The Cost of Decentralization

By N. Dean Meyer

Many business leaders want to own their own IT groups. In other words, they advocate decentralization.

Most grant that corporate IT should be the sole provider of some infrastructure-based services like voice and data telecommunications, corporate applications hosting and e-mail. But they’ll adamantly cling to their decentralized applications developers.

What these business leaders may or may not know is that decentralization is costing them money, reducing quality and undermining corporate synergies that may be strategic. Furthermore, the benefits they feel they’re getting from decentralization can all be delivered by a healthy centralized (shared-services) IT department.

First, let’s understand why decentralization is so costly and reduces quality. Then, we’ll look at why people advocate decentralization, and how a corporate IT organization can address those root causes without decentralization.

The Costs of Decentralization

Decentralization increases costs and reduces quality for two reasons: reduced specialization and fragmentation.

Reduced specialization: When IT staff are scattered among the business units, they cannot specialize as much as they could within a consolidated IT function. For example, each business unit might have a small team of applications engineers to support its entire suite of financial systems. If those same staff were consolidated, they could specialize in data-objects and modules like receivables, payables, general ledger, tax, etc.

Specialists perform better than generalists. It’s that simple. They accumulate more experience in their specialty, and hence are more productive and produce better quality in less time. Furthermore, they keep up with the literature in their field better, enabling a better pace of innovation.

Also note that a greater degree of specialization provides more interesting career paths for technical professionals, attracting better people and motivating everyone to perform better.

Fragmentation: Fragmenting IT staff inevitably fragments systems. Where IT is decentralized, it’s not uncommon to find different financial, customer and procurement applications in each business unit.

When systems are fragmented, costs rise for many reasons. There’s duplication of efforts. Economies of scale are lost, affecting both infrastructure and software licensing. And bargaining power with vendors is diminished.

More insidious, corporate synergies are lost. For example, I once used an insurance company that decentralized its IT staff. One day, the company canceled the policy covering my vintage sports car, saying they were no longer interested in that type of business. What they didn’t consider was that I also used them to insure my other cars, my home, my personal liability umbrella and my company. Because their systems were fragmented, they saw a bunch of individual policies; they didn’t see me as a total customer with diverse needs. As a result, I moved all my insurance to another vendor.

Corporate synergies can be found in every external interface: customers, vendors, investors, regulators, media and the community. More subtle but still powerful, synergies can be attained through collaboration across business units in every functional area. In fact, the days of pure “holding companies” are over. Corporate leaders seek synergies across business units as fundamental to competitive differentiation. Fragmenting IT undermines these corporatewide strategies.

The costs of decentralization are explored in more detail in my book, Decentralization: Fantasies, Failings, and Fundamentals.

Why People Decentralize IT

So with all these strong arguments against it, why do people still advocate decentralization? Three reasons are most commonly cited.

The first reason is customer focus. Many business leaders feel that corporate IT staff treat them as a nuisance rather than a customer, or worse, as unruly children to be controlled. If IT staff report to them, then they know they’ll be respected.

The second reason isstrategic alignment. Business leaders believe that an IT group reporting to them will be “closer to the business” and better understand local strategies.

The third reason is business-unit autonomy. Business leaders know they can control IT priorities within their decentralized groups, but may feel they have to wait in line or beg for attention to get what they want from the corporate IT staff.

How Shared Services Can Deliver the Same Benefits

Some corporations go to great lengths to remain decentralized and “patch” the problems they create. They talk of “federated” functions; they impose “governance” in the form of committees and working groups; they try to hold a CIO accountable for things he/she cannot control. Ultimately, these patches are ineffective. The right answer is consolidation.

But consolidation works only if the corporate shared-services provider can satisfy the three reasons for decentralization. Otherwise, business leaders will understandably choose to pay more for less rather than do business with the corporate IT department.

Consider what it takes for a shared-services organization to please business-unit clients:

Customer focus: A corporate IT department can be just as customer focused as any decentralized group. This must go beyond just its style of interaction with clients. IT must serve clients’ needs, without an agenda of its own. For example, there’s no reason a shared applications engineering function can’t deliver “custom” applications to satisfy the unique needs of each business unit—while implementing an integrated data store and reusing code to the greatest extent possible.

There are two root causes to be addressed. One is culture, the patterns of behavior in the organization. This is relatively easy to address. The other is structure; the corporate service provider must never be chartered to judge or control its clients. Controls over business units must be applied through their legitimate lines of reporting and through an arm’s-length audit function, but never through a service provider like corporate IT.

Strategic alignment: A corporate IT department can be just as “close to the business” as any decentralized function. The solution is a structure that includes an effective relationship managers group. In fact, corporate IT relationship managers often have better access to business-unit leaders than IT staff buried a few levels down within the business unit.

Of course, relationship managers must do more than just make friends and facilitate relationships. They must be trained to translate business strategies into IT requirements, and to discover business strategies enabled by IT. There are numerous other “products” of the relationship managers’ function, all of which add value in ways that technical professionals cannot.

Business-unit autonomy: You don’t need to own your own grocery store to control what you eat, because you control your checkbook. The same is true of a corporate IT function. With or without chargebacks, clients can control the “checkbook” and decide what they will and won’t buy with the corporation’s IT budget. This is not a matter of committees and bureaucracy. It’s best accomplished by internal resource governance processes based on market economics.

The Key: Shared Services Leadership

A corporation can have all the benefits of decentralization without fragmenting the IT function. The key is a shared-services organization that earns clients’ business through customer focus, strategic alignment, a market-based internal economy and, of course, performance.

It’s a matter of leadership. Is the CIO willing to invest in a high-performance business within a business, or just settle for the obvious shared services like infrastructure and ERP?

This question, more so than any other, differentiates a great CIO from a caretaker. A CIO with a vision of a high-performance business within a business can deliver all the benefits of decentralization along with the benefits of consolidation.

Dean Meyer helps IT leadership teams design high-performance organizations. Author of six books, numerous monographs, columns and articles, he brings innovative systematic approaches to what others consider the “soft” side of leadership. Contact him at dean@ndma.com or visit his website for information that can help you implement these ideas, or with suggestions for other buzzwords to analyze in future.

’Dean
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Copyright © 2006 IDG Communications, Inc.

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