As a company grows, it becomes necessary to determine the dynamics of its management and decision-making: will they be carried out in a centralized manner or will a decentralized organizational model be the predominant one?

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Changes in technology, consumer habits, and workforce expectations make deciding on the appropriate organizational model critical to growth plans. However, this raises important questions:

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Will managers take the lead on projects or will they assign mid-level and entry-level employees to spearhead initiatives?

What level of input will junior employees have?

Who will be responsible for decision-making, solution proposals, and innovations?

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It is precisely in a context of expansion and growth that these types of questions begin to emerge. And also where companies must choose between a centralized structure, a decentralized organization, or a combination of both.

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As in many other aspects of business development, there is no single right answer. Issues such as the specifics of the industry to which it belongs, as well as the capabilities of the workforce, are taken into account.

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For these reasons, we want to analyze the differences between these two organizational models, their pros and cons, as well as the keys that can help you make the best decision when managing teams in different latitudes.  

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Main differences between a centralized and a decentralized organization

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In short, a decentralized organization is one where day-to-day operations and decision-making power is delegated from the top level of management to the middle and entry levels. On the other hand, centralized organizations are those where these aspects are concentrated in top management.

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The decentralized structure is a way for the organization's leadership to focus on growth opportunities and long-term strategic decisions, rather than overseeing day-to-day tasks.

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Now, by no means does this mean that a company's managers are not involved in the details. However, they do so through frameworks with checks and balances, as well as through oversight and accountability mechanisms.

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The main idea behind decentralized organizations is that authority and responsibility rest with those who know best. In other words, the stakeholders directly involved in the business area of their specialty should be in charge of its operation.

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Although this organizational model is relatively new, centralization is still predominant. With that in mind, let's review some pros and cons of both approaches.

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Centralization: Pros and Cons

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The centralized model within organizations has been around for much longer, and some even consider it to be the traditional structure of companies, governments, or any public or private association.

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As we have already said, its main feature is that the central command concentrates decision-making and the direction of every aspect of the organization. These powers are retained in the central offices and each collaborator whose opinion has weight in these commands is part of that office.

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The advantages of this model include a well-defined and established chain of command. This makes it easier for each department head to choose to whom to delegate certain functions, as well as for each employee to know to whom he or she should report.

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There is also a greater focus on results and more effective ways of realizing the leadership vision. However, diversity of viewpoints is also diminished, which creates the danger of bias in the organization.

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On the other hand, while generally linked to efficiency and productivity, this model falls short when processes become too bureaucratic and ultimately sacrifice work agility.

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In sum, the pros are strong, established leadership and better-structured accountability, but at the cost of less diversity of opinion and the risk of processes that inhibit team initiative.

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Decentralization: Pros and Cons

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Since we have analyzed the nuances of centralization, let us understand a little more about its opposite, decentralization.

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Given the above definition, we can anticipate that decentralized organizations are those in which specialists in certain areas are delegated to be in charge of operation and decision-making.

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Based on this principle, one of the main assets of decentralization is that organizations become self-sufficient under good management.

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The short-term benefits are evident: more agility and less risk in periods of transition or absence of leadership (such as leave or illness). It also empowers employees to take ownership of their activities and to be more vigilant about the quality of their deliveries.

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In the long term, a decentralized organizational structure makes it easier for growing companies to adapt their business model to new markets because the units work in much more agile flows.

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Quick decision-making in the face of emergencies and initiatives, as well as greater confidence for experimentation, also gives teams freedom. Decentralized structures encourage them to use their experience and expertise to solve problems or propose solutions.

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However, the truth is that a decentralized organization that lacks the necessary guidance entails a series of problems that are not minor. Basically, if not carried out with the necessary controls, decentralization falters in all aspects where robust centralization makes progress.

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This translates into a weak chain of command, unclear accountability processes, and a permanent brainstorming that hardly lands in significant value contributions.

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Fortunately, the challenges brought about by the pandemic in this area caused organizational science experts to begin to innovate and put into practice many assumptions that were previously considered unfeasible.

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Let's explore some of them and see how they can help you transform and/or strengthen your organizational model.

