Decentralisation: the keys to success

Tim Hindle, author of “The Economist Guide to Management Ideas and Gurus”, recently pointed out in The Economist that centralisation has only been popular since Alexander Graham Bell invented the telephone, and that decentralisation is again the order of the day.

The technological revolution has driven up the speed of communication and the pace of business, and therefore made everything much more dynamic and complex. So communication has got faster: for example, using Skype, we can set up and run a global conference within seconds.

You would think this would make it easier to run a company in a centralised way. However, the effect is more like what happens during wars – only the generals on the ground really understand what’s going on. So decentralization is more and more essential. Having people out there who can make their own decisions is more and more crucial. Especially as the trend with Generation Y shows, people are becoming less and less likely to respond to authority.

Risk management is the biggest issue for organisations using decentralisation. It’s about stopping the Nick Leesons of the world. Leeson ran the front and back office of Barings Bank – both the trading floor and full control of the account – in Singapore. When things started going wrong, he created a hidden bank account to cover the trading losses. When it was eventually discovered, the losses caused by one man were so great that the bank couldn’t be rescued – despite being one of the most venerable and revered banks in the world. So decentralisation has its dangers as well.

The effect of decentralisation on employees tends to drive people in one of two ways. For some, it is an elevating experience. They feel that they’ve been given control and responsibility, and step up into a role.

Others find it pressured and stressful, and want more help and guidance from a central source. This may be personality based. The problem with the first group is that hubris may take over –they may think they’re infalliable. The problem with the second group is that they can get overwhelmed and make poor decisions.

So to make decentralisation work, businesses first need controls that manage risk effectively. Second, they also need to develop the right behaviours in those people they will give the power to – this is key. Thirdly, businesses need to create a really strongly communicated core of values, behaviours, and well-understood strategy in the organization. So that the commercial interests, ethical stance and the values of the company all drive behaviours in the right way, and give clear guidelines for decisions. If you were the only person representing the East India Company out in the Indian jungle would you have asked yourself, what would the East India Company do?

So to summarise, we would agree with The Economist that at the moment companies need absolutely more decentralisation and more empowerment of people. Organisations should be thinking very carefully about the way their structures are communicated to everyone. They should ensure they have a coherent framework that aids people to come to decisions others would consider to be the right ones. And they should also be very careful about selecting and developing people who are going to be in key roles so they can cope with the demands.

Whether your company is running at a global or local level, think very hard about the core structures that bind everyone in your organisation together, and question whether you are selecting and developing well for the critical roles. This will help ensure your decentralisation strategy is successful and avoid another Leeson event.