The Dangers of Centralization

Many companies, especially in the financial services industry, are centralizing in a fury of cost-cutting and "rationalization". The savings look compelling when presented on a consultant’s slides and many such initiatives are being pitched as attempts to create Centers of Excellence (CoE) that will theoretically improve quality and scale. However companies need to be aware of the hidden costs to such moves.

One company that we are familiar with, centralized into CoE’s in response to the crisis of 2008. This involved moving many of the functions such as customer insights, pricing, risk management, IT, new product development and others out of the businesses and into corporate CoE’s. More than two years hence the company finds itself dealing with many of the consequences of such a move:

• The CoE’s have become bottlenecks for work and a constant source of frustration for the businesses.

• The organization has become a lot more silo’d than it was before with new disconnects between the businesses and the CoE’s, as well as the CoE’s themselves. Depite the fact that the CoE’s are all in the same location and sometimes on the same floor, their engagement with the businesses is very choppy and quite disconnected.

• The CoE's do not feel engaged in the businesses. They find themselves being kept at arms-length from the businesses and feel very litle sense of ownership or partnership in meeting their results.

• The organization has become a lot slower to respond to the demands of the market and has in fact become more inward-focused .

While demand has re-surfaced in many of the segments the company operates in, it finds itself struggling to make the most of the growth opportunities because of the structural barriers created by the centralized model. Yet because of the obvious cost-benefits it is finding it hard to revert to give up the CoE structure.

While some companies may find it imperative to centralize and reduce their cost structure because of market conditions, they should get into it with their eyes open. Remember the old adage - There aint no such thing......