Should Your Organization Be Centralized?

by Virgil R. Carter

As non-profit organizations look for growth and opportunity, a key question arises about the organization’s operations: should the organization be centralized? Centralization appears to offer some advantages: planning and production efficiencies, reduced overhead, improved quality, more predictable scheduling, and more reliable distribution and customer service. But is this really true?

Centralization vs. decentralization is a predictable and perennial tug-of-war between advocates for each. It is a dilemma for organizational leaders. Now, in a recent article by Andrew Campbell, Sven Junisch and Gunter Muller-Stewens, published in the McKinsey Quarterly, the authors describe how organizational leaders can lead a more thoughtful debate by asking three questions.

The three questions each pose a test that must be considered by any centralization proposal. A decision to centralize requires an affirmative answer to at least one of the three questions. The questions are:

Is centralization mandated: Does the organization have a choice? For example the corporation annual report and consolidated tax filing are required by law and must be signed by the CEO, making this function impossible to delegate to subordinate units. Thus the response is yes to centralizing this activity.

Does centralization add significant value (a minimum of 10%): The authors write that if centralization is not mandated, it should only be adopted if it adds substantial value. Without significant added value, the risks of centralization may not be worth taking.

Are the risks low: Proposals for centralization should proceed only if negative side effects are low. The authors suggest that an initiative for centralizing payroll is a likely example of low negative side effects.

If you and your organization are facing a centralization decision, you may want to consider these three questions.

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