Centralization and Decentralization

My last posting reflected upon “What’s System Thinking” and referred to the issue of centralization and decentralization in organizations. Is it always desirable to make decisions locally? When are local decisions more advantageous than global decisions and vice-versa? Indeed there are multiple factors impinging on these choices. In particular new communication and information technologies are changing the balance in both directions for different issues. The cost of communications has been falling dramatically in recent years. Today more people than ever before can be involved in local decisions. Equally, today more people than ever before can contribute with local knowledge to global decisions.

Structurally, it is desirable to have relatively small teams responsible for the full value chain of a business process. They can operate from inputs to outputs through a transformation process that is theirs. These teams absorb most of the customers’ variety locally. This approach allows these customers to recognise the ‘faces’ of those responsible for the products and services they consume. For instance citizens in need of housing services would be able to interact with the unit responsible for assessing their needs as well as for delivering the services. This avoids fragmenting service delivery; proximity allows for the right hand to know what the left is doing. However, the increasing complexity of people’s demands and the constraints imposed by culture and resources tend to force some degree of centralization as organizations look for synergies and economies of scale. People are distributed in varied geographic areas, require different types of services, have different urgency and so forth. These are complexity drivers guiding the structuring of housing services and if this structuring is not thought through the chances are that poor service delivery will dominate their interactions with citizens.

Most significantly, local teams need global information to close effectively local loops. Among others, policy priorities are decided globally, specialised knowledge and resources are often pooled together beyond local teams and the economies of scale offered by available technologies may tempt centralisation. But, centralization increases the chances of functionalism at the expense of holism. Service delivery teams risk becoming customer service units with limited appreciation of, and responsibility for, the total service they offer.
Beyond managing the value chain, those providing services at the local level need to have flexibility to define their own policies. This is necessary to respond to local needs and avoid the uniformity of ‘faceless’ bureaucrats following the dictate of global policies. Distributing the activities of the value chain at different structural levels, beyond the flexible response of autonomous local teams, increase the chances of reducing local officials to the role of post boxes distributing to other groups the responsibilities to deal with customers’ requirements. As they do this officials lose contact with the very people that they are supposed to service. This is why local services for large markets require creating local policies within the framework of a global policy. They also require negotiating and accepting specific programme requirements, including the use of scarce resources. To avoid fragmentation it is necessary truly systemic, synergistic, organizations that succeed balancing local responsiveness with global coordination of policies. Organizational systems need cohesion and adaptation to manage the complexity of their tasks.

In this effort for holism the cost of communications is changing the balance between centralization and decentralization. Today’s decreasing cost of communications makes possible creating virtual teams that facilitate decentralisation. Members of centralised groups with specialised knowledge can be effective contributors for the creation and implementation of local policies. People responsible for the use of expensive centralized resources can be made (virtually) part of local teams and thus accountable to the team. These are cases of resource centralization and functional decentralization. Equally, those working in these groups, with local knowledge of stakeholders can influence more effectively global policies by communicating to policy-makers local responses to exiting policies.

From the perspective of organizational design the challenge is fostering a cascading of self-contained product/service teams which make possible the progressive integration of functions into larger self-contained groups that match customers’ needs at different performance requirements. For instance, for housing services, local teams focused on providing particular types of services can be embedded in regional units with functional capacity for the deployment of building and maintenance resources according to local needs. What is particular to this proposition is that building and maintenance resources provide a more global performance requirement, namely building and maintenance capabilities, at the same time that they are contributors and accountable to local teams for local services. As the cost of communications is reduced the allocation of resources can be reconfigured transforming the organization’s capabilities. Constituting effective local teams and coordinating these multiple teams in a global context becomes increasingly challenging but also, with the support of new information and communication technologies, manageable and potentially more effective.