This is the latest installment in the series on functional, corporate and leadership development in high growth, scale-up stage technology businesses. This piece focuses on how to do managerial decentralization, when a business becomes large enough and diverse enough to benefit from organizing into multiple semi-autonomous divisions or business units.

1. MANAGERIAL
DECENTRALIZATION
Sustaining and Enhancing the Ability to Rapidly Grow at Scale
in High Technology Enterprises
AUGUST 29, 2019
DAVE LITWILLER

2. INTRODUCTION TO
MANAGERIAL
DECENTRALIZATION
• Why do it?
• To progress efficiently, fostering and supporting increasing
scale, and enhancing capacity for further rapid growth
• In what circumstances?
• Typically, when the business is working with increasing
diversification and specialization of technologies, products,
services, markets, competitors, and customers
• Decentralization allows a larger, but still fast-growing
business to pursue multiple strategies with less ambiguity
and better focus, as well as clearer measurement of
performance through divisional P&L and productivity

3. INTRODUCTION
• Decentralization also provides a leadership development
engine, since multiple divisions are chartered to deliver a
nearly full suite of the ingredients of business success
• What does it take to do achieve managerial
decentralization?
• A juxtaposition of unity and diversity, direction and
autonomy, between centralized (headquarters) roles, and
decentralized divisional (business unit) roles

4. ROLES OF CENTRALIZED
MANAGEMENT
• Raising capital, investor relations and cash management
• Allocating capital, especially above the replacement needs
of the divisions
• Approving divisional executive hires

5. ROLES OF CENTRALIZED
MANAGEMENT
• Providing oversight and consistency of finance and
accounting policies to be applied at the division level, as well
as related IT infrastructure
• Variability in accounting, internal auditing, budgeting, cash
flow management, currency hedging and disjoint approaches
to tax are antithetical to comparability (over time, and
between divisions) and pursuit of efficiency
• The ability to consistently review operations of multiple
divisions on financial and near-financial measures lessens the
need to administer other operations centrally, to enhance
divisional autonomy and self-regulation
• Most critically, consistent and timely financial reporting and
control ensures that weaker or more speculative divisions do
not come to threaten the existence of stronger ones
• Control = setting standards, checking performance against
predetermined standards, correcting deviations, and mapping
the ongoing relationship between subgoals

6. ROLES OF CENTRALIZED
MANAGEMENT
• A sampling of stronger measures to ensure central
authority over finance and accounting, especially in ultra-
high growth situations or where there are very strong
willed divisional general managers seeking outsized
influence or allegiance from local staff:
• Conduct a centralized finance & accounting boot camp as
part of onboarding in these functions, to quickly instill the
right practices in newly joining staff before they decamp to
operating divisions
• Similar practices can be helpful for closely related IT and
ERP staff where there needs to be a single consistent
standard for overall monitoring and control
• Impose central veto rights over hiring and promotions of
senior finance and accounting staff in the divisions

7. ROLES OF CENTRALIZED
MANAGEMENT
• Arbitrating competitive encroachment (a.k.a.
product/service grabbing) among divisions
• Can require active, candid, intervention
• Demands independent, informed judgment by top
leadership to avoid devolving into a game of which division
can best lobby top leadership
• Left untreated, competitive encroachment among divisions
can further spill over into divisions trying to gain
negotiating leverage externally, such competitively
lobbying the same landmark customer, or sowing brand
and product line confusion for customers and distribution
networks

8. ROLES OF CENTRALIZED
MANAGEMENT
• Maintaining regulatory and legal compliance
• Providing staff experts to help develop and share best
practices and implement new methods among the
divisions
• Planning for the longer term horizons of the overall
business
• Orchestrating the response to opportunities or threats
common to multiple divisions
• Such as shared suppliers, scarce capabilities, common
distribution channels, technological challenges, or
disruptive technologies

