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Centralization vs. decentralization is one of the key organization design questions when it comes to delivering a digital strategy (or building new capabilities in general) in multi-divisional businesses. Do you build one central “digital” unit or team? Or is it better to put digital resources into functions and divisions that support the respective functional strategies? Or maybe you could strike a balance between central and decentral – but how would that balance work?
GE took a centralized approach, at least for its big data unit Predix, which was organizationally and spatially placed outside of GE’s headquarters and which works horizontally across GE’s divisions. Siemens, on the other hand, has followed more of a decentralized approach by aligning digital strategies vertically with its business units. (Siemens recently concentrated its innovation activities in its “next47” structure, but not, however, with the obvious intention of having this unit serve or work closely with its incumbent businesses.)
Which approach is right? The view that everything is (or will be) digital anyway doesn’t provide clear guidance. A central digital powerhouse, whose activities and processes are properly linked with the business divisions, can, in principle, lead to as thorough a transformation as a decentral build-up of digital capabilities that transforms a business from inside. In general, the centralized approach reduces the risk of the incumbent management structure killing new ideas that don’t fit the routines and success criteria of a pre-digital world.
On the other hand, there are often crucial resources and capabilities that need to be part of the cross-functional teams that seek to build new products or business models. For example, if you’re building a whole new digital offering for your existing clients, you won’t want to forego crucial client insights from your marketing and sales people. But such a requirement alone doesn’t lead to a clear decision for going central or decentral in terms of structure.
Following the framework of the Organizational Structure Kit, the question of centralization vs. decentralization relates to the unit structure of an organization. This unit structure is informed by required activities and capabilities to drive a strategy within a defined scope and has implications for structural interfaces (links) and how decision making is defined in an organization (shape).
Using our Kit’s approach as a tool to think through the central vs. decentral question, we came up with a number of lead questions and criteria to consider:
Capabilities and unit structure: How important is focus on digital capabilities and functional excellence compared to integration of digital capabilities with existing businesses and resources? A narrow focus e.g., on a marketing app that enhances customer relationships, suggests a close integration with the marketing function. However, it will probably not lead to the development of new business models.
Links and unit structure: Whether you go down the centralized or the decentralized route will have implications for structural interfaces. If there is a centralized digital powerhouse, a key structural interface will be at the top management level. In a decentralized set-up, overall integration of digital capabilities will depend on lateral processes between units, with the risk of fragmenting the digital approach.
Shape and unit structure: Who makes which decisions regarding digital topics? In a centralized approach, the digital powerhouse can develop its own way of working, capabilities, and decision making rhythms, including, crucially, a sufficient level of autonomy for project teams to adapt to its learnings in an agile way. In a decentralized approach, the new capability will have to fit in with routinized ways of doing things and making decisions. The question then becomes: Is the innovation and change capability within your given units sufficient to support a genuinely new approach to thinking about your business?
As part of our Organizational Structure Kit we have built a tool to support the balancing of centralization and decentralization in organization design: