Evolution of Corporate Centers
In spite of its clear purpose and value addition, corporate centers often get a vote of no confidence. The scale, profitability and independence in the decision-making of an individual business unit determine the evolution of such centers. In these VUCA times, it is not easy to keep abreast with all the changes impacting the present and future of the business. The primary goal of a corporate center is governance and protecting shareholder value while being right, both in spirit and intent of every decision. Today, though India is uniquely positioned with its conglomerate structure, there are not many diversified businesses under one umbrella brand. In addition to India, one can witness a similar situation in Korea and to some extent in China and Japan. In all of the US, the two names that come to our mind are GE and UTC. However, there is a perpetual need to understand the logic behind such centers.
One Size doesn't Fit All
Corporates, especially conglomerates, are forced to deconstruct due to scaled-up operations or diversified businesses in the global markets, increased investor engagement mounting out of capital structure, strategic and governance issues. There is a constant debate on the size and competence of corporate centers. It is rare to find clearly defined roles at the headquarters and in the business units. Moreover, corporate centers often tend to overextend themselves; this leads to in efficiencies, wastes resources and impedes decision-making at business units. A quick look at the governance models should help simplify the problem at hand.
General Governance Models of Corporates
A general governance model philosophically defines how the business should be organized and run in order to achieve its strategic intent. The idea is to build and deploy shared capabilities to build synergies and economies of scale and support a “one company way”. This will ensure a scalable model and balance cost efficiency and business effectiveness.
The interplay between corporate core, business units and enterprise / enabling functions is strongly determined by the governance model. There are in general four models, each with its own rationale.
For a financial holding company, the primary objective is to establish and enforce a disciplined management model to protect shareholders' interests. The set of mechanisms are used to manage the relationship among stakeholders and to determine and control the strategic direction and performance of corporates. While the corporate core sets broad policies and financial and operational goals, the Business Units (BUs) are accountable for achieving results, thereby committing to multi-year strategy plans, and the support functions provide specific services thus ensuring economies of scales.
In a strategic management company, adding value by leveraging synergies between business units is the key focus area. The corporate core sets key financial and operational metrics while ensuring strategic coherence across different entities in form of annual reviews. Much like in a financial holding company, the business units are accountable for results in this model. However, they are being constantly challenged by the corporate core within annual planning cycle. The support functions, on the other hand, cater to business unit-specific services and eventually move towards providing joint outsourcing services.
Providing guidance to business units by sharing expertise is the driving force, as far as an active management company is concerned. Here, the corporate core sets out to guide and actively support sector strategic plans and budget while undertaking joint projects with business units. The support function delivers on expertise services with the corporate core, while also carrying out bundling and standardization of transactional services.
By making key decisions for business units, an operational involvement company finds value by creating corporate expertise and control with the aim of achieving cost/operational efficiency. Apart from being responsible for financial and operating performance, the corporate core dictates and manages sector strategic plans and budgets. While business operations are closely aligned across BUs, the support function has an explicitly stated corporate policy where the business operations are more specific in nature.
Shapes and Sizes of Corporate Centers
Depending on how the corporation is structured and the strategic imperatives of corporate centers, there are different ways that the corporate core adds value:
In the paper ‘From Corporate Strategy to Parenting Advantage’, Marcus Alexander, Michael Goold and Andrew Campbell argue that the parent company should not only add value to a business unit but should add more value than any other potential parent. They call this: ‘Parenting Advantage’.
Portfolio coordinators create value by altering the composition of the portfolio by separating out or moving business from operational entities, creating new businesses, buying or divesting businesses. Such decentralization gives center managers the freedom to make their own decisions, as long as their profit-planning ratios and bottom line are satisfactory. The parent interferes in running its businesses only when it sees ways to enhance performance.
On the other hand, many business units in several conglomerates have reached a scale where they can compete as standalone entities with the balance sheet support of sibling business units. A strategic leader will have an influence to enhance the standalone performance of the national and international businesses. Using basic performance targets, the businesses are controlled and monitored. Value creation is provided by making strategic decisions such as the appointment of managers and approving major capital expenditures.
Through linkage influence, an active advisor links the systems, data and best practice across businesses and geographies for economies of scale. The corporate parent seeks to create value by fostering coordination and synergies between its businesses.
Another approach is to establish cost-effective central services and functions for the businesses. The corporate value in the key manager model is created through the provision of administrative and managerial services to the businesses.
Which type of influence is best suited to maximize value creation? The answer is complex and is determined by a number of factors depending upon the reconciliation of the multiple paradoxes of parenting advantage: control v/s empowerment, responsiveness v/s synergy, portfolio v/s core competence.
The absence of a standard model of a corporate center prevents a consistent approach to managing the various businesses. There is also a need to establish and document a common set of practices and work standards. However, there is a distinct lack of real impact at the unit of implementation i.e., the concerned workplace. Corporate centers need to assist businesses in implementing these work practices.
Therefore, the critical issue when it comes to corporate centers isn’t whether the work they’re doing is important to the business. It is how to ensure that their effort isn’t duplicating and taking decision-making away from the independent businesses. Thus, the real challenge is to engage with various businesses in a manner that aligns capabilities, strategy, culture and people.
Defining the Corporate Center
The purpose of the corporate center is to ensure that resources are invested to maximize profitable growth and long-term intrinsic value. They are created primarily to ensure strategic leadership (corporate and operational strategy),
control (financial and operating unit strategic measures), capital (allocations and investment), identity (corporate brand), and capabilities (develop personnel) in largely single-business national market companies that often grew into the multi-business global companies of today.
These five overarching missions define the general purpose of the corporate core. In order to fulfill these missions, focus and required capabilities are–again, strongly dependent on the role of the corporate core opted from the four core model, thereby increasing the level of hands-on management from corporate.
The Litmus Test
In reality, corporate centers are unable to find a symbiotic way to create value for the portfolio of businesses under it. The quest for finding the right balance throws up some vital questions for the corporates:
Role of HR
- Do the business units see the value of centers of excellence as more of a traditional, mandatory central function in new guise?
- Are shared service centers creating more value than the external service providers?
- Are the economies of scale being annulled by additional interface of staff cost at the corporate center and reducing flexibility?
Corporate HR surely has its task cut out. In its entirety, corporates centers offer good prospects to the company in terms of:
- Building “one company way” of managing people across businesses, geographies as an essential element that can only be addressed at a corporate level. Being the custodian of the organizational values and culture, it should reflect across every aspect of a business in a fair and transparent manner
- “Creating next gen leaders ” has always been inadequately addressed at a business/market level. The onus is with the corporate to create a leadership talent pipeline that will future-proof the enterprise by addition of new skills, succession planning
- Creating an “alignment” of goals and purposes with the top team. Developing and coaching CXOs and key talent on their individual performance and style. The individual and collective motivation and energy of the executives across business units has to be the corporate responsibility
- Deploy “shared capabilities” to build synergies and economies of scale and support the common vision of HR across the corporate. Not every business and market has the availability, budget or brand to hire the best; therefore, the corporate center can create these specialized skills that effectively partner with the business
The predominant purpose is for the corporate center to create responsible stewardship to create long-term value for employees and shareholders. A detailed, meticulous, and participative “operational governance” approach is a prerequisite to efficient and harmonious collaboration between the corporate center and the rest of a large business organization. The corporate center needs to ensure that the whole is worth more than the sum of its parts.
(This article was also published in Business Today, India Today Group – Sat 28th Nov, 2015)
Chief Executive Offi cer, Aon Hewitt Consulting India
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