The balance between centralization and decentralization is a frequent, ongoing negotiation between business units and functions. Taking a BU-back approach grounds functional design in the needs of business units and enables organizational leaders to align on a common vision. Spending time up front on this holistic assessment will help ensure that functional decisions best meet the needs of the business and maximize the organization’s value proposition.

The Bottomline

Companies should identify the unique characteristics of the markets they operate in and the competitive dynamics within them. How do companies meet the needs of their core customers? How do business units differ in their response to those needs? What products do business units offer, what differentiates them from one another, and what cycle times does each one require?When this exercise is done correctly, a solid value-creation narrative for the organization will emerge.

Identify The Market

The next step is to determine how functions best fit into that narrative. Organizations must answer the following questions:<ul><li>What are the key decisions that business-unit leaders need to make, and what do they need to control? </li><li>What markets, products, and customer bases might require targeted functions? What shared needs could be addressed more effectively or efficiently if they were commonly tied across the organization?</li><li>Why are certain resources best housed at the centre? </li></ul>

Fitting The Narrative

Organizations should adopt a business-unit lens, or BU-back approach, when designing functions. Because value creation primarily happens within business units, activities of corporate functions should reflect the needs of business units. Functions should be set up only when a business unit absolutely needs them; the functions must then ensure they are fulfilling their promise to those business units.

Designing Functions

Organizations must first determine the kind of business leaders they need to consult to understand the design requirements of a given function. To gain this perspective, executives must take a step back and <a href="https://www.mckinsey.com/business-functions/people-and-organizational-performance/our-insights/bridging-the-gap-between-a-companys-strategy-and-operating-model">consider the value narrative of the organization</a>. The overall narrative ensures all leaders are aligned on value creation and organizational strategy and enables them to make the trade-offs and decisions required to design an effective, efficient organization

Define The Organizational Strategy

Once organizations have a clear view of what type of corporate-function setup is required, they can choose from nine different options:<ul><li>Fully centralized</li><li>Fully centralized shared services</li><li>Strong CoE, with some execution resources informally assigned to business units</li><li>Strong CoE, with some execution resources directed by business units</li><li>Helix organization</li><li>Lean CoE with enforcement ability</li><li>Lean CoE to promote sharing and adoption of best practices</li><li>Decentralized with formal networks</li><li>Fully decentralized:</li></ul>

Determine How to Allocate Decision Rights and Responsibilities

This type of leader has control over functions, typically those requiring more localized oversight. Strong centralized functions best support this type of executive. For example, Procter & Gamble’s business-unit leaders are responsible for a range of functions such as product development, branding, advertising, and product positioning, but they also take advantage of global business-services groups (for example, IT support and accounting) because the needs in these areas across business units are similar and highly transactional.

Four primary Archetypes of Business-Unit Leaders: The Line-Of-Business Integrator

Over the past decade, companies have struggled with organizational designs that vary widely in how centralized or decentralized they are across functions. These organizational redesigns are often prompted more by who is designing them than by objective, fact-based decisions about what maximizes value. For example, when functional leaders design functions, they are usually more centralized (in pursuit of economies of scale and skill); when business-unit leaders weigh in, functions tend to end up more decentralized (in pursuit of responsiveness and control).

Striking the Right Balance 

Safeguarding functions include those protecting the company from threats to survival by maintaining basic controls. These functions are almost always led by a corporate entity. Typically, they involve decisions inappropriate for a single business unit to make and often involve legal, risk, regulatory, or investor-related topics.

Safeguarding the Organization 

Shaping functions include those supporting the implementation of the organization’s strategic priorities and requiring one voice across the enterprise, such as branding, strategy and business development, communications, R&D, and centers of excellence (CoEs). The top team must always set the value agenda, but corporate functions, and to some extent the business units, should help shape it. In turn, business units should always be responsible for carrying out the value agenda.

Shaping The Value Agenda

Sharing functions serves needs across business units (for example, payroll, IT, and accounting). Sometimes, these functions can be aggregated to provide efficiencies of scale. Other times, they can be distributed within business units when needs are dissimilar. Sharing functions should be highly responsive to the day-to-day needs of business units.

Sharing Economies of Scale, Skill, and Scope

Putting these core beliefs into practice requires organizations to take three key steps: define the organizational strategy and ground it in how functions deliver value at the enterprise and busines-unit levels, take a BU-back approach to function design, and move quickly to determine how to allocate decision rights and responsibilities.

Employing a BU-Back Lens(Business Unit Needs)

The reason organizations struggle to define central functions is that they move too quickly to define how functions could add value rather than grounding decisions more fully in the needs of business units.Organizations often struggle to define their organizational strategies. They create an answer that sounds good but that results in a bloated, inefficient organization that often provides worse service.

Understanding Value Addition

This business-unit leader has little to no control over most functions. Instead, this type focuses on pursuing business development and sales, often playing a role with a light touch in product development and in adapting products to local customer bases. This leader operates well with fully centralized functions and clearly defined service-level agreements. For example, companies with similar products across business units often choose this model.

Four primary Archetypes of Business-Unit Leaders: The Powerful Commercial Leader

This type of leader controls nearly all the functions (except essential safeguarding functions responsible for risk mitigation), must manage P&L statements, and substantively drives the value agenda. These executives are often found in private-equity companies, for example, which require severable businesses that can be independently evaluated and easily sold.

Four primary Archetypes of Business-Unit Leaders: The Autonomous Business-Unit Leader

In large, global multi-business companies, this dynamic may result in a struggle between functional leaders trying to achieve standardization and scale, and business leaders who feel they are paying for a large corporate overhead that is not sufficiently responsive to their needs. Underlying these issues are two problems: the lack of a strategic rationale for the current design and an unclear division of decision rights and roles between business-unit and functional leaders.

Addressing The Needs of Business Units

The empowered general manager controls most profit and loss (P&L) functions and plays a prominent role in shaping and executing the value agenda. However, this leader looks to centralized functions to support a narrow range of shared needs. There are two ways to set up functions in support of this archetype: a lean CoE in which resources may report directly to the business unit, or a <a href="https://www.mckinsey.com/business-functions/people-and-organizational-performance/our-insights/the-helix-organization">helix model</a> in which business units make up the value line and functions make up a capability line that business units can tap.

Four primary Archetypes of Business-Unit Leaders: The Empowered General Manager

we believe companies need a new approach to set up functions that maximize business value and successfully serve business units. This approach is based on three core beliefs:<ul><li>Organizations should flip the script on traditional value assessment of functions and define functions by looking first at business-unit needs.</li><li>Defining “corporate” does not mean functions need to be one size fits all.</li><li>Not every corporate function is up for grabs. </li></ul>

Toward a New Approach

Functions in an organization continuously shift between centralized and decentralized modes, first centralizing to achieve efficiency, then giving power back to business units to spur responsiveness and accountability.Organizations implement tenuous “we’ll both do it” models that rely on collaboration and result in large and expensive functions, with business units finding ways to opt-out and act independently. Functional organizations follow an agenda that is not tailored to the needs of business units, so business units create shadow functions that add even more cost to the organization.