Simulated Decentralization
The main rule is to look simulated decentralization as a last resort only.
Whenever a unit can be set up as a business, no design principle can match federal decentralization. We have learned, however, that a great many large companies cannot be divided into genuine businesses. Yet they have clearly outgrown the limits of size and complexity of the functional or of the team structure. These are the companies that are increasingly turning to “simulated decentralization” as the answer to their organization problem. Simulated decentralization forms structural units that are not businesses but which are still up as if they were businesses, with maximum possible autonomy, with their own management, and with at least a “simulation” of profit-and-loss responsibility. They buy from and sell to each other using “transfer prices” determined internally rather than by an outside market. Or their “profits” are arrived at by internal allocation of costs to which then, often, a “standard fee,” such as 20 percent of costs, is added.
Building Blocks of Organization
Contribution determines ranking and placement.
“What activities belong together and what activities belong apart?” A searching analysis is needed that groups of activities by the kind of contribution they make. There are four major groups of activities, if distinguished by their contribution. First, result-producing activities – that is, activities that produce measurable results that can be related, directly or indirectly, to the results and performance of the entire enterprise. Second, support activities that, while needed and even essential, do not by them-selves produce results but have results only thorough the use made of their “output” by other components within the business. Third, activities those have no direct or indirect relationship to the results of the business, activities that are truly ancillary. They are hygiene and housekeeping activities. Finally, is the top-management activity. Among the result-producing activities, there are some that directly bring in revenues (or in service institutions, directly produce “patient care” or “learning”). Here belong innovating activities, selling and all the work needed to do a systematic and organized selling job. Here also belongs the treasury function, that is, the supply and management of money in the business.
Key activities should never be subordinated to nonkey activities. Revenue-producing activities should never be subordinated to nonrevenue-producing activities. And support activities should never be mixed with revenue-producing and result-contributory activities.
Federal Decentralization: Requirements
As a minimum the unit must contribute a profit to the company rather than merely contribute to the profit of the company.
Federal decentralization has stringent requirements. Federal decentralization is applicable only where a company can truly be organized into a number of genuine “businesses.” This is its basic limitation. As a minimum the unit must contribute a profit to the company. And it must be a genuine profit determined by the objective judgment of the marketplace.
Federal decentralization will work only if the top-management job is clearly defined and thought through. Federalization, if properly applied, makes top management capable of doing its own job precisely because it does not have to worry about operations, but can concentrate on direction, strategy, objectives, and key decisions for the future. The federal principle demands great responsibility from the operating units, the autonomous businesses. They are given the maximum of autonomy; and this requires that they assume the maximum of responsibility. Federal decentralization requires centralized controls and common measurement must know what is expected of each business, what is meant by “performance,” and what developments are important. To be able to give autonomy one must have confidence. And this requires controls that make opinions unnecessary. A federal unit of a autonomy is a means toward better performance for the entire company.
Reservation of Authority
There must be a kind of “supremacy clause” reserving to central management the decisions that affect the business as a whole and its long-range future welfare.
Top management in a decentralized company must think through carefully what decisions it reserves for itself. For there are decisions that have to do with the entire company, its integrity, and its future. These decisions can be made only by somebody who sees the whole and is responsible for the whole. Specifically, there must be three reserved areas if the business is to remain a whole rather than splinter into fragments. Top management, and to management alone, can make the decision on what technologies, markets, and products to go into, what businesses to start and what businesses to abandon, and also what the basic values, beliefs, and principles of the company are. Second, top management must reserve to itself the control of the allocation of the key resource of capital. Both the supply of capital and its investment are top-management responsibilities that cannot be turned over to the autonomous units of a federal organization.
Third, the other key resource is people. The people in a federally organized company, and especially managers and key professionals, are a resource of the entire company rather than of any one unit. The company’s policies with respect to people and decisions on key appointments in the decentralized autonomous business are top-management decisions – though of course, autonomous business managers need to take an active part in them.