The Role of the Corporate Center

David Cuykendall
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Collaboration Mechanisms

The role of the corporate center is defined in terms of the center’s value creation — across businesses, across regions, or across functions. And also its effectiveness in overhead cost control — so that the whole is worth more than the sum of its parts.

The goal of the corporate center is to relieve costs and operating constraints by providing offsetting benefits. What is the corporate parent doing to add value to the business units? More than assembling a portfolio of good businesses the parent adds market share and knowhow by providing parenting advantage in key business functions through clear guidelines, improvements in decision quality, and by building a high performance culture.

The responsiblity of the corporate center is to design collaboration mechanisms that provide the connectivity for key enterprise processes. It requires a process that starts with structure, proceeds to staff that structure, and defines the roles and collaboration to make that structure work effectively; in other words, it provides a means to translate strategic logic into action. 

The Role Charter

Organizations must hold people individually accountable and their teams jointly accountable through a process called role chartering.

This involves translating overall objectives into four related matters:

1. Individual and shared accountabilities; that is, responsibilities for the completion of tasks.
2. Key performance indicators (KPI’s).
3. Decision rights.
4. Leadership behaviors.

These four aspects serve as the charter. Each direct report writes his or her own charter and then meets with the CEO or his or her representatives along with the rest of the direct reports tasked with developing charters to collectively agree on each charter. This cascading process helps to build clarity for each role.

The Levers of Control

The center establishes the activities and results it tracks and the main reporting lines. It also defines its parental decision rights by establishing what decisions the center makes and what decisions the business units make. By enacting its functional mandate, the center establishes HOW it leads — and to what depth it leads — regarding direction setting, policies, concepts, and execution.  

For example, the center can style itself as relatively hands-off — exerting control though its board by overseeing business unit heads while restricting parental control to legally required statutory information in company reports —  approving only major decisions and investments and selecting key executives, leaving detailed decision rights in financial, strategic, and operational matters (as well as execution) to the business units. 

By assuming the role of a financial sponsor or family builder the center can exert relatively more control — providing guidance in the form of top-down financial targets, challenging the financial plans of the business units, and retaining final authority over financial decisions even though strategic and operational decisions (as well as execution) are left to the business units.

Moving farther in the direction of control, the center can choose to provide the business units with targets and challenge the units’ strategic plans. To reinforce its control, it can create a strategy function that shares responsibility with business unit heads who retain rights for operational decisions and execution.

Additionally, the center can locate the primary oversight responsibility in its general and administrative functions (such as finance, strategy, and human resources) for their counterparts in the business units — retaining rights over financial decisions as well as functional standards — while the business units maintain rights over operational decisions and execution within the given standards.

Also, the center can be selective about the functions it focuses on —  usually support functions —  including talent management, leadership development, performance management, information technology, and intellectual property protection. Further, it can heavily leverage shared services to build cost advantage and facilitate integration and collaboration, and/or provide strategic capabilities via competence centers related to sales, marketing, or purchasing.

Finally, the corporate center can become fully hands-on by reducing the responsibility of the business units to mainly executing tasks.

How Different Corporate Centers Handle Capital Allocation

The hands-off parent handles capital allocation only at the highest level —  determining dividend policy, approving affiliations, and authorizing substantial investments. 

The financial sponsor and family builder parent goes further by establishing clear expectations for the free cash flow that the business units must generate.  

The strategically guiding parent uses portfolio management as its main instrument in the capital allocation process — while the parent that seeks to functionally lead the business units determines guidelines for approving capital investments, establishes metrics and other criteria used to evaluate investment proposals, and prescribes the processes for implementing guidelines that define how projects advance through their stage-gate process.

The fully hands-on parent takes full control of detailed capital allocation decisions using internal rate of return to evaluate them —  selecting individual projects for investment, monitoring step-by-step execution of the projects, and setting their operational budgets (while also aiming to improve performance monitoring tools and processes that more accurately identify the sources of profitability). Also, the hands-on parent will take care to procure experts at developing, implementing, and communicating strategy.

The Dimensions of the Role of the Corporate Center

In pinpointing the capabilities that matter behavioral aspects are crucial. Strong leadership, engaged employees, and a collaborative culture are vital for success. Behaviors are foremost with respect to strategy execution. This means using clear-cut formally established behavioral standards aimed at improving people practices and aligning structure with business strategy. There is clearly a gulf between aspiration and implementation; leadership pipelines are usually thin and sporadic. Companies can close the gap between their awareness and actions by bringing behaviors to the fore that focus particular attention to the weaknesses in their leadership pipelines and by building platforms for collaboration, reducing the need for adding to structural complexity by creating an environment conductive to collaboration.

The performance managing center oversees a group of unrelated businesses. It manages by financial objectives, selects and motivates senior managers, establishes performance management systems and metrics, challenges business unit strategies, and allocates resources.

