In simple words decentralization in an organization is the distribution of authority i.e., decision making power and responsibilities to individuals or group which allows them to take autonomous decisions rather than being concentrated in a single central authority.
In the centralized decision-making process, various decisions are made by the top-level managers, while those at the lower levels are responsible for the implementation of these policies. Meanwhile, the decentralized process allows lower-level managers to make and implement decisions related to their area of responsibility. Establishment of authorization for each of the levels in the organization often motivate or encourage employees to improve their performance. The authority here provides the understanding and right to determine the assignment, while responsibility is an obligation to achieve set goals. This means that the higher the level of decentralization, the greater the employees' ability to make autonomous decisions.
Many companies use the decentralization process to improve their overall efficiency. It improves and increases the effectiveness and productivity of an organization. Organizations utilize this process in decision-making allow mangers at various levels to make important decisions relating to their scope of responsibilities. Decentralization is the practice of delegating decision-making authority to a lower level in order to achieve freedom of decision security. Decentralization is a broader concept and relates to how top management delegate authority down to divisions, branches, and other lower-level units of the organization. Decentralization is also the delegation of authority in making decisions and policies to managers or people at the lower level of an organizational structure.
When control and therefore decision making is delegated by the highest layer of management such as CEO, important directors, senior management to
1. middle/lower level of management
2. departments (HR, OPS, finance, marketing)
3. locations (branches, regions, countries)
Motivation and Empowerment: It motivates the employee to work responsibly as they are the decision-making authority in their area of expertise and achieve their goals.
Taking initiative: Decentralization encourages the individual or team working at different levels to take initiative and act independently which helps in bringing up their management skills and fostering a proactive and entrepreneurial mindset.
Positive productivity: The process of decentralization allows quick and efficient decision making. It removes the bottlenecks that are caused by the excessive centralization thus helping in increasing the productivity of the organization.
Innovation: The fact that in decentralized organization individuals are free to take their own decisions in setting their goals that align with the top end organizational goal and work in the way they love which increases work efficiency fosters a culture of innovation by increasing diverse perspectives and ideas and empowers the employees to contribute innovative insights
Below are some of the top organizations with follow decentralized management approach.
Amazon
Its highly decentralized structure, with small, siloed teams, is the equivalent of "1,000 independent businesses, all marching in the same direction," says former Amazon senior manager Eric Heller, who now helps brands sell on the site.
Coca-Cola
It follows the decentralization within centralization model of organizing itself. This means that while the global headquarters retains its overall decision making, the corporation is divided into regions and geographical territories in which it operates.
These regional divisions are then organized into the functional departments which in its case comprise the Production, Industrial Relations, Sales and Marketing, and Human Resources departments.
Netflix
Netflix shows itself to be an innovative company that has achieved a competitive advantage by changing its business model a few times to better meet customer requirements, using new technologies. Netflix has a flat organizational structure that provides ample freedom for employees. It is also known as a decentralized organizational structure that allows the respective person to make quick decisions. Netflix’s organizational structure avoids top-down decision-making strategies to create a conducive working environment for employees. It also focuses on creating a favorable environment to promote employees’ work performance. Netflix has a labor division that works to improve performance. The authority reviews the performance regularly. They opt for a multi-rater feedback system that is also known as a 360-degree review method.
Johnson and Johnson
Everyone knows Johnson and Johnson baby products, but they have expanded into the pharmaceutical business due to their decentralization model. They have scaled to a level with 130,000 employees globally as a benefit of this.
In 2022, Johnson and Johnson were ahead of the curve, with the structure in place since 1999. However, the former top bosses have said it does allow their products to be more customer-centric and their brand more connectable.
The reasons they use a decentralized structure are
Eventbrite
Eventbrite has already established itself as the prime event management, creation, and ticketing brand. They have employed a decentralized organizational structure to ensure that they perform admirably well globally.
They created over 4.7MM events in 2019 from over 949,000 event creators with this structure. They choose the decentralized structure because many of their users perform multiple functions:
Organizations are self-sufficient
With decentralization; the pressure is distributed on all levels. Hence, the absence of a team member does not impact the overall productivity a lot. Consequently, even the top management can take off days which means that the organization is self-sufficient.
Scaling is easier
Since the top management does not need to dive into the nitty-gritty details of the office operations of a particular location, scaling becomes easier. The command can easily hire capable local employees to handle day-to-day functions, which can help them to grow the business overall and not get stuck in micromanagement.
Faster decision-making
Decentralization gives autonomy to managers at all levels of the organization. It means that the employees do not need to wait for approvals from senior management before taking on a task. This helps in faster decision-making, which increases overall productivity.
Happier team members and business owners
The basic principle behind decentralization is to make employees at all levels capable and self-motivated. It means that they can find meaning and motivation through the work. This, in turn, keeps the team members and business owners happy.
Strengthening leadership skills
By giving the power to make decisions from their own experience and wisdom, leadership qualities are inculcated into every individual. This helps in building better leaders for tomorrow.
Subordinates' motivation
When the employees know they are being valued and their skills developing in an all-round manner, their motivation will increase. Furthermore, it also helps increase the employee retention rate for the business.
Efficient communication
Since the power to make decisions flows at all levels; the communication channels become more transparent and efficient for everyone. This improves clarity around tasks and helps form relationships that are not possible with a hierarchical structure of a centralized organization.
Poor leadership can damage a company’s reputation
While some are born leaders, some have to learn it. And during this learning curve, they can take decisions that are detrimental to the company. While the mistake can be corrected, the damage to the company’s reputation is more difficult to remedy.
Communication barriers
It is often said that too many cooks spoil the broth. With a decentralized organization, too much autonomy often results in communication barriers. This happens because everyone has their methodology and ideology to get the work done, which can often cause ambiguity about what way to take.
Difficulty collaborating
Despite the improvement of communication channels, scheduling barriers still arise. Now, employees have to run in circles to check the availability of every individual to get work done.
Team-wise expenses increase
To handle operations of various teams at every level, a manager is required. This means hiring costs and overall operational costs also increase.
Service functions can waste resources
To serve employees at all levels, separate teams are often required. This can cause a surplus of resources and increase redundancies.
For instance, centralized organizations often use the same accounting and finance team for all employees, which helps get done more with fewer resources.
One feature that has spurred the decentralized spree globally is the advent of blockchain technology. While it gained traction from 2008 onwards by the efforts of Satoshi Nakamoto, who launched Bitcoin, its history traces back to 1991 when Stuart Haber and W. Scott Stornetta envisioned it.
The core idea behind blockchain is not to use a central location to store all the information. Instead, it uses a group of computers on a network on which data is distributed. The same principle was then adapted to fit organizations which gave rise to virtual machines, remote working, and what we now call decentralization.
From the start of Bitcoin, many other cryptocurrencies came to life. After Bitcoin, Ethereum came and was funded via crowd sale. Cryptocurrencies and crypto tokens have helped increase the number of transactions today and are being used by decentralized organizations to build assets for Web 3.0.
So, is decentralization the future? Absolutely! While it might seem like a costly investment, it allows the company to scale faster, become more customer-centric, inspires self-sufficient organizations, and helps in increasing employee satisfaction. Hence, the pros far outweigh the cons to be overlooked even in 2023.
Hence, if you are looking for an organizational structure that can help you and your employees to grow, decentralization might be the answer you are looking for.
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