What is the role of the corporate centre?
There are numerous factors currently responsible for placing heavy demands on corporations and their senior executives.
Companies are in a state of perpetual structural flux, resulting in the increased need for engagement on organisational redesign.
Historically, smaller scale changes often provided sufficient scope to drive the leverage required for meeting new targets, competitive market challenges and desired outcomes. However, today’s organisations can require a complete redesign in order to improve performance, meet objectives and deliver on targets.
As part of those organisational design decisions, determining which role the corporate centre should play can add significant value to an organisation. This must be balanced against the risk that the consequence of the centre playing the wrong role can be dire and lead to negative and sustained impact on the bottom-line.
Not only is there a significant loss of time and investment but the direction, focus and morale among senior executives becomes undermined.
The corporate centre does not have to select a single role to apply uniformly across all business units or functions. It should instead select the role that matches the organisation’s unique situation and will generate the most value.
We look at the how a corporate centre can adapt the role it plays across various business functions.
Form must follow function
The first step to defining the role of a value-adding corporate centre is to define both the short and long-term strategic goals of the company. Only then can the role of the corporate centre be evaluated.
There is no absolute or prescribed paradigm for success for every organisation. The unique mix of the organisation’s people, culture, strategy and resources requires a customised solution to questions around governance, allocation of decision-making and definition of the role of the corporate centre.
It is important to scope the definition of roles from the perspective of the value created for the company. The organisation may need to transform major business functions in order to harness this value.
Such thinking forms the basis in determining the role of the corporate centre. Transforming the strategy into reality also requires designing a centre whose structure, people and processes support the strategy.
The role of the corporate centre
The optimal corporate centre strategy must be aligned with the needs of the business units and the functionality required from the corporate centre. For example, in a more mature industry a company may prefer to leave more autonomy to the divisions.
The innate culture of a successful organisation must be given consideration and this may restrict the scope of changes and the level of autonomy of business units.
The flexibility of the corporate centre may also be restricted, with its requirements to comply with local legal requirements, labour laws, taxation and its obligations to investors.
To achieve a lean and effective corporate centre, its architecture must be built with rigor and a defined allocation of responsibilities between the centre and business units across different dimensions such as its business lines, customer types, and geographical factors.
This requires a detailed understanding of the strategic issues for each business line, as well as the required level of autonomy for each business and function.
The three key questions
When evaluating the relevance and scope of a corporate centre re-design, we typically ask three key questions.
- What are the organisation’s long term and short term strategic goals?
- Which corporate centre role adds the most value to each function in the organisation?
- How will the corporate centre engage with the rest of the business?
Corporate centre roles
An effective corporate centre has a clear focus on those activities that add the most value to the organisation.
In determining the key drivers that will shape the strategy, companies need to drill down to identify the levers that will achieve this value, including its business synergies, financial planning, optimal operational practices and the development of its business strategies.
As a tool for understanding we have drawn an analogy between the management of sports teams and the various roles a corporate centre may play across business functions.
The challenge is picking the role that adds the most value to the organisation.
1. The board member / financial backer role
Involved mostly in the key decisions, provides funding for and authorises major investments, sets the financial targets and organisational objectives of the business unit or function.
2. The referee role
Sets the rules by which business units or functions interact, develops and manages the service level agreements. Makes sure all the rules are followed. Makes sure different business units are operating well together.
3. The coaching role
Encourages synergy among the business units or functions. Sets the strategy and roles of the business units. Evaluates performance during the year and makes necessary adjustments to correct. Empower employees to play an effective role in the overall value chain of the organisation and deliver value to customers.
4. The player role
In this instance the corporate centre is effectively “on the field” providing the service. They will set the objectives, direct activity and take accountability for success and failure. Functions may not necessarily be performed by the corporate centre, for example low value, transactional work may be outsourced if this makes sense.
Examples of role definition
Large group of unrelated companies
The main sources of revenue are different, the companies service different markets and they have different corporate cultures.
In this instance the group was best served by a lean corporate centre, providing guidance and setting group wide objectives.
The group did not exist to provide any synergies between companies, but a decision was made to search for talent within the organisation first.
Value was seen in centralising the legal function due to a relatively weak legal function in a number of the companies with low productivity.
Large group of similar companies
In the group above, the companies have businesses that are much more related, operating in the same industry.
In this instance value was obtained by centralising a number of functions to be executed by the corporate centre. All low productivity functions that were similar across business were centralised to improve efficiency and reduce cost.
Value was also extracted by the centre being more involved in setting corporate policies and processes as well as driving the rules of engagement on intercompany dealings.
Small group of very similar companies
The organisation above has a number of very similar businesses. Had it not grown through acquisition it may have existed as a single company.
A far greater level of control is exercised in the corporate centre, freeing the business to get on with the core value producing activities. The centre acted as a supplier of expertise and services.
In the case of R&D, holding this function in the centre allowed for a bigger pool of funds to pursue larger projects, completely changing the R&D portfolio management process.
Global group of identical companies
This global group produced the same product and distributed it through the same or very similar channels but operated across a number of countries.
The control was divested into those regions in order to allow the regions to organise and respond to the various cultural differences.
Where it made sense to perform a function centrally, this was done. R&D was determined to be largely region agnostic and the benefit of pooling of funds was pursued. Compliance and risk was centralised in order to reduce headcount.
Deciding which role the corporate centre should play
Working through the three key questions and considering the factors below should assist in determining which role the corporate centre should play in each function, business unit or company.
Delegate or do?
Do any functions generate more value by being centralised (benefits of scale, concentration of capability)?
Are functions being duplicated within the organisation presently that may be better executed centrally (research and development, environmental affairs, audit)?
Do any functions lose value by being centralised (large cultural differences due to company history or geographic separation, loss of customer centricity)?
Must any functions be centralised due to high risk profile of that function in this organisation (marketing and shareholder communications in a company which is cross-listed)?
Are any critical functions being poorly executed as they are of low tactical or operational significance but have high strategic significance (research and development, innovation)?
Business unit variation
How do individual business units currently impact on the performance of other functions in the company?
Are there differentiated value targets for each business unit, based on an understanding of their full potential?
Which business units require a disproportionate amount of caretaking and support relative to their output and value?
How is each business unit’s performance benchmarking against the competition in product quality, product innovation, distribution, operational efficiencies and cost?
In what ways do we expect our industry’s competitive dynamics to change in the short term?
What are the technology and consumer trends that will impact on the business and drive growth in the next three years?
What will it take?
How do we size the selected functions within the corporate centre?
What are the opportunities to leverage resources?
What leadership and management model components or attributes will drive the transformation?
How big is the gap between the current model and the proposed model?
How do you manage the transition and define new operating practices?
Have the expected benefits of change been documented so that they can be managed through a structured benefits realisation process?
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