9. ROLES OF CENTRALIZED
MANAGEMENT
• Entering new lines of business, whether through internal
incubation or external acquisitions
• Pulling the plug and admitting defeat on initiatives,
product lines, or divisions that aren’t working
• Divisional executives who are directly responsible are
(understandably!) usually less willing to do so
• Setting the policies for the corporation as a whole, in
consultation with the divisional leadership

10. ROLES OF CENTRALIZED
MANAGEMENT
• Corporate brand management
• Corporate intellectual property management
• Developing and evolving an overall performance
management system for employee and management
development
• So that overly varied divisional approaches do not take
hold which would otherwise amount to sharply different
standards of performance and rewards which, left
uncontrolled, ultimately threatens meritocracy

11. ROLES OF
DECENTRALIZED
MANAGEMENT
• Leading and managing multi-functional divisions, or
business units, which usually have their own resources to
conceive, develop, produce, market and support their
products and services
• Owning a full P&L, as well as ROA or ROCE, and capital
turnover responsibility
• Operating as if they were stand-alone businesses, apart
from sourcing capital and operating within the rules of
engagement set jointly with central management
• Hiring, firing and promotions intra-division
• Staying very close to target markets and customers, and
the operations to service them
• Administering the policies of the corporation

12. RATIO OF CENTRALIZED TO
DECENTRALIZED MANAGEMENT
• The foregoing section details more extensively the role
and responsibilities of centralized management vs.
decentralized
• The balance of operating reality is strongly the reverse:
• The large majority of overall corporate resources are in the
decentralized operating divisions
• Only a small percentage of resources reside in central
corporate activities

13. RATIO OF CENTRALIZED TO
DECENTRALIZED MANAGEMENT
• The reason for reversal of balance in the earlier
description:
• It is much harder to take back divisional autonomy that has
been explicitly or implicitly granted at the outset, if the rules
of engagement are left unclear
• Sustainable decentralization over time and changing
circumstances with all of its attendant benefits requires a
relatively precise and known body of centralized activities
• Much of what is left unarticulated to deliver the full
potential of the business is for the operating divisions to
handle

14. PROVIDING BOUNDED
AUTONOMY TO DECENTRALIZED
MANAGEMENT
• Effective delegated authority with sufficient reporting and
control for the overall corporation and each division requires:
• Articulation of period objectives, goals, delivery dates and the
measures of performance
• Enables variance and deviation analysis as the period
transpires, to drive learning, improvement, and corrective
action
• Description of what will be required, by when, how it will be
accomplished, what it will earn, by when, and what capital
and other resources will be required
• A companion set of written and evolving understandings
detailing the relationships between committed plans among
different functions and collaborating divisions, as well as the
assumptions, dependencies and sensitivities underlying those
interrelationship plans

15. DIVISION COMPASS
• In addition to P&L, and delivering according to qualitative
business plan goals & objectives, to be able to really
evaluate the performance that matters for a division:
• Market share and profit pool share, in the division’s market
of operation
• Competitive productivity standing in each of R&D,
production and sales & marketing, in the division’s market
of operation
• Quality of product and service
• Customer experience
• Cost, price, volume and financial rate of return
• Skilled, disciplined and consistent cost accounting is
important

16. DIVISION COMPASS
• Market share and competitive productivity trajectories are
destiny, since the external market is the ultimate arbiter of
success (even if the company’s larger resources can seem
to shield that reality out for a while)
• Internal financial measurement of divisional performance is
necessary, but not sufficient, to evaluate overall divisional
performance
• The double checks of internal performance along with
external market measures are necessary to sufficiently
evaluate productivity
• Productivity (relative and absolute) is one of the strongest
leading indicators of future business performance

