The Secret Sauce of Corporate Entrepreneurship: Decentralization
2022 was a very insightful year for me and my company, Purpose Works. As I reflect on my experiences and conversations, one question kept coming up again and again: why do so many organizations fail to embrace decentralization and entrepreneurship?
Last November I was pleased to attend the 14th annual Drucker Forum in Vienna, a thought-provoking gathering of executives and leading management thinkers (such as Amy Edmondson, Gary Hamel, and Roger Martin). Over two days, a dozen or so panel discussions explored the theme of ‘Performance that matters: Sparking the Entrepreneurial Spirit’. Two of the panels included leaders from companies that had embraced radical decentralization:
Xavier Huillard, the CEO of VINCI group, argued that decentralization is the only way to grow without getting fat. Its 220,000 employees are organized into 4000 business units, allowing every employee to have a sense of family.
Sharon MacBeath, the Group HR director for Hermes, the storied $10B luxury goods company, explained how two of its core values - freedom to create and freedom to buy - allow the company to operate as a network of entrepreneurial businesses. Its artisans are encouraged to create freely within their métier, but the stores are not obliged to buy.
Kevin Nolan, the CEO of GE Appliances, discussed the changes he has experienced since Haier acquired them in 2016. Haier, famous for its organizational structure, is organized into 4,000+ micro-enterprises with an entrepreneurial mindset. Kevin elaborated on why even he, as the CEO, can’t kill a project, even if he thinks it’s a bad idea: “We as managers cannot judge. Let the market judge.”
These discussions reminded me of Handelsbanken and W.L. Gore who both have embraced decentralization for many years - and of my own experience with Asea Brown Boveri (ABB). I had the good fortune of starting my career with ABB in 1990, just two years after the merger of two engineering giants: Swedish Asea and Swiss Brown Boveri. Back then, ABB had $27B in revenues, employed 215,000 people, and was renowned for matrix management: balancing the objectives of global business areas with local needs. Less well known is that the company was comprised of 1300 legal entities and 5000 profit centers, with the expressed objective to reduce bureaucracy and bring the company closer to the customer. In its heyday, ABB went toe to toe with General Electric.
The concept of decentralized management is familiar, and there is a lot to like: more market and customer focus - and less complexity, bureaucracy, corporate overhead.
So why is this idea not being embraced more widely? The main culprits are the lure of scale economies and the urge to control.
Economies of Scale?
Taking advantage of economies of scale is a powerful argument for centralization. Yet, in my experience, only a few companies realize the expected savings. Why?
Let’s look at an example: A diversified company consolidates transactional work (HR, finance, procurement) into a shared services function. On paper, the business case is compelling and well worth the cost and disruption. But in large companies, change is slow, so it took nearly a year to finalize the organizational structure. Consolidating disparate IT systems took longer than anticipated. And just when the new organization started to perform, a change in corporate strategy led to divestitures of several operating divisions. And all these divestitures required carving off parts of the newly created organization and rebuilding those capabilities for each divested company - undoing what had been put in place not too long ago at an enormous cost. Hence, the promised organization synergies would never materialize. Looking back, the cost of centralizing far outweigh the benefits.
I am not arguing that scale economies do not exist. They do. But the business case for centralization often underestimates both the rate of change and the increased complexity.
Cost of Control
The other argument is the need for control. Decentralized management models require autonomy and freedom, which is kryptonite for corporate executives. But that urge to control comes with a hefty price tag. Not only does it slow everything down (try getting your innovative ideas funded inside the company in less than a year) but it also shifts the focus away from paying customers toward the executives holding the reins. In centralized companies, bureaucracy often grows like weeds, leaving market-facing executives feeling like kings without a castle.
Leaning into Decentralization
Adopting a decentralized management model is an enormous undertaking. It only makes sense if the benefits outweigh the costs and if it creates a sustainable advantage in the marketplace. Transitioning away from such a traditional management model requires top-down leadership commitment.
Does it have to be all or nothing? No!
Managers at all levels should consider where to incorporate some of the underlying decentralization principles and tap into the entrepreneurial spirit.
When working with teams charged with improving a process, I often encourage them to think about the challenge from the perspective of a start-up. “Your current employer has decided to spin off your team. From now on, you can decide how you meet their needs. All that matters is that you produce the same or better outcomes. How you do the work is completely up to you. You are starting with a blank sheet.”
It always amazes me how framing the challenge as an entrepreneurial one unlocks creativity, producing some excellent ideas for rethinking the work.
Entrepreneurial thinking does not have to end there. Here are some questions to consider:
Can you establish teams that manage a work product from start to finish? Can you enable these teams to ‘own’ the product and customer?
What can you do to increase the value of your organization? What new products can your team build?
How competitive are you if you were to offer your products and services to the outside world? Could you become a profit center instead of a cost center?
What is possible given the organization's culture? How much autonomy do you have as a leader?
Peter Drucker stated, “Managers always have to administer, manage and improve what already exists and is already known. But there is another dimension to managerial performance. But there is another dimension to managerial performance. Managers also have to be entrepreneurs. They must redirect resources from areas of low or diminishing results to areas of high or increasing results. They have to slough off yesterday and make what already exists and is already known obsolete. They have to create tomorrow.”
The discussions at the Drucker Forum illustrated that some of the world’s largest companies are embracing decentralization as a means to tap into the entrepreneurial spirit of their employees. If you are a manager facing a volatile, uncertain, complex, and ambiguous (VUCA) world, maybe you should too.