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4 keys to decentralized teams

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Before the pandemic, it was difficult to find examples of companies that opted for a decentralized organizational model. As mentioned above, the norm was centralization and on-site work.

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However, the paradigmatic example is probably Basecamp. Even to this day, although there are many experiments running at the moment.

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Due to the experiences left by this and other companies, it is possible to recognize at least 4 keys that define adequate management of work teams in a decentralized organization.

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1. Access to global and diverse talent

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The battle for talent can be just as fierce as the competition you face with your direct competitors.

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There' s an important geographic factor at play here: centralized, on-site teams compete for talent within a few miles of each other. In perspective, this greatly reduces the amount of talent available to meet your specific business needs.

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Having a team distributed across different cities and even countries helps you not only reach a considerably larger talent pool, but also strengthens your employment value proposition.

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Not all workforces are willing to move out of the city where they have always lived to pay higher housing, food, transportation, and entertainment costs (which is almost a rule in urban work centers).

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2. Happier teams

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As we said, one of the great advantages of decentralized teams is that they offer employees freedom and stimulate their creativity.

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The creation of this atmosphere of trust in the professional context can be coupled with a better work-life balance thanks to decentralization.

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We assure you: the autonomy that comes with being able to work from anywhere, living new experiences, and all this without "burning" vacation time, is an advantage that can hardly be offered by a centralized compensation package.

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3. Loyalty and commitment (or lower turnover)

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According to an OECD study on well-being and mental health in the work context, a worker highly values a sense of tranquility and comfort when carrying out his or her duties.

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Generally, in a decentralized scheme, having these two conditions is much more common because each person can provide for themselves as they see fit, and it is also easier for companies to provide the right conditions.

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This is a step towards ensuring that your employees do their best not to change these conditions and even dare to take on a more responsible role. When it comes to job security, decentralization is an ally.

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4. Lower overall costs

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Any company manager will tell you there is no better cost-cutting strategy than simply not having to spend money.

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For instance, a remote team does not require offices to work out of, which also reduces the expense of furniture and supplies, as well as maintenance, travel expenses, rent... and so on.

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These four keys can help you decide if the decentralized organizational model can really bring a significant and positive change to your company. Keeping them in mind will help you put them into practice later on.

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How to manage teams in different latitudes

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So far we have analyzed the pros and cons of two organizational models. If you have followed the reading this far, you will have noticed a preference for the decentralized model. This is not to say that centralizing cer your company.

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A McKinsey analysis suggests that the key to choosing which aspects enrich your operation and which may pose a risk lies in mapping the main processes that cannot benefit the particular needs of each of your business units.

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To accomplish this, we have prepared a checklist that you can review to harmoniously integrate both models in the direction you want to give your company:

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Organize your workforce into strategic business units (SBUs): An SBU is a group of collaborators that operates independently, but with goals, processes, and accountability aligned with the overall business strategy. Organizing your company in this way is convenient to standardize processes and clear individual and collective objectives.

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Direct the functions of each unit to value creation: part of the definition of a strategic business unit is to focus only on particular aspects of the company. The purpose is for each unit to generate added-value propositions for the business and be responsible for executing them.  

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Determine where to distribute your decision-making centers: we understand that it can be complicated, but delegating to your collaborators gives them the necessary license to innovate and keep the creative momentum going. Let "those who know best" take ownership of their areas of expertise.

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Adopt an organizational model for each business unit: this may seem to go against all of the above, but for the organization to move forward without friction, it is vital that in addition to decision making, each manager can decide which models are best suited to the team under his or her responsibility.  

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Use methodologies for defining objectives and reporting such as OKRs: setting goals and objectives is fundamental for growth, but ambitious goals are useless if there is no plan to reach them. There are methodologies such as OKRs (Objectives and Key Results) whose purpose is to provide teams with how to implement work plans.

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Lastly

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The decentralized organizational model embraces different areas and has a holistic approach to both the growth of companies and the personal and professional development of their employees.

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When choosing either option or trying to design a hybrid model, don't lose sight of the assets you have at hand. Ultimately, proper management of these particulars and a willingness to raise the ceilings of growth are objectives that all employees share with their companies.