Centralized Versus Decentralized HR

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For companies with multiple, geographically distributed locations, deciding whether or not to centralize HR is a decision with broad operational and strategic implications. A centralized approach enables an organization to streamline departmental functions across a complex system. It also ensures that HR policies are applied consistently and that information is managed in a unified way.

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On the other hand, different locations are typically subject to distinct human resources regulatory and payroll tax environments, not to mention unique recruiting cultures; which lends weight to the argument for decentralization.  

Multi-location companies that have grown through acquisition typically approach this question from a need to impose centralized control and consistency on an amalgam of diverse entities striving to become one.

To Centralize or Not

For these organizations, McKinsey & Company offers a decision making framework[1] based on their research and experience. The framework includes three questions that inform the decision to centralize or not to centralize.

  1. Is centralization mandated?The first question to answer, according to McKinsey’s framework, is whether or not the company has a choice. Perhaps centralizing certain functions, such as corporate finance, are required for legal compliance, while health and safety compliance can be managed at the division level, based on local regulations.
  2. Does centralization add significant value? If centralization is not mandated, it should be adopted only if it adds significant value. Since determining that value can be challenging, McKinsey & Company suggest asking: “Does the proposed initiative add 10 percent to the market capitalization or profits of the corporation?
  3. Are the risks low? There are risks associated with centralization—business rigidity, reduced motivation, bureaucracy, and distraction—which are often greater than the value created. McKinsey & Company suggest that centralization proposals should go forward only if the risks of these negative side effects are low.

In the final analysis, McKinsey & Company recommend that any centralization proposal that does not survive at least one of these three questions should be abandoned or redesigned.

An HR Perspective

Typically, the decision to centralize (or not) is an executive one, and may not even consider the HR perspective. Not surprisingly, the framework provided for CEOs by McKinsey & Company sheds light on many of the challenges associated with centralizing control in a multi-location company, but doesn’t address the cultural risks associated with remaining fragmented. Nor does the framework consider the potential added value (in productivity and employee satisfaction) of shared culture and consistent vision.

HR knows that one of the most difficult post-acquisition challenges is creating this coherent core and shared culture across the newly formed entity. While managing multi-jurisdictional regulatory environments, recruiting cultures and labor law can be a logistical nightmare; creating a sense of shared purpose and instilling shared values across multiple locations is an even bigger challenge and one that organizations ignore a their peril. 

“In a Bain survey of executives who have managed through mergers, that [culture clash] was the No. 1 reason for a deal’s failure to achieve the promised value. In a culture clash, the companies’ fundamental ways of working are so different and so easily misinterpreted that people feel frustrated and anxious, leading to demoralization and defections. Productivity flags, and no one seems to know how to fix it.[2]

At the same time, one of the most important contributors to employee satisfaction is the degree of ownership or autonomy[3] individuals have in doing their work. This applies to remote managers as much as it does to front line workers (if not more so). As such, imposing centralized control regardless of the unique characteristics of global divisions can run counter to any efforts to cultivate a unified high performance culture.

A Hybrid Approach

As organizations strive to determine which structure makes the most sense, inevitably the question arises: are centralized and decentralized approaches mutually exclusive? The answer, of course, is not necessarily. The human resources function in particular, may lend itself to a hybrid approach. This approach involves a network of corporate and local HR roles working together to deliver HR functions across the organization. Certain enterprise-wide aspects are managed centrally (e.g. HR information systems, core training and development programs, communication of corporate values, etc.), while local people perform HR functions that are better fulfilled locally (e.g. recruiting, individual development, site specific training). If your organization is considering a hybrid or “Federated HR”[4] model, here are some planning steps to help you get started.

  1. Work collaboratively with the corporate and local HR teams in developing your hybrid solution.
  2. Gain a clear understanding of the situation in each geographical location, including; culture, current HR practices and policies, regulatory environment, local labor law, technology and tools in use, incumbent HR staff, local workforce characteristics and recruiting processes, training and development practices, etc. 
  3. Determine which HR functions must be centralized to satisfy corporate and/or legal requirements.
  4. Identify any HR functions that would be more effectively fulfilled through outsourcing or automation.
  5. Determine any additional HR functions that should be centralized to support a unified corporate culture.
  6. Map out the HR functions that can be provided more effectively at a local level.
  7. Create the policies required to support your new HR structure.
  8. Document, communicate and implement your solution with appropriate change management support.


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[2] Integrating cultures after a merger. http://www.bain.com/publications/articles/integrating-cultures-after-a-merger.aspx
[4] Bersin: A "federated model" has a small core team that manages some technology and corporate programs, and empowers business and functional units to run their own training programs.


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