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(De)Centralization

Someone once told me a story about a man who only kept two files in his desk — one on how to centralize the company and one on how to decentralize it.  It turns out every time there was a change in leadership, there would be a corresponding shift in the way the company was structured.  Why all the flip flopping?  Is one structure better than the other?  Or is this just a case of someone putting a stake in the ground to put their own signature on the company?

Quite honestly, there is no clear cut answer about what is best for a business.  Whether to centralize or decentralize needs to be evaluated on a case-by-case basis by considering the goals of the company and how interactions, both internally and externally, will get the business to those goals.  What happens more often than not is a hybrid situation.  Sales is decentralized but marketing is centralized.  HR is centralized but operations is decentralized.  However, there are two areas of a company where I think at least some centralization needs to be strongly considered — finance & accounting and IT.

Many of the arguments for centralizing these two functions are similar:

  • There are economies of scale to be gained from managing bulk transactions or company-wide systems with a dedicated group of employees.
  • Consistency and best practices can be filtered throughout the organization.
  • Maintaining controls and ensuring prescribed procedures are followed is easier.

In today’s economy, and with the multitude of legislative requirements especially surrounding the finance & accounting field like SARBOX, these thoughts should be at the top of the list when considering the centralization question.  Centralization of functional areas like A/P, A/R, cash management and payroll is important to consider since these are prime gateways to fraud and embezzlement.  And the recent stories coming out of Koss, Avaya and Bank of America should certainly make us sit up and take notice.  This is not to say centralization would completely protect a company but it’s easier to ensure the controls to prevent it are followed.

Even though it may seem I’m a huge proponent of centralization for finance & accounting, you will notice I said some centralization needs to be strongly considered.  One of the downfalls of having all of finance & accounting run from a central perspective is often the creation of an “us vs. them” mentality.  Finance is viewed as being prohibitive, not working with the business and being more concerned with following the rules regardless of the impact on operations.

There is a way to avoid this — ensure there is good communication between finance and the business units.  One of the best ways to accomplish this is to have a dedicated accountant or analyst working with each group that is actually part of their team.  The accountant can act as a champion for the unit to see their needs are addressed but are still balanced with the requirements from the center.  They also gain a better understanding of the unit and can provide the insight needed when doing variance analysis or business evaluations as part of the reporting process.  This is how I structured my department and each of my accountants became a valued team member whose opinion was sought in day-to-day decision making.

Ultimately, each company must weigh their requirements and their culture to structure the finance & accounting function so it provides the support and value needed by the business.  Just remember, it doesn’t have to be an all-or-nothing proposition when it comes to centralization or decentralization.

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3 Responses

  1. Laresa…

    I’m in agreement with your conclusion that hybrid management practices, (including centralized and decentralized processes), is an efficient utilization of resources to allow for the meeting of current, corporate expectation agreements.

    I’m also in agreement with the need for clear and precise communications between the hierarchial tiers between accounting and operations; this is required in order to update, transition and retain lean operating processes to provide the ability to take advantage of non-planned, competitive, expansion-leveraging events.

    Sincerely, Ron Dick

  2. Nicely written. From an IT standpoint I agree that centralization has its strengths and weaknesses. The bottom line, as you clearly pointed out, is communication no matter what the model. (The “us” versus “them” is a company killer.)

  3. I run an IT support company based in South Florida and have been a huge advocate for the centralization of IT services.

    The hurricanes of 2005 provided an excellent reason to move IT functions from onsite into secure data centers. Once our clients grasped that applications and data don’t need to be onsite and that the performance of “cloud” hosted applications is nearly non-noticeable, they began to investigate moving all remote office IT functions centrally.

    They elected to do this because of financial and control reasons, not knowing that help desk calls and other standard IT problems would reduce drastically as well.

    From an IT perspective, it’s much easier to support one very large system than many, dispersed smaller systems. Additionally functionality and redundancy is also more cost effective in a centralized system.

    Mark me in the ‘for centralization’ column. As far as I am concerned, the man in your story can throw out the decentralization paper.

    Adam Steinhoff
    DedicatedIT

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