The portfolio developing center manages a set of diversified, loosely related businesses. In addition to carrying out the duties of the performance managing center, it drives strategic initiatives across the organization and actively shapes businesses by seeking opportunities for consolidation, entry into new markets, and global expansion. It also brings together complementary skills and assets from the respective businesses.

The synergy driving center leads a set of related businesses. In addition to maintaining the responsibilities of the portfolio developing center, it fosters the exchange of good practices and knowhow, facilitates and organizes cooperation, leverages scale in key business functions, develops common operational systems and tools, and creates shared strategic resources.

The integrated center drives a single business or a cluster of closely related businesses. Besides conducting all the activities listed above, this center model directly steers and manages significant operational functions such as manufacturing or sales across regions, products, or businesses.

The role of the center needs to be considered in its organizational context. Large corporations generally have multiple layers and multiple hubs that oversee divisional and regional businesses. It is crucial to delegate different roles to the different layers. Typically, the corporate center, which faces the most business diversity, assumes a performance managing or portfolio developing role. Centers at divisional and regional levels, which we call subcenters, oversee a related set of businesses and activities and should gravitate toward a synergy driving or integrated role.

Two complementary lenses are required in order to fine tune the corporate structure at the different levels. The first applies to the structure of the business portfolio; specifically, companies should assess whether the organizational grouping of their business activities permits the creation of links that unleash synergy among those businesses. Does a group of businesses, for example, have similar key capabilities or share common resources?

If, within a given portfolio, a cluster of businesses is closely related, then those businesses could be effectively managed by a synergy driving subcenter. By contrast, if the relationships among businesses within a portfolio are weak, then the individual businesses should probably report directly to the corporate center because the rationale for a subcenter is missing. Without a clear division of roles between the corporate center and subcenters, the risk of redundancy and excessive bureaucracy rises.

The second lens applies to the optimal spans of control — or the number of direct reports per manager — maintained at each of the company’s management levels. Low spans of control create excessive bureaucracy and slow down decision making and execution. High spans run the opposite risk: too little oversight. Both extremes can significantly inhibit value creation. Usually, however, a company’s spans of control are too low overall. Before introducing or modifying structures, companies should consider spans of control and their effect.

In reality, unrelated businesses frequently report into a single subcenter, leading to relatively low spans of control at the corporate center level. The following opportunities to delayer such organizations may arise:

• Some subcenters of these business clusters are simply artifacts of earlier corporate configurations. Many companies have narrowed the range of businesses they operate. As this process continues, they often can take out subcenter layers. 
• Linkages between businesses can change over time through new technologies, outsourcing, collaboration with outside parties, and other forms of deconstruction. As links disappear and business clusters break apart, many subcenter structures may become unnecessary.
• Some unrelated clusters were created during mergers and acquisitions and were never fully integrated into the overall organization. As companies refocus and sharpen their operations, organizations, and business portfolios, they may be making some of these subcenters obsolete.
• As corporate centers aspire to be more involved in operations, their role increasingly converges with the role of the subcenters below them. Eventually, it may make sense for the corporate center to assume the responsibilities of the subcenters. 

Assessing and designing a corporate structure are best done using an iterative rather than a top-down approach. That is, it makes sense to begin by assessing linkages and opportunities for synergies across business units and then to derive effective organizational groupings before defining the roles of the corporate center and possible subcenters. Given the dynamic nature of many portfolios and businesses, companies should regularly revisit their corporate structure and the role of the center to make sure that both remain aligned with the business portfolio and corporate strategy.

The Means of Activating a Broad Set of Organizational Levers 

Structural Design	Description
Organizational structure	Reporting lines, including profit and loss accountabilities
Role of the center	The corporate center's role with regard to involvement and leadership
Layers and span of control	The number of reporting layers and people reporting directly to a manager
Organizational cost efficiency	The level of cost efficiency enabled by the organization
Shared services, offshoring, and outsourcing	Internal service provider; cross country relocation; subcontracting to other companies
Roles and collaboration mechanisms
Role clarity	Understanding the role's responsibilities in the organization
Cross functional collaboration mechanisms	Lateral coordination effort between functions or units
Informal/virtual networks	Informal channels for reinforcing culture and communicating key information
Processes and tools
Process excellence/optimization	Processes optimized for high quality, short processing times, or low cost
Project management	For example, roles, processes, and tools
Business analytics and information management	Skills, technologies, applications, and practices to drive business planning
Leadership
Leadership performance	Capable and effective individual leaders and leadership teams
Leadership pipeline	Preparing for the next generation leadership team
Middle management effectiveness	Middle managers empowered to carry strategy into the organization
People and engagement
Recruitment and retention	Providing the necessary talent to meet strategic and growth goals
Employee performance management	Systems and processes aligned to ensure that goals are achieved
Employee motivation	The willingness to exert discretionary effort
Culture and change
Change management capabilities	The organization’s ability to manage change efforts
Adaptability and flexibility	A flexible structure that allows adapting to external challenges
Culture	The set of shared values in an organization