Companies adopt either a centralized structure or a divisionalized structure. Any corporate manager will tell you – the pendulum swings between centralization and divisionalization every three years or so. If you are a divisionalized company, you complain about the silos and the lack of communication. If you are a centralized company, you complain about the lack of accountability of the central organizations. In most corporations people get tired of their current structure and demand a shift to the other structure.
Which is better? Centralization or divisionalization? Centralization gives you economies of scale and alignment of the different businesses. Divisionalization gives the businesses autonomy to operate and holds them accountable for results. There is no universal truth. Hence the pendulum swings.
The question of centralization versus divisionalization is articulated in different companies at different levels. In some companies, the divisions are made up of independent businesses that operate independently and autonomously. Eventually, someone figures out that centralizing certain functions like accounting, human resources and IT creates economies of scale.
In contrast, other companies have long adopted the shared-services model of support functions, leaving the divisions to simply run their unique businesses. These companies often find that each division presents themselves narrowly to their clients/customers and, as a result, the company does not reap the benefits of synergy between the divisions.
For example, in our own company, Think Shift, we have three seemingly distinct businesses:
1. An advertising agency business
2. A digital web-based sales and marketing business
3. A leadership and culture consulting business
For a couple of years we have ran them as three divisions with expectations of performance, holding each accountable for results and providing autonomy for execution. Seeing the lack of synergy between the divisions, our pendulum is swinging.
Does the pendulum swing back the other way? Absolutely. The more the businesses are centralized, the less you can hold people deeper in the organization accountable. A totally centralized business has a single P&L managed by the CEO. Ironically, everybody thinks their department is doing well, and it all adds up to a negative number on the bottom line of the total P&L. The CEO gets upset and gives individual P&L responsibility to senior executives. Centralization moves to divisionalization.
In other companies that have separate businesses with their own P&L, but a centralized shared services model, the divisions complain that the central services are too inefficient; the divisions fight over overhead allocations; and they complain that the central services do not treat the divisions as customers, and if they did, the central service would not be in business. The pendulum swings towards divisionalization.
I had the pleasure of having coffee with my friend Dr. Carolyn McKnight recently. As I bounced my ideas for this article of off Carolyn, she, in her inimitable style, drew parallels between the dichotomy expressed above and the inherent dichotomies in Greek mythologies. Credit goes to Carolyn for the comparison below to the Greek gods.
So what are the fundamental force fields that cause the swing of the pendulum? There are three primary reasons.
1. The dichotomy between the desire for order and the desire for freedom
The more order you impose, the more people’s freedom is constrained. Carolyn compares them to Apollo and Dionysus. Apollo, an embodiment of perfection, looks to create order in knowledge. Dionysus, the god of wine, parties and ecstasy, represents the freedom in life. Should we impose the strict rules of Apollo to create order and efficiency in our business or allow our people to enjoy the life of business, like Dionysus, to reap the most they can out of the business? Clearly, there is a balance that is needed. It is in search of that balance the pendulum swings.
2. The dichotomy between the need for individual identity and the desire for inter-departmental interaction
In Carolyn’s comparison, these two competing positions are represented by Hestia and Hermes. Hestia is the goddess of family who grounds us to our hearth, home and domesticity and gives us an identity. Hermes, serving as a messenger, is the god of travel and communication who is willing to take us far from home. Are we better off with the comfort and identity that Hestia offers or the travel and trade that Hermes promotes? We seldom want one extreme without the other. Can we have both? Must the pendulum swing?
3. The dichotomy between concentration and expansion
This is the desire to focus and concentrate on what we know and do well, versus the desire to expand into new and adjacent territories. Demeter, the goddess of agriculture, growth and nourishment, tells us to nurture what we have. Poseidon, the god of the sea, rivers and floods, urges us to explore. Divisionalization promotes concentration in, and consolidation of, your existing businesses. Centralization expands your visibility to, and the opportunity of, new and adjacent markets. What is more important? Concentration or expansion? Demeter or Poseidon? Which way has the pendulum swung?
Should you stop the pendulum from swinging? We argue that the swinging of the pendulum is the natural process by which the organization finds its optimum balance along each of the three dimensions mentioned above. And, even when they do find the optimum point, circumstances change in a few years, requiring the pendulum to swing again. So, if your pendulum is standing still, give it a push. A swinging pendulum is a sign of a healthy company.