Over the past decade, companies have grappled with organizational designs that vary widely in how centralized or decentralized the various functions are. These organizational redesigns are often driven more by who is designing them than by objective, fact-based decisions about what maximizes value. For example, when functional leaders design functions, they are often more centralized (pursuing economies of scale and skills); When business unit leaders are involved, functions tend to be more fragmented (in pursuit of responsiveness and control).
In large, global, multi-business companies, this dynamic can lead to a struggle between functional leaders trying to standardize and scale, and business leaders who feel they are paying for the large corporate overheads that don't adequately respond to their needs. Behind these issues are two problems: a lack of strategic rationale in the current design, and a lack of clarity in decision-making authority and roles between business unit and functional leaders. Common symptoms of this dynamic include:
1. Functions in an organization are constantly shifting between centralized and decentralized models, first centralizing to achieve efficiency, and then returning power to the business to stimulate responsiveness and accountability.
2. Organizations have implemented fragile "we both do" models that rely on collaboration and result in bulky and expensive features where business units find ways to opt out and act independently. This approach creates an end state that makes the organization both inefficient and ineffective.
3. Functional organizations follow agendas that are not tailored to the needs of the business units, so the business units create shadow functions that add more costs to the organization.
4. Patchwork fixes are used to address issues with specific functions and business interactions, resulting in less clarity and coherence across the enterprise and undermining increased accountability and complexity in service delivery.
1. Towards a new approach
Against this backdrop, we believe companies need a new approach to building functions that maximize business value and successfully serve business units.
1. Organizations should subvert the traditional functional value assessment and define functions by focusing first on the needs of the business unit or "BU-back". By definition, centralized functions are burdensome to organizations because they slow down activity at the edge of the business unit. To ensure that they provide value, organizations must set high standards for when resource ownership is pulled into the center, and the benefits of centralization must also be clearly articulated to the business.
2. Defining "function" does not mean that functions need to be one-size-fits-all. Business units may have different needs, so organizations may need multiple enterprise or centralized functional models to meet those needs, and trying to force a one-size-fits-all approach when developing and defining corporate functions will only lead to frustration and existing problems.
3. Not every corporate functional department can compete. Some basic principles can help leaders narrow down the list of functions considered. While the business unit should always be responsible for executing the value agenda, there is no controversy as the following types of functions involve the type of decisions and activities.
4. Protect the organization: The safeguard function includes the function of protecting the company from existential threats by maintaining basic control, which is almost always led by the corporate entity. Typically, they involve decisions that are not appropriate for a single business unit to make, and often involve legal, risk, regulatory, or investor-related topics.
5. Shaping the Corporate Value Agenda: Shaping functions include those that support the implementation of the organization's strategic priorities and require a voice across the enterprise, such as branding, strategy and business development, communications, research and development, and centers of excellence (COEs). The top team must always have a value agenda, and the corporate function, which is somehow a business unit, should help shape it. In turn, the business unit should remain accountable for executing the value agenda.
6. Shared economies of scale, skills, and scope (from primarily owned by the business unit to fully owned by the "company"): Shared capabilities meet the needs of cross-business units (e.g., payroll, IT, and accounting). Sometimes, these capabilities can be aggregated to provide economies of scale. Other times, when requirements differ, they can be distributed within the business unit, and shared functionality should be highly responsive to the day-to-day needs of the business unit.
The senior team must always have a value agenda, but the corporate function, which is the business to some extent, should help shape it.
Addressing the latter two types of issues is often the most ambiguous for organizations that do not have a clear strategic direction or define the respective decision-making powers of functions and business units.
Second, the BU-back method is adopted
Putting these core beliefs into practice requires organizations to take 3 key steps: define organizational strategy and base it on how functions can deliver value at the enterprise and business unit level, take a BU-back approach to functional design, and quickly determine how decision-making authority and responsibility will be distributed.
1. Define organizational strategy and base it on how functions deliver value at the enterprise and business unit level.
At its core, defining how the company's functions can help the organization maximize value. An organization's corporate functions do not exist in a vacuum, they exist to support the business. In turn, the form of this support depends on how one envisions what the organization needs to maximize value creation.
Organizations must first identify the type of business leaders they need to consult with to understand the design requirements for a given feature. To get this perspective, executives must take a step back and consider the overall context of the organization. The holistic narrative ensures that all leaders are aligned on value creation and organizational strategy and empowers them to make the trade-offs and decisions needed to design an effective, efficient organization. The value creation narrative of the business function should be aligned with the organization's strategy. On the other hand, executives must also consider how business units differ in contributing to the value agenda.
Companies should identify the unique characteristics of the markets in which they operate and the competitive dynamics within them. How does the company meet the needs of its core customers? How do business units respond differently to these needs? What products do business units offer, what are the differences between them, and how much cycle time does each business unit take?
When this work is done correctly, a solid narrative of organizational value creation emerges. Once defined, the next step is to determine how the function best fits into that narrative. Organizations must answer the following questions:
What are the key decisions that business unit leaders need to make, and what decisions do they need to control? For example, if IT business application development is a core enabler of a business unit's growth strategy, how much control does its leader need to ensure that the project is completed correctly? How different are the needs of this business unit leader compared to the needs of others in the organization?
Which markets, products, and customer segments may require targeted capabilities? What common needs could be addressed more effectively or efficiently if they were universally bundled across the organization?
For functions that leaders believe should be more centralized (by ownership, accountability, or resources), organizations should ask, "Why are these resources best placed in the center?" How will the business units providing these resources benefit from this arrangement? What are the benefits for businesses?