17. TYPICAL CHALLENGES AT THE INTERFACE
BETWEEN CENTRALIZED AND
DECENTRALIZED LEADERSHIP
• Courage, decisiveness and speed in dealing with
personnel weakness
• Maintaining a focus on fact-driven assessments, and the
right facts, rather than devolving into superficiality and
overly facile narratives as the basis for decisions
• Developing a sufficiently shared approach to risk:
• Defining and agreeing upon what chances, rewards and
approaches are appropriate
• Sustaining sufficient alignment about the identity of the
business:
• What it is, what it could be, and what it should be (to
borrow from Peter Drucker)

18. WHERE CENTRAL MANAGEMENT
USUALLY NEEDS TO BE INSISTENT:
CROSS-DIVISION COLLABORATION
• It is rare that divisions which do not have a natural vertical
or horizontal relationship will seek out collaboration
opportunities anew
• The human drive to maximize divisional autonomy is
typically stronger over time than the desire to collaborate,
share resources and share decision authority within the
larger enterprise (especially for larger or stronger
divisions)
• New cross-divisional collaborations, to take advantage of
white space internally, convergence/consolidation trends
externally, or emergent opportunities at the intersection of
multiple divisions’ capabilities, usually have to be
encouraged with a pretty strong hand from central
management

19. WHERE CENTRAL MANAGEMENT
USUALLY NEEDS TO BE INSISTENT:
CROSS-DIVISION COLLABORATION
• Moving managers among divisions can help motivate co-
operation and co-ordination
• Standing committees and temporary working groups can
also assist in creating and sustaining cross-division
collaboration
• Examples: Common technological, production and distribution
platforms
• Tip: Get affected division heads to sign-off on the charter for
each committee or working group, so cross-division efforts do
not become lame ducks from lack of divisional buy-in
• Central leaders insisting on cross-division collaboration need
to do so with an understanding that such actions do, at least
temporarily, increase the potential for the leadership of those
divisions to make excuses for underperformance

20. DISPARITY AMONG DIVISION
SIZES, OUTLOOKS, MANAGEMENT
TALENT, AND RESOURCES
• Challenges arise when there are major differences in size,
resources and growth outlooks among different divisions
• No one really wants to be the creditor nation in the
federation of divisions, if some (debtor nations) require
significant investment for a length of time
• Speculative new venture divisions can attract outsized
resources and empathy when facing setbacks relative to
the larger legacy divisions that are carrying the overall
enterprise
• Small or weak divisions can try to upload their problems to
corporate staff or stronger divisions, often setting off an
addiction loop if so allowed, unless there is suitable
intervention to develop sufficient managerial capability at
the division level

21. DISPARITY AMONG DIVISION
SIZES, OUTLOOKS, MANAGEMENT
TALENT, AND RESOURCES
• The metrics which best monitor and evaluate more mature
divisions may be appreciably different than those for
smaller, more dynamic ones
• Differences in culture among divisions may be
unavoidable based on history, location, maturity and
outlook, which can be somewhat at odds with a desire for
a more unified corporate culture

22. DISPARITY AMONG DIVISION
SIZES, OUTLOOKS, MANAGEMENT
TALENT, AND RESOURCES
• Some cultural differences among divisions can be
beneficial though, providing internal diversity, and a better
environment in more dynamic, entrepreneurial divisions to
develop leadership successors
• The best leadership successors for the overall corporation
often come out of the smaller, more agile divisions:
• Better entrepreneurialism, managerial ingenuity, initiative,
dexterity and adaptability
• Balance between strategic and tactical mindsets
• Ability to attract and build strong associates
• Faster cycles of action to drive learning, and more
cumulative learning over time as well as breadth of skill
development
• Easier evaluation of executive individual performance and
contribution

23. DISPARITY AMONG DIVISION
SIZES, OUTLOOKS, MANAGEMENT
TALENT, AND RESOURCES
• What is not acceptable however with cultural variation is
differing standards of individual integrity and intellectual
honesty between different divisions, no matter their size
or stage of development
• Lapses in individual integrity and intellectual honesty
quickly become highly corrosive in multifarious ways in a
high growth, complex business

