When Centralized Decision Making Makes Sense

When Centralized Decision Making Makes Sense
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Centralized Decision Making — Efficient and Effective Decision Making Cultures Vary

The location at which companies make decisions — centralized decision making or decentralized — matters.  Sometimes it makes sense to centralize decision making from a strategic and cultural perspective.  Other times it makes sense to decentralize decision making.

Corporate Culture Defined
We define corporate culture as how and why things truly get done. Culture can be measured by understanding the way people think, behave and work.  A company’s culture represents what a new employee needs to learn to be “accepted as a member” and what makes the company “feel and act” like itself.

While often invisible to the eye, culture becomes very apparent when people act in ways that misaligned accepted cultural norms. How a company makes decisions can say a lot about its culture.

Decision Making Challenges
Thanks to the growing complexity that most leaders face, not only has the number of decisions that must be made increased, but leaders also report that it is more difficult to cleanly delegate decisions to their subordinates.

A recent McKinsey study found that 72% of senior-executives thought bad strategic decisions either were about as frequent as good ones or were the prevailing norm in their organization. It is not easy to have a strong culture if the way you make decisions is flawed.

So how do you know which circumstances should dictate which decisions?

Centralized vs. Decentralized Decisions
When a decision is centralized, it is typically unilaterally mandated by a central, usually high-level, authority.  Decentralized decisions are, instead, made at a more local level by frontline employees who are close to whomever will feel the impact.  Neither decision making approach is inherently “right”.  The choice of which decision making mode is best completely depends upon the situation and your goals.

 When Centralized Decision Making Makes Sense
There are four factors to evaluate where a decision needs to be made and these will help you choose the best mode of decision making for the specific situation.

  1. When the Impact is High and the Scope is Wide
    When a business is faced with big opportunities, issues or threats with potential company-wide impact, it is often best to have your top leaders make the final decision. In this instance, it is important to have policies and procedures in place to help ensure that there is alignment throughout the organization.

    For example, one client decided that all decisions with an impact of greater than $250,000 needed to be approved by the CEO.

  2. When Standards and Uniformity Matter
    Every organization needs to operate with some common standards and procedures. It makes little economic sense to have duplication of effort, misalignment, or inequity.  One overall authority in areas such as payroll, procurement, legal, quality assurance, and safety can often improve economies of scale with centralized decision making.
  3. When the Long-Term and the Greater Good Matters
    While decentralized decision making can help speed the decision making process by empowering the frontline, centralized decision making is often required to create longer term thinking for the greater good of all.

    Whenever there are shared or limited resources (i.e., the need to hit short-term quarterly targets), the self-interests of each stakeholder can advocate for decisions that may be positive in the short term but have negative longer term consequences.

    For example, one client made their HR function a shared service center which defunded a leadership development program that was essential to building their talent pipeline.

The Cultural Implications of Centralizes Decision Making
If your company needs to make centralized decisions to best execute its strategy, look for strong and decisive leaders, invest in customized decision making training, agree upon what decisions need to be mandated versus autonomous, and delineate your decision making criteria when decisions are announced.

The Bottom Line
While effective leaders must be able to delegate decisions to get work done and to empower employees at all levels, certain situations and strategies require centralized decision making.  You will likely still need to actively involve key stakeholders in the process to get buy-in and sustainable results, but do not be shy about mandating some key decisions.

To learn more about effective decision making, download 3 Steps to Set Your Team Up to Make Better Decisions

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