Organizations often struggle to define their organizational strategy. They create a system that sounds good but results in bloated, inefficient, and often poorer services. Other times, they resort to purely function-by-function analysis, which is time-consuming and provides neither organizational clarity nor coherence. This dynamic can lead to a constant push-pull dynamic, as no one understands the logic behind centralized decision-making.
We believe that the reason organizations struggle to define core functions is that they move too quickly to define how functions add value, rather than making decisions more fully based on the needs of the business.
2. Adopt the BU-back method for functional design.
When designing features, organizations should adopt a business unit perspective or a BU-back approach. Since value creation occurs primarily within the business units, the company's functional activities should reflect the needs of the business units. Functionality should only be set up when absolutely needed by the business; Functions must then ensure that they deliver on their commitments to those business units. In other words, if a corporate function treats a business unit as a customer, will that business unit continue to do business with that function? Or will you try to join another business that can provide better service?
To make it easier to determine whether corporate functions should exist and how they can maximize value creation, an organization should first determine what type of business unit leaders it needs to maximize value and how much delegation and focus they need in the context of an overarching strategy. A natural consequence of this approach may be that companies will need business unit leaders across multiple categories based on the diversity of their markets.
In working with organizations, we observed 4 main archetypes of business unit leaders, each with different requirements for functionality and the level of control required.
(1) Strong business leaders
The head of this business unit has little control over most functions. Instead, this type focuses on pursuing business development and sales, often playing a lighter role in product development and adapting products to a local customer base. This leader works well with fully centralized functionality and well-defined service-level agreements. For example, companies with similar products across business units often choose this model. This approach allows business unit leaders to focus on selling products in a low-margin, competitive environment, while centralized functions take on more non-core function management.
(2) Business line integrators
This type of leader can take control of functions, usually those that require more localized oversight. This type of executive is best supported by a strong centralized function. For example, business unit heads at Procter & Gamble are responsible for a range of functions such as product development, branding, advertising, and product positioning, but they also utilize global business services teams (e.g., IT support and accounting) because the needs in these areas are similar and highly transactional.
(3) Authorized General Manager
The delegated General Manager controls most of the P&L functions and plays an important role in shaping and executing the value agenda. However, the leader wanted centralized functionality to support a narrow range of common needs. There are two ways to set up functions that support this archetype: a lean COE, where resources can be reported directly to the business units, or a spiral model, where the business units form the value lines and functions form the lines of competency that the business units can leverage. Samsung, for example, is a diversified company whose general manager oversees business units, but because best-in-class design is important for value creation in all of these business units, it maintains a centralized design center to promote best practices and norms.
(4) Autonomous business unit leaders
This type of leader controls almost all functions (except for the basic assurance function responsible for risk reduction) and must manage the P&L and substantially drive the value agenda. For example, these executives are often found in private equity firms that require divisible businesses that can be independently valued and easily sold. (A strong enterprise center ties business units together, complicating their severability.)
3. Act quickly to determine how to allocate decision-making power and responsibility.
The BU-back approach provides a starting point and ultimately pushes the organization to establish a more direct connection to the value creation narrative. While organizations will still make individual decisions about each function (and sub-function), each business unit leadership model implies a different type of support and interaction with functions from functions. Most importantly, this approach results in a cohesive, simple guideline that can be referred to when making sub-function determinations on a case-by-case basis, thus facilitating execution.
Once organizations have a clear understanding of what type of corporate function setup they need, they can choose from nine different options. These models should help functional and sub-functional departments meet the different needs of the business.
(1) Fully centralized: A centralized functional leadership team that sets and drives the agenda for the organization, with functions commonly found in this model including legal, risk, finance, and investor relations.
(2) Fully centralized shared services: Resources are reported to the central team, but services are either delivered from the central team to the business units or delivered to the business units through an outsourcing arrangement. Common features in this model include payroll or indirect purchases, such as travel.
(3) A strong COE that informally allocates some executive resources to business units: resources report to a central team, and some executive resources are located in or connected to business units, with functions common in this model including public and government affairs and human resources.
(4) Strong COE, some executive resources guided by the business unit: There is a large central team, but some executive resources are located within the business unit and connected to the COE, and common functions in this model include planning and business development and controller functions.
(5) Virtual and real organization: Resources have two solid lines that report to business departments and centers, in other words, one solid line reports to one department and one strong dotted line reports to another department. Common features in this model include HR business partners. Note that this model can present challenges in terms of character clarity if not implemented properly.
(6) Lean COE with execution capabilities: There is a lean central team with most of the resources reported to the business department. The Center of Excellence has the authority and authority to set and implement standardization (e.g., audit functions), and common functions in this model include process safety and security.
(7) Lean Center of Excellence, which facilitates the sharing and adoption of best practices: Most resources report to the business, but differ in their functionality in that it only focuses on the sharing and adoption of best practices (usually by providing a pool of subject matter experts). Common features in this model include manufacturing leadership councils and networking.
(8) Decentralization through a formal network: Resources are fully reported to the business units, and the business units develop and lead their work agendas. However, the functions of the various business units are coordinated by a formal network (with a small budget allocated to facilitate coordination). Common features in this model include technical discipline networks.
(9) Full decentralization: Resources are reported to the business units, which set and drive agendas, and there is no formal sharing between the business units. Local sales teams often have this setup because they don't need to coordinate.
Any of these corporate functional options can be effective as long as they are tied to the business model and value creation narrative. Aligning on the value creation narrative, taking a BU-back approach, and identifying enterprise functional prototypes may sound complex, but the process is worth it, and it achieves two important goals that save the organization time and avoid frustration.
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