24. OPERATING SITES IN
HIGHER AND LOWER
COST LOCALES
• For businesses of any significant scale, it is becomes
likely to need to have some operations in high cost locales
(i.e. Si-V, major urban centres, other major tech hubs)
• Often, the depth of talent and particularly the pool of
seasoned management available in higher cost, more
competitive tech employment markets contributes to
generating productivity that more than offsets the higher
cost of operations vs. lower cost, less competitive locales
• As long as productivity can be measured and realized in
higher cost locales, the internal equity differences of
higher and lower cost locales are not something to be
avoided or feared, though they do require ongoing
management and effort, often from central leadership

25. MANAGERIAL DEPTH
TEST
• Decentralization requires sufficient managerial capability
and know-how to make it work in the first place
• With decentralization working, it provides a powerful
system for optimizing division performance, further
developing management talent through localized
adaptation, shortening the distance between authority and
responsibility, making faster decisions closer to the action,
and acknowledging some internal competition between
divisions to drive progress
• If an organization does not have enough talented
management though to get decentralization off to a
sustainable start, one way or another the more significant
issues and decisions will recentralize to the few strong
managers

26. GENERAL MANAGERS:
HIRING AND PROMOTING
• The head of a decentralized division is a general manager
• Usually, more successful general managers leading
divisions are people who have backgrounds facing and
succeeding with many different kinds of challenges, rather
than those who have had a series of successes in a single
function or resolving a string of similar business issues
• With general managership being a consummate working
through people role, general managers must have proven
abilities:
• Organizing work and people, including prioritization
• Assembling and upgrading strong staff
• Delegating without abdicating
• Leading by example in their commitment to the business

27. GENERAL MANAGERS:
HIRING AND PROMOTING
• Other General Manager candidacy traits:
• Action-oriented
• Ability to make decisions with some uncertainty
• Adaptability
• Well informed and rapid learners about technology,
customer expectations and competitive practices
• Ability to quickly discern what is distinctive from what is
typical with an emerging issue or situation
• Good communicators internally and externally
• Ability to network well inside and outside the organization,
and the companion capacity to employ multiple avenues of
influence concurrently to deal with significant issues
• Ability to develop subordinate managers

28. MINIMUM VIABLE
SIZE FOR A DIVISION
• Each division needs to be large enough (or well enough
funded) to support the depth and quality of management it
requires, as well as offering individual growth
opportunities for managers and key employees
• Each division should have the full suite of competitively
significant capability to conceive, develop, produce,
market, support and renew its own line of products and
services
• Some sharing of resources between divisions can help
achieve economies of scale and scope
• But, on balance, some redundancy and inefficiency among
divisions is the price of realizing the advantages of a
decentralized organization in employee engagement,
adaptability, information flow and decision speed

29. MINIMUM VIABLE
SIZE FOR A DIVISION
• Each division usually needs to achieve the #1, #2 or a
strong #3 position in its chosen market of operation to
develop the scale required to:
• Be sustainable, being able to afford the ongoing
investments in R&D, distribution and operations that
smaller competitors will struggle to afford
• Participate strongly in the profit pool for the sector
• Niche strategies are possible as a smaller market share
participant, but are also more at risk to the vicissitudes of
larger players and forces in the competitive environment
over time

30. MINIMUM VIABLE
SIZE FOR A DIVISION
• Question to Ask to Shape Strategy for a Competitively
Small Division:
• If a division has a much smaller share of its market of
operation than 10%, how would the market need to be
redefined and re-segmented for the division to be able to
climb into the top-3, and a market share above 10%?

