Decentralized Operating Models Are Far Superior to Centralized Operating Models
Recently I came across an underperforming Technology company mentioned to me by a friend. This Technology company has significantly underperformed the NASDAQ Composite and I know there is room for operational improvement without having fully dug into the operations yet. How do I know this? I know this because the 8,000+ employee company runs a centralized operating model with one guy (the CEO) making all P&L decisions. This is despite the company having 3-4 distinct business units (BUs).
Such a company should have 3-4 General Mangers – one in charge of each BU – and each GM should have P&L responsibility. The compensation model for each GM should be based upon Revenue and EBITDA targets for each BU.
This type of decentralized operating model is the only way to hold executives accountable and to drive operating results. I promise you that if this particular company had 3-4 GMs leading each of the 3-4 business units and if their compensation was tied to operating performance, each business unit would improve on day 1.
On the very first day there would be a renewed focus on maximizing Revenue growth and profitability. GMs would embed themselves in their operating units, building strong relationships with employees who would be encouraged to float ideas around driving growth and removing waste from the operation. Doing more with less. Spending cash flow as if it were your own. Thinking creatively about improving products, improving service delivery, enhancing customer relations, identifying customer upsell opportunities, developing creative, customer-friendly pricing strategies – you name it – GMs would leverage their employees and strengthen the BUs in ways that could not have been imagined under the old centralized operating model. Within a month these decentralized efforts would have a positive impact on operations.
Waste removal is usually the first place where such improvements flow through the financials. Waste removal is more than low-hanging fruit. Minimizing waste must become part of the culture to have maximum profitability impact. That does not happen overnight, but it is easier to create this change when there is accountability and variable compensation at stake.