8. Autonomous Business Units Versus Corporate Synergies

Corporations are often comprised of a number of autonomous business units. To be held accountable for their bottom lines, business-unit leaders must be given control of all their costs.

Some people believe this warrants decentralization of service functions such as engineering, manufacturing, procurement, sales, communications, information systems, finance, human resources, real estate, and administration -- any business within a business which is not directly accountable for product lines.

These folks will be quick to add that centralized "shared services" organizations often view themselves as monopolies with no need to be customer focused.

Staff who think this way generate costly bureaucracies, and are insensitive to the unique needs of their diverse clients.

Worse, they may believe they carry the power of the corporation, and have the right to make decisions for clients and control clients' decision making.

If they behave this way, then shared-services organizations become the antithesis of autonomous business units. The answer, these people argue, is to give each business unit the functions it needs to support its business.

While on the surface this may sound logical, the truth is that decentralization is extremely expensive.

Decentralization has three major consequences:

• Lost economies of scale: Many small departments cannot gain the economies of scale of a consolidated function with its shared infrastructure and shared licenses.

  There are also economies in pooling requirements for partial headcount (where two business units each need a half-time specialist), and in smoothing workload (where one business unit's peak demand is another's valley), also lost through decentralization.

  A fragmented function loses negotiating position, both purchasing power (eg, volume discounts) and selling power (the strength in selling a broad product line).

  Economies are also lost when isolated professionals are less likely to share their experiences and expertise. There is less opportunity for reusing knowledge, research, and solutions, leading to costly reinvention.

• Reduced specialization: Small decentralized groups cannot specialize to the same degree as can a consolidated function. Decentralized staff must be relative generalists to do everything their business units need.

  By contrast, a centralized function can establish groups of specialists that are shared throughout the corporation.

  The results of lost specialization (i.e., less professional depth in each discipline) are a slower pace of innovation, reduced productivity and responsiveness, lower quality, and limited career paths that may not attract top talent.

• Lost corporatewide synergies: Business units that could be synergistic collaborate less as a result of decentralization.

  Conversely, shared support functions improve business units' synergies.

  For example, a shared engineering function can reduce the variety of parts in use (eg, nuts and bolts) to a standard set, driving down every business unit's procurement, inventory, manufacturing, and repair costs.

  Shared HR services can lead to more flexible staffing.

  Shared information systems can facilitate cross-boundary work flows, and business synergies such as a common view of external customers.

  A common financial chart of accounts can induce better corporatewide resource management.

  All such opportunities for business synergies are diminished through decentralization.

A corporation may accept these as the "inevitable" costs of business-unit autonomy, but there's no need. The BWB paradigm breaks the apparent paradox. It allows business units to remain autonomous while sharing service functions.

Consider an analogy. You demand absolute control over what you eat. That's entirely reasonable. Yet you probably don't own your own grocery store. Instead, you share a centralized grocery store with your community.

You don't feel the need to own a grocery store since you control your spending power. You buy what you want, and don't buy things that don't seem worthwhile to you.

Of course, if you don't find what you want at your usual grocery store and the store is unwilling to order it for you, you have the right to go to another store. But, for most of us, doing so is the exception rather than the rule; we frequent our usual store, and shop elsewhere only on occasion for unusual items.

You're able to control what you eat without owning your own store because we live in a market economy, and grocery stores are customer focused and work hard to supply you with just what you want (and will pay for).

Similarly, autonomous business units are in complete control of what they buy from external vendors. In a BWB organization, they're equally in control of internal vendors.

Entrepreneurial support functions treat business units as customers; only sell what business units choose to buy; customize their products and services to the extent that business units are willing to pay; and treat business units as well as they would if they reported to the business-unit executive.

In addition, they give business units a better deal than could be gotten from a fragmented set of small groups of generalists.

In short, the BWB paradigm allows a corporation to "have its cake and eat it too." Product managers and support services alike can be managed as autonomous business units, in complete control of their costs and their strategies. At the same time, centralized shared-services providers can deliver cost savings and synergies.