A P R I L 2016

Centralization versus decentralization:
what’s right for you?

1FIGURE 1: CENTRALIZED VERSUS DECENTRALIZED MANUFACTURING COSTS
30%

30

Controllable costs aspercentage of revenue

Organizational structure isnotoriously difficult to design.
One of the biggest questions
involves which functions orunits to centralize. Centralization
can bring with it many benefits:cost savings, standardization,and sharing of best practices.
For example, according to theAmerican Productivity & Quality
Center (APQC) (formerly, American
Productivity & Quality Council),1
controllable manufacturing costs
are 10% lower at centralized versus
decentralized manufacturingorganizations (figure 1).

2521%

2018%

1511%

108%

501%
25th percentile

CentralizedMedian75th percentile

Decentralized

Source: APQC

APQC, “Manufacturing: Centralization vs Decentralization. Which Is Better?” Target magazine, Third Issue, 2010, accessed
March 1, 2016, http://www.ame.org/sites/default/files/10-26-03Benchmarks.pdf.

At the same time, centralization, especially when it
requires restructuring an existing business, often
carries its own risks—in the forms of increased layersof approvals, slower decision making, and hierarchicaldisruption of important cross-organizational
processes as employees adjust to new ways ofworking. So, how do you know whether centralization
is right for your organization?
C E N T R A L I Z AT I O N A N D
D E C E N T R A L I Z AT I O N D E F I N E D
It’s important to start by being clear about what wemean by centralization. Centralization refers to theconcentration of management and decision-making
power at the top of the organizational hierarchy forthe purpose of coordinating financial, human, andother business resources. In centralized organizations,strategic planning, goal setting, budgeting, and talent
deployment are typically conducted by a single,
senior leader or leadership team. In contrast, indecentralized organizations, formal decision-making
power is distributed across multiple individuals orteams. It’s notable that although centralization caninvolve the colocation of personnel, it does not have to;centralization is more about where decisions get maderather than where people sit.
C E N T R A L I Z AT I O N V E R S U SD E C E N T R A L I Z AT I O N
Leaders choose to centralize or decentralize theirorganizations for a variety of reasons, and certain
benefits are associated with both centralized anddecentralized models (figure 2).
Centralization makes sense when scale orstandardization is a major factor when it comes tocosts, or when specialized production capabilities
are necessary, or when manufacturing strategy is astrong component of business strategy. Alternatively,
decentralization is more appropriate when different
products for individual markets are needed or when
the company must respond quickly to changing or
regionally differentiated customer needs.

FIGURE 2: PROS AND CONS OF CENTRALIZED VERSUS DECENTRALIZED ORGANIZATIONAL MODELSCENTRALIZATION

TalentOrganization

Financial/Customer



DECENTRALIZATION

Generates economies of scale

Can duplicate efforts or resources

Fosters one-size-fits-all products andservices

Promotes experimentation and innovation

Further from the customer; lessresponsiveCloser to the customer; more responsive

Aids in adoption of best practices

Slower to adopt best practices

Allows for common standards andmetricsDifficulty comparing performance acrossunits

Slower decision making

More autonomy; speeds local decisions



Increased collaboration between
departments

Risks organizational silosEasier integration with external
stakeholders

Harder to integrate other functions or thirdpartiesFlexible talent deployment

Difficulty deploying talent across disparate
units

Fewer career opportunities foremployeesGreater career options

Reduced empowerment

Increased empowerment

Source: AlixPartners

2 / Centralization versus decentralization: what’s right for you?

FIGURE 3: HYBRID ORGANIZATIONAL MODELSCENTRALIZEDType of coordination

Description

Central operation

Global centralized unit located in corporate or in a specificregion or business unit

Integration

Global manager with direct reporting-line authority overmultiple regions or business units

3

Coordination

Prescribed coordination mechanisms such as management
processes, leader forums, or common information technology
systems that link different regions or business units

4

Differentiation

Informal exchanges of information such as water cooler
conversations between regions or business units

5

Independence

Multiple, autonomous units with no formal or informal
coordination mechanisms

1
2

DECENTRALIZED
Source: AlixPartners

H Y B R I D C O O R D I N AT I O N A P P R O A C H E S
An understanding of the benefits of each of the models
is helpful, but most organizations are complicated,and usually, a hybrid model makes the most sense.
Five different hybrid models can describe ways there’s
room for adaptation (figure 3).
The models described in figure 3 have been laidout on a continuum from more centralized tomore decentralized. But more than simply formal
structures and formal decision rights distinguishthe approaches, because there are other meaningful
factors: informal coordination mechanisms such as
management forums, use of common information
technology systems, or even frequent water cooler
discussions in which different groups exchange
information, collaborate, and share best practices.
F O C U S O N W O R K F LO W S
To determine which coordination is best for a given
organization, it’s important to first understand theunderlying, critical work flows that the structure must
support. Put another way, form follows function. For
instance, a business leader who sought to determine
the best structure for the support of new productdevelopment (NPD) activities might first identify all of
the functions involved in the NPD process. Next, theleader could consider the nature of the work that eachfunction performs to determine which coordination
approach is best suited for the given function (figure 4).

