By N. Dean Meyer\n\nMany business leaders want to own their own IT groups. In other words, they advocate decentralization. \n\nMost 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\u2019ll adamantly cling to their decentralized applications developers. \n\nWhat 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\u2019re getting from decentralization can all be delivered by a healthy centralized (shared-services) IT department. \n\nFirst, let\u2019s understand why decentralization is so costly and reduces quality. Then, we\u2019ll look at why people advocate decentralization, and how a corporate IT organization can address those root causes without decentralization. \n\n\n\nThe Costs of Decentralization\n\nDecentralization increases costs and reduces quality for two reasons: reduced specialization and fragmentation. \n\nReduced 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. \n\nSpecialists perform better than generalists. It\u2019s 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. \n\nAlso note that a greater degree of specialization provides more interesting career paths for technical professionals, attracting better people and motivating everyone to perform better. \n\nFragmentation: Fragmenting IT staff inevitably fragments systems. Where IT is decentralized, it\u2019s not uncommon to find different financial, customer and procurement applications in each business unit. \n\nWhen systems are fragmented, costs rise for many reasons. There\u2019s duplication of efforts. Economies of scale are lost, affecting both infrastructure and software licensing. And bargaining power with vendors is diminished. \n\nMore 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\u2019t 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\u2019t see me as a total customer with diverse needs. As a result, I moved all my insurance to another vendor. \n\nCorporate 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 \u201cholding companies\u201d are over. Corporate leaders seek synergies across business units as fundamental to competitive differentiation. Fragmenting IT undermines these corporatewide strategies. \n\nThe costs of decentralization are explored in more detail in my book, Decentralization: Fantasies, Failings, and Fundamentals. \n\n\n\nWhy People Decentralize IT\n\nSo with all these strong arguments against it, why do people still advocate decentralization? Three reasons are most commonly cited. \n\nThe 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\u2019ll be respected. \n\nThe second reason isstrategic alignment. Business leaders believe that an IT group reporting to them will be \u201ccloser to the business\u201d and better understand local strategies. \n\nThe 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. \n\n\n\nHow Shared Services Can Deliver the Same Benefits\n\nSome corporations go to great lengths to remain decentralized and \u201cpatch\u201d the problems they create. They talk of \u201cfederated\u201d functions; they impose \u201cgovernance\u201d 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. \n\nBut 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. \n\nConsider what it takes for a shared-services organization to please business-unit clients: \n\nCustomer 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\u2019 needs, without an agenda of its own. For example, there\u2019s no reason a shared applications engineering function can\u2019t deliver \u201ccustom\u201d applications to satisfy the unique needs of each business unit\u2014while implementing an integrated data store and reusing code to the greatest extent possible. \n\nThere 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\u2019s-length audit function, but never through a service provider like corporate IT. \n\nStrategic alignment: A corporate IT department can be just as \u201cclose to the business\u201d 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. \n\nOf 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 \u201cproducts\u201d of the relationship managers\u2019 function, all of which add value in ways that technical professionals cannot. \n\nBusiness-unit autonomy: You don\u2019t 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 \u201ccheckbook\u201d and decide what they will and won\u2019t buy with the corporation\u2019s IT budget. This is not a matter of committees and bureaucracy. It\u2019s best accomplished by internal resource governance processes based on market economics.\n\n \n\nThe Key: Shared Services Leadership\n\nA corporation can have all the benefits of decentralization without fragmenting the IT function. The key is a shared-services organization that earns clients\u2019 business through customer focus, strategic alignment, a market-based internal economy and, of course, performance. \n\nIt\u2019s 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? \n\nThis 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. \n\n\n\n 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 \u201csoft\u201d side of leadership. Contact him at email@example.com or visit his website for information that can help you implement these ideas, or with suggestions for other buzzwords to analyze in future.