31. DELEGATION LIMIT
Cardinal Rule of Delegation:
• Delegation of decision-making cannot be pushed below
the level at which the information pertinent to the decision
is available

32. LEGAL, OPERATING,
GOVERNANCE, ACCOUNTING
AND TAX PLURALITY
• Corporate executives and divisional leaders need to be
able to simultaneously keep in mind the different views of
the business depending on whether the perspective is:
• Divisional operations
• Legal organization of the corporation and its subsidiaries
• Governance, especially if there are minority interests in
any parts of the corporation, and,
• Accounting and tax perspectives with jurisdictional
variations
• Situational optimization varies considerably depending on
which of these factors have greatest purchase over an
emerging issue

33. BUDGETING
• Purely top-down budgeting (i.e. carried out by central
management) is inadvisable in normal business
conditions
• It fails to tap into the expertise and build buy-in from
operating divisions to deliver the plan
• Overly bottom-up budgeting and planning is similarly
impractical
• It often takes too many iterations at a consolidated level to
achieve a workable plan with too much divisional
autonomy for first authorship
• Protracted bottom-up budgeting often requires late-stage
capitulation to top-down intervention in order to bring the
effort to a timely conclusion

34. BUDGETING
• The hybrid model to get budgeting and related operating
planning done is a reasonable amount of time in a
decentralized organization:
• Broad guidelines are first set centrally, after consultation
with divisions and gaining conceptual agreement with the
board of directors
• Then, bottom-up detailed division level budgets and
operating plans are created within those set guidelines
• Corporate consolidation then takes place, with required
tweaks to reach overall targets pushed back out to
divisions for incorporation
• The final consolidated budget and associated operating
plan then is put to the board of directors for ratification or
modification

35. BUDGETING
• Precondition for budgeting success: To make the effort
worthwhile for building a detailed budget and operating
plan, each division needs to be able to develop in advance
• A sales forecast for the budget period that is likely to have
reasonable concurrence with actual results
• A product and service roadmap which resembles what will
actually be developed as the period unfolds, as the basis
for R&D and operational planning

36. TRANSFER PRICING
• When sourcing or distributing among divisions, the
question of transfer pricing arises
• There are three main goals (largely mutually exclusive) for
how to set transfer pricing for products, services and
rights exchanged among divisions
• The choices among the three transfer pricing policies
significantly affect incentives and interests

37. TRANSFER PRICING
• Method 1: Minimize corporate tax, allocating costs as
much as possible to higher tax jurisdictions, and
revenues to lower tax jurisdictions
• Saves $ now, subject to the limits allowed by tax
authorities
• This is often the lowest common denominator among
transfer pricing methods

38. TRANSFER PRICING
• Method 2: Encourage inter-division collaboration, with
attractive transfer pricing and terms
• Strives to make the whole corporation better than the sum
of the divisional parts
• A typical model is to have divisions be able to buy from
each other at cost, which keeps competitors out of internal
operations, and avoids internal profit becoming tied up in
internal inventory

39. TRANSFER PRICING
• Method 3: Reflect external marketplace forces, to improve
competitive fitness in every division
• Lets corporate Darwinism reign, reflecting as much of the
external marketplace reality for the business in internal
dealings, foregoing internal monopolies and artificial
preferences
• The usual protocol is to first try to source inter-divisionally
at market prices and terms, but if performance, cost,
quality and terms are not competitive, then the division
seeking supply is free to source externally

40. DEALING WITH
VOLATILITY
• Volatility will confront every business over time
• In any sort of business acceleration, urgent need for
transformational change, crisis or pull-back, some
recentralization of authority and increase in reporting
frequency is usually necessary on a temporary basis to
increase co-ordination and information flow to overcome
status quo behaviours and optimize the overall allocation
of transiently scarcer resources
• Preparation for volatility (during calmer times) begets
execution rapidity (during more urgent circumstances),
when speed is crucial

41. DEALING WITH
VOLATILITY
• Highlight scenario tests of tactical operating and financial
controls to tackle frequently encountered kinds of
volatility, that move the boundary between what is
centralized and what is decentralized:
• Escalated approval for outsized capital expenditures,
sharply increased working capital commitments, or
significant lengthening of cash conversion cycles
• Ability to implement a wide-scale hiring freeze quickly
• Ditto for travel curtailment
• Mechanisms to keep inventory and purchase commitments
scaling down at (least at 90% of) the rate of a revenue
decline

