Companies often face challenges with getting the roles of their centers right, as these roles can conflict with the front line and organizational philosophies. Ludovica Mottura, global practice senior director with Bain's Organization practice, discusses the importance of understanding and aligning these centers to achieve high performance.
Read the transcript below.
LUDOVICA MOTTURA: No company can be effective without the right role of the center. Yet the center often enjoys a bad reputation with the front lines. What do we mean by center anyway? We don't just mean headquarters or corporate, but we mean everywhere activities are coordinated or centralized in the name of achieving benefits of scale or customer intimacy.
There are a few reasons why companies may be motivated to look at their center. For example, they may be trying to enable innovation, or shift to new business models, or get value from M&A. Or they may be reacting to cost pressure. Or sometimes, they're just trying to improve decision speed and organizational performance.
Broadly speaking, we see four archetypes of the role of the center on a spectrum that involves decisions about what activities the center does and how it engages with the business units in those activities.
As Portfolio Manager, the center is typically hands-off except for making decisions about the business portfolio composition and the resource allocation across the businesses.
In the Challenger archetype, the center of gravity of decision making is with the business units, but the center offers up services or expertise that the business units are invited to leverage.
In the Integrator model, the center takes a strong stance in executing activities on behalf of the business units. There are still P&Ls in the business units, but they're leveraging activities that are pooled.
As an Operator, the center is the general manager. And therefore, there are no business units that are independent, and central functions execute all the way to the local level.
When companies shape the role of the center, they take into consideration the hard facts about the businesses in their portfolio as well as their management philosophy. Among the hard facts, they need to answer questions like, how related are the businesses in my portfolio, and what is the case for activating synergies across these businesses? How do these businesses succeed? How do they reach full potential and their source of competitive advantage? And finally, are there specific competencies that the parent has that the business units could be leveraging to reach their full potential?
Depending on their management philosophy, CEOs and leadership teams might lean toward giving business unit leaders more or less autonomy. However, companies struggle with defining the role of the center when their philosophy is at odds with the hard facts we talked about before. For example, a company may be composed of businesses that are highly unrelated and that could succeed independently, but the center has a strong bias for control.
Getting the role of the center right is about more than just picking the right archetype. Companies have to align all aspects of the operating model going beyond structure—for example, accountabilities, governance, ways of working and enabling capabilities that make it all work in practice to release the value. It is, however, well worth it, because companies that get this right are well on their path to achieving superior business and organizational performance.