Do you default to central control?

Don't be like China

I often write my columns after encountering something in the business world that causes me to think about a topic. It might be a client problem, something from the headlines or an issue that challenged me when I was an executive.

The deadly mistake of no clear responsibility has been on my mind, and with that lens I was reading about China’s economic problems. (Stick with me. This is not an economics lecture!) As noted in The Economist (Jan. 16, 2016) “ … China is not normal. It is caught in a dangerous no man’s land between the market and state control.”

Years ago when I was an executive at Kinko’s, we had a freewheeling culture that allowed and rewarded local autonomy and control. In fact for many years, there was no real mechanism for central control — kind of like the Borg from Star Trek. This caused headaches but allowed for rampant creativity, friendly competition and rapid growth.

We actually talked about the tension of local versus central control as the “federal versus state rights” issue, so the challenge that China faces in trying to decide whether to have a real market economy caused me to rethink this issue. The short story on the resolution at Kinko’s was that, before selling to FedEx, a private equity firm purchased the organization. Naturally, new leadership brought in from outside the company wanted to centralize control. Some good and bad things happened as a result, but the growth rate declined rapidly.

It’s not unusual for a management team to move toward centralizing control — especially as the company grows larger. In my experience, it’s less likely for a business to move from centralized control to dispersed or field-based control (i.e., to those who are closer to the customer, both physically and relationally).

Too often, the issue of federal versus state rights isn’t thought through rationally but rather the result of many small individual decisions that add up to a dramatic shift over time. As I helped a client with multiple geographies and offices tackle this question some time ago, I created a series of questions for him to answer that would hopefully lead to a better decision about where the nexus of control should reside. (This isn’t a binary issue, of course; it’s much more complex.)

Here are some of the questions we kicked around:

  • How important to customer delight is creativity versus standardized procedure in the individual offices?
  • Conversely, how important is a consistent service offering from branch to branch?
  • To what degree will incentive compensation drive correct actions versus supervision and structure?
  • Do you measure success more through revenue and profit growth or “correct” behavior?
  • Are you willing to share financial data at the unit level and reward people based on that, or will you keep it close to the vest?
  • Are you comfortable with capital decisions made locally, or do you want them centralized?
  • Do you have more competency in customer relationships or in system development?

There were more, but hopefully you get the picture.

My advice on whether the nexus of control should be at the “federal” level (the corporate office) or the “state” level (the individual unit or the shop floor) is that there’s no one right answer in business. There are, however, some good questions that you should ask before you consciously make that decision. Don’t be like China.

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