To Centralize is to Oppress

This article focuses on centralized business models and why they don’t work. Ben is our anti-hero who learns this lesson the hard way.

We Detest Centralized Business Models for Several Reasons:

1.) The centralized model assumes that corporate headquarters knows best.

Could there be a more arrogant assumption? For any company of size (let’s say $500 million of revenue and greater) – especially those with multiple business units – how could the remote C-Suite possibly know what is best for customers, product managers, product designers, engineers, customer service reps..?  Answer: it doesn’t. The men and women who eat, sleep and drink their business 24x7x365 know best.

2.) The myth that centralized models are more efficient and productive.

Sure, just like the federal government is efficient and productive. Let’s run an experiment.

Scenario 1 – Decentralized Model:

• Peter, Head of Robotics Sales, reports exclusively to Amy, GM of the Robotics business unit.
• Donna, Head of Cloud Services Sales, reports exclusively to James, GM of Cloud Services.
• Richard, Head of Enterprise Software Sales, reports to Lisa, GM of Enterprise Software.

Scenario 2 – Centralized Model:

Tyrell Corp’s new CEO – Ben – decides he wants to reorganize the company in an effort to boost operating efficiency. Rather than hold his GMs accountable and raise performance expectations, Ben decides one day while riding his stationary bike (complete with VR headset), that centralization is the silver bullet that will lead Tyrell to glory. Heck, it worked at ACME Command & Control where he was CEO until the Board ousted him.  “ACME’s demise wasn’t my fault” Ben told himself.  How could he know that within a year of reorganizing ACME around a centralized operating model all of ACME’s best people would leave? Surely this was an unfortunate coincidence.

Once implemented, Ben has no doubt that Tyrell Corp. will be well on its way to having best-in-class revenue growth, EBITDA margins and a soaring stock price. Surely CNBC, Bloomberg and Fox Business will want Ben to participate in the media car wash of meaningless 7-minute interviews to tell the world how he did it. Ahhh, Ben will have his day in the sun with a sizable equity grant on the other side.

• Under this new centralized operating structure, Peter is the Head of Sales for all three business units and reports to Ben. Only, there are no longer three distinct business units. Boundaries, the corporate reporting structure, responsibility and accountability are either amorphous or non-existent.
• Donna and Richard are no longer with Tyrell as their positions were eliminated. Peter is smart, energetic and has a promising future thinks Ben. If he dedicates himself Peter will undoubtedly generate superior Sales performance compared to Donna and Richard. “After all, how valuable could Richard’s 12 years of Enterprise Software experience be? He was expensive. So what if Donna helped launch AWS (as one of its original employees). Nobody understands the cloud anyway. She was expensive overhead as well.” Ben tells himself.
• Amy, James and Lisa are also gone. “Who needed three GMs? They were glorified, overpaid administrators” Ben complains to his wife Confida.

Ben contemplates recruiting his former ACME colleague Marcel to Tyrell to fill a president or COO role Ben is thinking of creating. The rationale for recruiting Marcel was two-fold:

• One, Marcel likes to get his hands dirty in the operation. “The Devil is in the details”, “Communication is critical” “I’d love to meet for a drink but I’m flying to Omaha to check on the new widget line”… Marcel enjoyed doing the things that Ben didn’t care to do. All of the little things that employees and customers appreciated but that weren’t terribly sexy, that didn’t lead to glossy puff pieces in Fortune magazine.
• However, the real reason Ben wanted to recruit Marcel – although he didn’t want to admit it to himself – was because what if the centralized strategy were to take a bit longer than anticipated? What if the unthinkable were to happen and the strategy ultimately failed? What if it was ACME all over again? “Marcel could take the fall” Ben thought to himself. He had a contingency plan for everything. Ben grabbed his phone and made haste for the elevator. The Vanity Fair party was about to start. It would be a great photo op, especially now that his hair transplant had filled in nicely.

3.) Centralized models lack accountability:

• Who reports to whom is never clear in a centralized model.
• Who to reward is never clear in a centralized model.
• Who to hold accountable is never clear in a centralized model.

Aftermath

Needless to say things didn’t work according to plan for Ben.

Marcel did join Tyrell, but left three quarters later when the significantly larger Wallace Corp. recruited Marcel for the newly opened CEO post. Wallace’s Board had recently removed its CEO who had deployed a centralized strategy similar to Tyrell’s. After 12 consecutive quarters of deteriorating results the Board had enough. Marcel implemented a decentralized operating model at Wallace. Sales flourished. EBITDA margins even more so. Customer NPS scores were through the roof. Two years later Wallace used one quarter’s free cash flow to acquire floundering Tyrell Corp. Wallace also had Robotics, Enterprise Software and Cloud Services divisions. Post acquisition close, Tyrell was absorbed into those divisions.

Coincidentally, Donna, Richard, Amy, James and Lisa were all now thriving at Wallace Corp. Even Peter bailed ship on Ben. Although rather than jump to Wallace he decided to form a new company – Omni Consumer Products – which would one day spin out Cyberdyne Systems and the vaunted Skynet AI.