four qualities most executives want their organizations to have: responsiveness, reliability,

efficiency, and perennity (e.g., the quality of being perennial, or continuing reliably in
perpetuity). When deciding on the best level at which a given task should be done, assess the impact
of the decision on these four qualities. For example, the efficiency gain from centralizing payroll
processing may be much more important than the possible loss of responsiveness to changes in local
labor laws that would be achieved by keeping this task decentralized; the centralization of payroll
processing indeed enables the harmonization of systems and procedures, hence the realization of
scale effects, possibly including the outsourcing to a single external service provider.

Let’s have a systematic look at the four qualities.

1. Responsiveness through immediacy. Responsiveness is all about taking the right action quickly in
response to opportunities and threats. If the sources of these opportunities and threats (e.g.,
customers, competitors, suppliers, employees, regulators, partners, and so on) occur at the level of
the operating unit, and if these interfaces are genuinely different between operating units, it makes
sense to locate the corresponding tasks (e.g., sales, procurement, recruiting, regulatory affairs) and
the accountability for proper execution at that level. For example, there is quite a difference
between dealing with a regulator, say, in India and one in Indonesia. Decentralization allows
immediacy in time and place, hence responsiveness.

2. Reliability through compliance. For some tasks, it is desirable or necessary to have common rules
across the operating units: policies, standards, methods, procedures, or systems. Think of
compensation and benefits policies, product design standards, quality assurance methods, fraud
reporting procedures, financial reporting systems, and the like. These rules are meant to align the
operating units with the company’s overall objectives, and make the business more predictable.
Some organization unit then should assume the role of guardian: defining these rules, instructing
employees properly, and monitoring conformity. It usually makes sense to assign that role to a
centralized unit. For some tasks there is not even a choice: they must be done by law or statute by a
central independent unit. Think, for example, of the internal audit or occupational safety functions in
general, or the risk management function in banks, as the Basel III regulatory framework stipulates
that this function should be “under the direction of a chief risk officer (CRO), with sufficient stature,
independence, resources and access to the board.”
3. Efficiency through syndication. For some tasks the case for centralization is rather straightforward:
a centralized unit can serve as the home for a task that is carried out more economically when
aggregated in one unit than when all operating units take care of that task separately. There are
various drivers of such efficiency gains:

 Traditional economies of scale. Having the same unit do more of the same task leads to
continuity, standardization, specialization, leverage, and productivity. Treasury and IT
procurement may be good examples.

 Minimum efficient scale.  Some tasks require expertise or infrastructure that is scarce and for
which demand from any individual operating unit may fluctuate over time. In that case, it is
more efficient to have a pool of specialists than to replicate these in each unit. Think, for
example, of legal, tax and technology experts, or costly test equipment.

 Avoiding duplication. Different operating units often have a common need for which the
solutions can be (nearly) identical (e.g., an on-boarding manual for new employees, an
instrument to monitor plant performance, a CRM tool). As a consequence, it is rather
wasteful for each of the units to develop these solutions in parallel.

4. Perennity through detachment. There are certain tasks which, left to the discretion of the
operating units, might not get done at all – this can be particularly true for tasks that are essential to
the company’s long-term wellbeing, but do not serve a short-term function for the business units.
Hence, a central unit with sufficient detachment from front-line operations may be required. Here
are some examples of such tasks:

 Investments in initiatives with distant and uncertain benefits (e.g., radical innovation);

 Investments in initiatives whose benefits are contingent on everybody’s participation (e.g.,

knowledge management and talent management);

 Activities that involve cross-unit arbitration, i.e. weighing alternatives and setting priorities
(e.g., product portfolio planning);

 Decisions to admit defeat and pull the plug (e.g., product withdrawal);

 Initiatives related to assets that are the sole property of the company (e.g., brands and
capital).

There is no one-size-fits-all organization structure. Obviously, changes in a company’s environment

or strategic priorities may have an impact on how it organizes itself. And getting the acclaimed
qualities of responsiveness, reliability, efficiency, and perennity does not always require hard
structural changes to the organization chart. In many cases, less disruptive changes can also do the
job, such as physically dispersing central staff to the operating units, appointing permanent points of
contact at HQ for the operating units, setting up a temporary task force of people from the operating
units, and so on.

In an age where the concept of “self-managed organization” attracts much attention, the question of
centralization versus decentralization does not go away. Nicolai Foss and Peter Klein argue in the
article “Why Managers Still Matter” that “In today’s knowledge-based economy, managerial
authority is supposedly in decline. But there is still a strong need for someone to define and
implement the organizational rules of the game.” We hope that the simple logic presented in this
article helps managers find solutions for achieving a balance between rules and responsiveness.