Decentralization of Decision Making

Decentralization of decision making is the act of moving the responsibility for decisions and actions away from central management authority and outward to those people closest to the situation. A central tenet of good management is that decisions should be made by the people with the most knowledge of the circumstances, principles, and objectives of the decision. Moreover, those closest to the customer are usually best qualified to create and deliver what the specific customer values.

The effect of decentralizing decision making, done properly, is to use local knowledge of the process, product, customer, supplier, department, plant, or division to arrive at the best possible decision. Decentralization also places the responsibility for results in the hands of people with unique local knowledge.

For-profit corporations frequently decentralize to more accurately assign costs where they are incurred and to determine the relative profitability and asset use of the business units that make up the corporation. The same principle works equally well in not-for-profit organizations, with minor adaptations for differences such as fund accounting.

Although decentralization remains popular for the reasons just listed, it has been declining in popularity for several reasons. One of the first reasons for the recent trend back to centralization is that it gives the impression of, and can actually result in, tighter control by the parent organization or its top management. During difficult economic times, this control, especially in the priority ranking of resources, is both necessary and desirable.

[Page 131]A major challenge of decentralization is achieving synergy among related business units, functions, or divisions. When each unit can make independent decisions, standardization and coordination usually suffer. Each unit tends to optimize decisions based on its own needs, which are not the same across many units. The more widely the units are spread about markets or geography, the more challenging it becomes to achieve synergistic leverage in a decentralized environment.

A final drawback of decentralization is the trapping of resources in local units, making it either difficult or impossible for the larger enterprise to use them. People, facilities, know-how, equipment, and even capital may be hoarded for the benefit of the decentralized unit, although it denies the larger enterprise access to them. When resources and talent are scarce, this suboptimal resource use may be the most dangerous drawback of decentralization.

In summary, decentralized decision making has many benefits: It puts local knowledge close to customers, markets, and decisions and thus should yield the best decisions and courses of action; it also clearly assigns costs, revenues, and profits where they are most directly created or incurred.

Along with these benefits, decentralization has some notable drawbacks: Multiple decentralized units, each with its own overheads, practices, and cultures, create complexity and difficulty in creating synergy or leverage. The most difficult problem of decentralization is that of trapped resources—usually human resources but also equipment, technology, facilities, and market access—with the result that some decentralized decision-making units may perform superbly, but others, and the overall enterprise, may suffer.

Choosing how far to decentralize decision making is a key strategic decision for any enterprise.

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