42. NATURAL TENSIONS
TO MANAGE
• Classically:
• Optimism of divisions seeking growth, opportunity and
resources, vs.
• The need for a more dispassionate ability within the central
management to evaluate likely near-term growth and
changes in demand based on broader economic, market
and technological factors

43. NATURAL TENSIONS
TO MANAGE
• Desire for division heads to have as much autonomy as
possible, while still achieving consistency and best
practices through corporate staff and finance functions
• Authority preference needs to be given much of the time to
the division general managers to deliver operating results
• But, checks and balances through central staff functions
exerting soft power through knowledge and persuasion are
necessary as well as centralized finance & accounting
• Some amount of intellectual bias is the price of having
sufficiently knowledgeable people to move ahead rapidly
and decisively

44. MONTHLY REPORTING
Elements of the monthly financial reporting package for each
division and service group, with written discussion and
analysis by the leadership of each reporting unit:
• Actual vs. plan for the month, with variance analysis and
action plans for exploiting positive variances and
improving negative deviations
• Outlook for the coming month, detailing evolving goals,
plans and standards of performance
• After some give and take between corporate and divisional
leadership, this reporting forms the basis for a monthly
rolling contract
• This system forms a central component of self-regulation
for each division in line with MBO or OKR

45. QUARTERLY MEETINGS AMONG
DIVISION HEADS AND
CORPORATE MANAGEMENT
• Quarterly leadership meetings help everyone understand
the issues and opportunities each division and the
corporation overall is facing, and the way that adjustments
in plans and operations are being made
• Prompt reporting and adjustment keeps expectations in
closer alignment, and reduces the likelihood of emotional
conflict
• Frequent dialog keeps everyone apprised of each other’s
differing points of view and impacts from potential and
actual change

46. QUARTERLY MEETINGS AMONG
DIVISION HEADS AND
CORPORATE MANAGEMENT
• The formal meetings and related reporting have value for
keeping everyone in sync
• The greater value though is the evolving context it
provides all participants away from the joint division and
corporate leadership meetings for how to handle the litany
of daily challenges, changes and interaction opportunities
to the best advantage of the overall enterprise, often in
ways that transcend the formal org chart

47. DIVISION GENERAL
MANAGER
COMPENSATION
• To reflect the need for one company thinking and
collaboration, while retaining sufficient emphasis on the
performance of the general manager’s division, the typical
variable compensation weighting for a division general
manager is:
• 1/3 for overall company performance
• 1/3 for the performance of the general manager’s division
• 1/3 for the general manager’s individual achievements,
beyond what can be readily measured, financially and
otherwise

48. SUMMARY
Decentralization in high growth, scale-up stage technology
businesses can be a powerful force for:
• Leadership development and succession
• Bringing more of the business in closer contact with the
competitive marketplace, reducing isolation
• Sparking initiative, engagement, adaptability and
accelerating growth
But:
• Some inefficiency and redundancy are required as the
price
• So is tolerance for the mistakes that accompany local
initiative in a fast changing and uncertain environment

49. SUMMARY
Overall:
• With thoughtful co-ordination and staff mechanisms as an
overlay to a decentralized structure, and particularly a strong
and predominantly centralized finance and accounting
function, freedom and control can be optimized to fuel
growth at scale
• Done right, many of the strengths of centrally organized high
growth businesses can be preserved in a decentralized
model:
• Consistency of performance
• Regulatory and legal compliance
• Scale and scope efficiency
• Emotional detachment when hard choices need to be made

50. FURTHER
DISCUSSION
To further explore managerial decentralization to achieve
focus, growth and leadership development in rapidly scaling
technology businesses:
dave.litwiller@communitech.ca