Federal Decentralization: Requirements
As a minimum the unit must contribute a profit to the company rather than merely contribute to the profit of the company.
Federal decentralization has stringent requirements. Federal decentralization is applicable only where a company can truly be organized into a number of genuine “businesses.” This is its basic limitation. As a minimum the unit must contribute a profit to the company. And it must be a genuine profit determined by the objective judgment of the marketplace.
Federal decentralization will work only if the top-management job is clearly defined and thought through. Federalization, if properly applied, makes top management capable of doing its own job precisely because it does not have to worry about operations, but can concentrate on direction, strategy, objectives, and key decisions for the future. The federal principle demands great responsibility from the operating units, the autonomous businesses. They are given the maximum of autonomy; and this requires that they assume the maximum of responsibility. Federal decentralization requires centralized controls and common measurement must know what is expected of each business, what is meant by “performance,” and what developments are important. To be able to give autonomy one must have confidence. And this requires controls that make opinions unnecessary. A federal unit of a autonomy is a means toward better performance for the entire company.
ACTION POINT: Ensure that executives of your autonomous units have maximum autonomy and maximum responsibility. Implement this by establishing a system of controls that makes performance or the lack of performance very evident.
Reservation of Authority
There must be a kind of “supremacy clause” reserving to central management the decisions that affect the business as a whole and its long-range future welfare.
Top management in a decentralized company must think through carefully what decisions it reserves for itself. For there are decisions that have to do with the entire company, its integrity, and its future. These decisions can be made only by somebody who sees the whole and is responsible for the whole. Specifically, there must be three reserved areas if the business is to remain a whole rather than splinter into fragments. Top management, and to management alone, can make the decision on what technologies, markets, and products to go into, what businesses to start and what businesses to abandon, and also what the basic values, beliefs, and principles of the company are. Second, top management must reserve to itself the control of the allocation of the key resource of capital. Both the supply of capital and its investment are top-management responsibilities that cannot be turned over to the autonomous units of a federal organization.
Third, the other key resource is people. The people in a federally organized company, and especially managers and key professionals, are a resource of the entire company rather than of any one unit. The company’s policies with respect to people and decisions on key appointments in the decentralized autonomous business are top-management decisions – though of course, autonomous business managers need to take an active part in them.
ACTION POINT: Reserve action key decisions for top management, especially those having to do with the mission, values, and direction of the organization; the allocation of capital; and the selection of key people.
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Thomas Jefferson
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
Henry Ford
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Suzy Kassem
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Thomas Jefferson
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J.K. Rowling
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Joseph E. Stiglitz
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Suzy Kassem
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E. Joseph Cossman