3 / Centralization versus decentralization: what’s right for you?

As shown in figure 4, organizational functions associatedwith NPD activities—such as research and development(R&D), marketing, and operations—are listed in theleftmost column. Alternatively, if the company wereconsidering centralizing its human resources (HR)functions, those functions could be replaced with HR
subteams such as compensation and benefits, talentacquisition, HR operations, and HR business partners.
The figure’s upper row lists the different coordination
approaches—from more decentralized to morecentralized. By considering the various requirementsof each function—closeness to customers,
standardization, economies of scale—leaders candetermine which coordination approach is best
for a given function. Once that analysis has been
completed, the leader can then start to sketch out anew organizational structure with, for example, finance,operations, and project management more centralized
and R&D, marketing, and sales more decentralized.
A S H I F T T O W A R D D E C E N T R A L I Z AT I O N ?
Although centralization is in vogue, several trends
foretell a shift toward greater decentralization. For
example, millennials now represent the largest
generation in the workforce. Millennials, in particular,
seek flexibility and autonomy in their work, which arecharacteristics more compatible with decentralizedstructures. Keeping that growing segment of theworkforce engaged may necessitate spreading
decision making more broadly across the enterprise.

FIGURE 4: NEW PRODUCT DEVELOPMENT WORK FLOW ANALYSIS EXAMPLE

Independence

Differentiation

Coordination

FinanceFinance support
for NPD

R&D

Concept design,
prototyping, anddevelopment
done in local
business unit

MarketingMarket research, Marketingproduct definition, budgetingproduct
promotion

Operations

Productproduction
in dedicatedregional plants

Projectmanagement

Sales

Integration

R&D budgeting,technology
search, andplatform
development

Budgetingcouncil,packagingdevelopment,pilot plant
operations
Projectmanagement
support for NPD

Independent,
business-unitfocused sales
teams

Primary consideration

Establishment ofcorporate hurdle
rates for new
products

Interactions
with regulatory
authorities

Branding

Procurement

Lessons
learned; project
management
methodologies
and tools
Account
strategies

Centraloperation

Stage-gateprocess
definition

Sales
training andcommissions

Secondary consideration

Source: AlixPartners

In addition, many organizations are starting tocollapse their distribution channels and interact
directly with customers. In that context, companies
cannot leave it up to regional distributors to customizemarketing efforts or tailor products and services.
Instead, they must empower their own employees
to respond quickly to changing customer needs. For
example, Zappos, the Web-based shoe and clothingcompany known for outstanding customer service,recently announced it’s done away with bosses
altogether.2 Similarly, the employee handbook for Valve
Corporation’s successful software Steam states:“We don’t have any management, and nobody ‘reports
to’ anybody else. We do have a founder/president, buteven he isn’t your manager. This company is yours tosteer— toward opportunities and away from risks. You
have the power to green-light projects. You have thepower to ship products.”3
Finally, digital technologies are transforming businesseverywhere we look. Even the Indianapolis Zoo has
digitized its business model.4 As companies digitize
back offices, interactions with customers, employee
communications, and products and services, they pave

George Anders, “Gurus Gone Wild: Does Zappos’ Reorganization Make Any Sense?” Forbes, January 9, 2014, http://www.forbes.
com/sites/georgeanders/2014/01/09/gurus-gone-wild-does-zappos-reorganization-make-any-sense/#2ec042eb3b67.
3Henry Farrell, “How Valve Demonstrates Democracy in the Workplace,” Washington Post, November 21, 2013, https://www.
washingtonpost.com/news/monkey-cage/wp/2013/11/21/how-valve-demonstrates-democracy-in-the-workplace/.
4Jack Nicas, “Now Prices Can Change from Minute to Minute,” Wall Street Journal, December 14, 2015, http://www.wsj.com/
articles/now-prices-can-change-from-minute-to-minute-1450057990.
24 / Centralization versus decentralization: what’s right for you?

the way for decentralization. Digitization addresses
many of decentralization’s traditional limitations byfostering common standards and metrics, collaboration
across departments, and integration with third parties.
CONCLUSION
Although the pendulum may be swinging back toward
decentralization, centralized structures still could offer
potentially significant costs savings. Determining
which model is right for your organization is criticalto any restructuring effort—the decision has theability to impact not just your organization’s costs
and efficiency, but also customer satisfaction andemployee engagement. Take time to understand thepros and cons of centralization versus decentralization,
consider the various hybrid models, and determine
which supports your most critical business processes.
By applying this analytical approach, you can build thebusiness case and make your restructuring decisions
with confidence.

F O R M O R E I N F O R M AT I O N , C O N TA C T :Ted Bililies, Ph.D.
Managing Director+1 617 849 6004
tbililies@alixpartners.com
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