that brought success to a team located elsewhere.
One of the major advantages of decentralized way of taking decisions is witnessed during a sudden change in the local business environment such as the onset of recession or currency devaluation, etc. Businesses are able to respond and adapt quickly to these changes when authority is decentralized.
Retail businesses like Walmart and hotel chains often benefit from having a decentralized style of management. Businesses, where quick decisions amidst fast-paced changes in environment are the order of the day, stand to benefit from decentralization.
Disadvantages of Decentralization
Too much emphasis on localized way of taking decisions may end up blurring the bigger picture. As you go down the corporate ladder, employees seem to lose sight of the organizational vision.
A highly decentralized organization can be the battleground for unhealthy competition between local managers leading to lack of co-operation and coordination.
Interdependent functions may suffer and resolving interdepartmental conflicts is difficult when authority has been delegated. In addition, there is costly duplication of work (activities, processes and outcomes) that may impact economy of scale.
Decentralization is not always a good strategy to begin with, especially when the organization is still to find its footing in the market. Pushing decisions down the hierarchy without assessing if those levels in fact have the required skills and capabilities, is a mistake that could prove to be costly.
While decentralization promotes the spread of standards and best practices, different managers perceive them differently. Therefore, implementation of uniform organization-wide consistent policies becomes problematic.
In case of emergencies that require adoption of organization-wide standards, the diffusion of authority and independent opinions and actions pose a major hindrance in a decentralized structure.
Decentralization often gives rise to an employee population composed mainly of generalists and very few specialists. External specialist consultants often need to be sought when the need arises, further adding to the costs.
Work allocation and performance evaluation are not consistent in a strongly decentralized establishment. A sub-unit that is a cost center ends up getting a raw deal, whereas revenue generating units reap the benefits of a good performance by their sub-unit. It is difficult to measure the performance of cost centers and the associated employees as they do not generate profits.
Businesses like fast food chains such as McDonald’s where specialization is important and consistency in service is vital, stand to benefit from a more centralized work culture.
We have seen both the advantages and disadvantages of decentralization that hopefully makes clear what the trade-offs could be in adopting this concept in an organization. However, most disadvantages of decentralization can be overcome by controlling the degree of authority delegated to the lower levels of the organization. Both centralization and decentralization have their extremes which is why, the key is to avoid those extremes and take the middle road. A combination of both concepts and a conscious deviation from the autocratic management style is recommended as a plausible strategy. Striking a balance between how much independence is given to individual business units and what kind of decisions remain under the central command could lead to a successful strategy.