Badly judged centralization can stifle initiative, constrain the ability to tailor products and services locally, and burden business divisions with high costs and poor service. However, insufficient centralization can deny business units the economies of scale or coordinated strategies needed to win global customers or outperform rivals.
McKinsey Quarterly, “To Centralize Or Not To Centralize”
So how do you answer the question? Especially when none of the executives interviewed in 30 different global companies volunteered an orderly, analytical approach for resolving centralization decisions when interviewed. After all, benchmarks, politics, and fashion — the usual approaches — are not the answer.
In the above referenced article, McKinsey put forward a decision making framework based on three questions. According to the framework, centralization should only occur if at least one of the following questions can be answer affirmatively.
- Is it mandated?
- Does it add significant value?
- Are the risks low?
For the most part, SI agrees. The only disagreement is with the explanation of value. According to McKinsey, it should add 10% to the market capitalization or profits or be part of a larger initiative that will add 10%. Significant value is not always immediately quantifiable, especially where innovation is involved. Thus, SI would also recommend centralization if the following question can be answered affirmatively:
- Will it increase the chances of innovation without significantly reducing any of the benefits decentralization provides?
If, for example, the only downside to centralizing a certain buy is that you have to add more users to your online supply chain platform and buy a few more licenses, this would likely be a case where you would centralize the buy as it would provide opportunities to innovate in network design and inventory management.
