Centralisation decentralisation of organisations

Centralisation decentralisation

The shape of the organisation is independent of where power lies within the organisation. You could have two organisations of exactly the same shape and structure, yet in one a particular grade of employee could be given an expenditure authority of only 100 Euros but in another, the same grade of person could be given an expenditure authority of 10,000 Euros. Decentralisation or centralisation describes how far down the organisation power is passed. Generally it is agreed that some decentralisation is good but too much decentralisation can be counterproductive.

Claimed advantages are as follows. 

If nothing is decentralised, all decisions have to remain at the top of the organisation, with the managing director or the board of directors for example. Those people would be overworked, they will be mixing up trivial decisions with important decisions, and really their skills should be reserved for making important decisions.

Secondly, if requests have to be passed up through an organisation for a decision to be made and then the answers are passed down, decisions are likely to be much slower. So decentralisation adds speed.

Third, it might be better to decentralise power to areas of expertise. For example the best person to make a decision about where to place advertising is somebody in the sales and marketing department, not the managing director who may have come from an accounting or engineering background. Similarly, perhaps the best person to deal with competitive pressures in South America is the head of the South American organisation, not somebody based in London or Paris. The person in South America has local or geographic expertise.

Fourth, motivation: good employees like to make decisions and like running their own departments or divisions. If you don’t decentralise and allow them to have power, the good people will leave.

Finally, training and assessment. If you never allow any junior people to make decisions, how will you know who the good ones are and who should be promoted in the future?

The big potential disadvantage is poor co-ordination, sometimes described as dysfunctional decision-making. That’s where one division could make a decision which although good for it may harm the organisation as a whole. It might be, for example, that a manufacturing division stops making a component which is vital somewhere else in the organisation. Poor co-ordination means it’s all messed up. Therefore there has to be some degree of co-ordination between the various departments and divisions in an organisation, and this may require the head office or the board of directors occasionally to interfere with the decentralisation and to impose decisions.

Recent trends

There have been some recent trends in organisational structure. 

Downsizing has been necessary to keep costs down.

Delayering, we have discussed recently, moving towards wider, flatter organisations, both to save costs and to achieve flexibility.
Outsourcing means getting an outside firm to perform some of your operations. These operations will generally be your support operations. Therefore, it is relatively common to outsource your IT and perhaps your receivables ledger. Most businesses don’t make money from the receivables ledger or from their IT. These are to them necessary evils. They may make their money from clever engineering or thinking up clever adverts if they are an advertising agency. The thought behind outsourcing is that firms should concentrate on what they are good at, their core activities, and try to outsource everything else, because those functions are liable to be management distractions. Management should concentrate on where it adds value: where the organisation can makes its money.