Savvy business leaders and head office structures
A downturn often provokes business leaders to review company strategy and regularly leads to changes being made as Challenges are mounted to processes that have become entrenched within the corporate structure. Many leaders take the back-to-basics route which means a review of their products or services, their people and their processes. If these three core business pillars are correctly focused then the company will be applying its resources to best effect, maximising value and minimising costs.Our research has shown that the structure and style of head office is at the heart of making sure that this focus and balance is right and that costs are appropriate. In times of difficulty, businesses must know what each layer of the company does and eradicate any superfluous layers, they must make sure that teams write the best to do list on a Monday and have most of it done by a Friday. So which types of company have done this best and what has made most of the difference?
Benchmarking corporate centres
Our own benchmarking analysis examined the head offices of some of the major corporations in the UK. We concluded that corporate centres can be differentiated into one of four different categories, with each category having its own distinct features and characteristics, strengths and weaknesses. The four categories can be split into two basic types: lean centres which are evident in Holding Companies and Private Equity styles and the larger centres as demonstrated by the Tactical Partnership and Active Partnership styles.Having established the distinguishing features of the four categories, we can then investigate how well each type has coped during the downturn, and assess what leadership teams both executive and non-executive, have learned through the downturn.
The four categories are summarised in the diagram below:
Fig.1 The main characteristics of the four corporate centre styles
The Holding Company
In times of economic difficulty one would expect that the leaner styles of head office, such as the Holding Company, would do well. However, unless the Holding Company central team has been particularly strategic and focused on performance management, then the business is likely to own a portfolio of different companies, not all of which will perform well in hard markets. In addition, repetition is common in this type of corporate entity, which means that, when the total cost of corporate service is calculated, it often ends up being more than the benchmark average for a similar-sized company run with a more unified structure.
Finally, one of the key issues is that there is no mechanism for resolving disagreements between functional leaders and divisional leaders. Consequently all decisions go to the CEO who becomes stretched and starts to lose patience with their managers thus leading to tense management relationships and tortuously slow management decision-making. In short, Holding Companies can impede flexibility and value, both of which are crucial for survival in a downturn.
The Active Partnership
The Active Partnership model has a strong set of central functions providing services across the corporate entity which creates a series of advantages when responding to a downturn. Firstly, it is likely that management information is comparable across all companies in the business and that KPIs can be changed across the Group to face the new reality of the economic downturn fairly quickly.
Further, the structure of the company minimises repetition between and across divisions which means that when re-forecasting becomes a necessity, as in a downturn, it is possible for the leadership to have a fairly robust picture of the situation reasonably quickly without having to create a new group financial baseline.
However, the Active Partnership model does have its disadvantages during a downturn, as for those who are not in the centre of the business decision-making process can seem very distant. This may ostracize and disillusion business unit leaders. In addition to this, leaders at the centre must ensure that they are visible regularly to improve morale to try and prevent the development of an ivory tower syndrome, where businesses focus less on the needs of customers and more on internal values.
The Private Equity Model
In this model the business is incentivised by overall performance and value targets that are driven by share price. In this way when times are good the hard work is worthwhile as it is easy to measure shareholder value and for the management team to measure their wealth. However, when hard times strike this system does not work so well. In a downturn, the leadership team needs to posses the skills required to manage the portfolio through troubled times, but their skills are more focused on the financial aspect than operational expertise.Consequently, the corporate centre starts to look and feel much more like an expensive team which appears to have little real value. Furthermore, in these companies, the leadership teams are not made with long term goals in mind and so can change regularly. In a downturn, tensions begin to occur between the teams and change may not follow a cohesive plan, thus making it hard to navigate the company through the downturn.
Tactical Partnership
The Tactical Partnership style is defined by the central leadership having a high level of influence on the company but a relatively slow speed of decision-making. Often, much is talked about strategy with less evidence of delivery. This can be problematic in an economic downturn, as change, which is necessary for the survival of the company, is discussed repeatedly but little is put into action. Further, in this model there is confusion over who fulfils what function in the leadership team and again this can weaken the company in the economic downturn.What a lean corporate centre should look like
So what are the criteria that ensure that the leadership team has the right information about the corporate centre to help the company cope with the downturn? This knowledge is vital if the centre is to focus valuable resources effectively and keep the markets well informed about the corporate centre strategy to prevent shareholders from becoming too jittery.
In the midst of a recession many firms will be looking to ensure that their corporate centre is as lean as possible and many of our clients are looking at the Lessons to be learnt from those companies who operate under the principles of holding companies or on a private equity model.
On average, a lean corporate centre represents 0.38% of total FTEs and costs the business 0.65% of turnover. However, to be a top quartile performer in the lean sphere and beat the recession, your corporate centre needs to be at 0.25% of total FTEs and cost under 0.4% of turnover. But there is more to it than this.
Moving to a lean corporate centre delivers cost efficiencies but it does not, per se, ensure effective process and people effectiveness. This is where taking the best of the more proactive governance styles of the Active Partnership or Portfolio models has clear advantages and adds to the end result. This certainly puts companies in a better shape to survive the economic downturn.
Whatever the style of corporate centre, it is best to keep things simple and allow managers to make decisions quickly so that they can communicate this to the rest of the business.