Decentralizing Your Operating and Talent Models the Right Way

As companies recognize that the timeline for moving past the impact of COVID-19 may lengthen into 2021 and maybe even beyond, key structures and processes within global organizations are coming under great strain.

Before the pandemic, centralized experts within organizations could easily travel across the globe to where they were needed. Global talent development and culture strategies relied on sending experts between home country and international assignments, and on developing local talent that was subsequently deployed in other regions in order to develop a true global mindset.

These processes have been completely short-circuited by COVID-19. Leaders must thoroughly reexamine how to accomplish these objectives in an environment where the ties between the center and periphery have been greatly weakened. Organizations that have a history of strong local decision-making and leadership development now face increased barriers to developing global processes and global leaders. Meanwhile, organizations with a dominant global mindset and decision-rights structure face the increased threat of overlooking critical local issues. The challenges are similar for companies that operate only nationally or regionally rather than globally.

Pre-Pandemic Global Best Practices

One of the foundational texts on decentralized decision rights and leadership development is Christopher A. Bartlett and Sumantra Ghoshal’s 1989 book Managing Across Borders. It examined the challenges organizations face when designing and executing global operating models for efficiency and flexibility. The authors proposed a transnational organizational model that strikes a careful balance between global best practices and local adaptability. More than three decades later, we can see many examples of industries that embody the transnational principles, though in practice, companies often emphasize one facet more than the other, because a perfect balance is extremely difficult to achieve. As a result, there is almost always work to be done to shift the emphasis away from an organization’s strengths to its weaknesses.

Pre-COVID-19, the industries that struck the best balance included professional services (such as consulting and accounting) and consumer products: They have strong local expertise in each country and share best practices globally. Yet, even the leading companies tend to be overly strong in either global best practices or local adaptability. Within consumer products, Unilever and Nestlé are very strong locally in the countries where they have large operations — a legacy of their very decentralized approach, which Bartlett and Ghoshal identified as part of the companies’ century-old “administrative heritage.” This describes strong investments in country-level operations and leadership teams but weaker leadership development and more limited sharing of best practices across global operations.

In contrast, consumer products companies such as Procter & Gamble and PepsiCo tend to have better global best practices but fall short of replicating Unilever and Nestlé’s strength of in-country operations and local leadership development.

Each approach has its strengths and weaknesses when it comes to leadership development. The decentralized approaches of Unilever and Nestlé tend to create deep benches of leaders within a country who know the local market extremely well but may struggle to gain global perspectives of the business. The centralized approaches of Procter & Gamble and PepsiCo lend themselves to having leaders with more of a global outlook who might lack enough local knowledge to appreciate when global processes need to be adapted for the local context. Before COVID-19, the solution for both approaches involved actively moving people across countries in order to develop either expertise in global operations centers or in local contexts.

Global Best Practices During COVID-19

The global outbreak of COVID-19 and subsequent retrenchment of travel has severely affected the ways multinational organizations promote best practices across all their geographies. Traditionally, organizations have enabled global best practices using centrally organized teams of business leaders and subject matter experts (SMEs), with some team members based locally. The core team members are on permanent assignment and are usually centrally located (often on secondment), and they are supplemented by locally or regionally based leaders and SMEs who “double hat” their regular jobs with the team assignment.

These teams spend huge amounts of time traveling to global and regional headquarters to meet face-to-face with each other and with other stakeholders. Meeting in person is important to their efforts to work through complex data and work-design questions, because it enables them to develop a shared understanding of team objectives and communication norms and to build trust.

This in-person work builds the social capital needed for the team members to continue to function effectively when they are no longer co-located in future meetings. It also provides rich developmental opportunities for high-potential individuals and rising leaders to cultivate the expertise and social networks needed to advance in their careers and contribute to the organization at even higher levels. In the initial months of travel restrictions, these global teams heavily relied on those preexisting relationships and social capital and the norms of work in order to continue the team’s work entirely remotely. But as the pandemic stretches on, companies need to bring in new members, work with different organizational stakeholders, and tackle new operational challenges, which puts strain on these global teams to continue to meet these needs fully remotely.

The solution requires organizations to make the best of the current situation and look at the impact of a more decentralized approach for decision-making around best practices and for leadership development. For companies that usually have a greater need to address local context and decision-making (such as PepsiCo and Procter & Gamble), COVID-19 presents an opportunity to rely more on local decision rights and leadership development than they traditionally have. For those that are already strong in locally based approaches (such as Nestlé and Unilever), the challenge is that they may lose ground in maintaining and developing the more globally focused approaches that are needed to augment their local strengths. Therefore, they must work even harder to find ways to take a more global approach even while it’s that much harder to do under heavy travel restrictions.

In addition to spending time ensuring that teams are operating effectively when working virtually, leaders across different culture types can take steps to set the right tone and motivate teams.

• Companies with strong global cultures should hold teams accountable for building new local knowledge. Now more than ever, senior leaders need to encourage teams to work through challenging circumstances and not default to what is comfortable. In companies like PepsiCo and Procter & Gamble, people may default to being too global in their approach and not take the extra time and effort needed to build local knowledge and perspective. While it’s that much harder to develop critical local knowledge when you can’t be there in person, that’s precisely why leaders need to emphasize the criticality of reaching out to local experts to engage them in the work, and for team members to build social networks and human capital that increase their expertise on local issues.
• Companies with strong local cultures should focus on global processes. In companies like Nestlé and Unilever, people may also default to what they know best, which means focusing on the in-country expertise at the expense of building a more global mindset. In this case, senior leaders need to emphasize the importance of getting out of the local context virtually to immerse themselves in global processes by reaching out to global leaders and process owners, and for team members to build social networks and human capital that increase their expertise on global issues.

Building greater expertise outside of one’s comfort zone — whether global or local — is hard under normal circumstances. During COVID-19, the challenge is even greater, requiring more attention, energy, and perseverance. That is why it is more essential now than ever to focus on that work. Building the requisite global or local expertise will take time away from all the other duties people have to fulfill. For individuals, this may require shifting some work to other team members, colleagues, or supervisors to ensure that they have time to develop this new expertise — something no one else can do for them.

Regional Best Practices During COVID-19

National or regional strategies around efficiency and flexibility have the same inherent trade-offs as global strategies but can be less complex and easier to navigate. In large countries such as the U.S., Brazil, India, or China, a national headquarters with regional offices is the norm, and the regional offices tend to have little autonomy to make independent decisions on strategic topics. The structures and work processes pre-pandemic assumed that people from the central office would travel frequently to the regions, and people from the regions would travel to headquarters, to identify and cultivate best practices and to develop strategic leadership skills. Challenges for domestic travel within very large countries are similar to the challenges of between-country travel in regions with large numbers of smaller countries (such as Western and Central Europe, Central and South America, and Africa).

Even in normal times, large companies struggle with decentralized decision-making. A defining characteristic of most processes in these organizations is that they are designed at corporate headquarters by senior decision makers and then promoted throughout operations nationally or regionally. The lament we hear often from people in regional operations is that when issues arise around process design and optimization, they have to be kicked back to headquarters to be addressed because the deep relationships and “hallway conversations” at headquarters are an essential part of the decision-making process. Travel restrictions or not, it would be much quicker and more efficient if these issues could be addressed in real time where the problems occur regionally.

This is not to say that all central decision-making should be blown up and distributed to the regions; that would create large inefficiencies and the duplication of work due to a lack of process consistency and sharing of knowledge. But there can and should be a better balance between central and regional decision-making, and COVID-19 provides a great laboratory for trying it out. The solutions mirror those described above. Centrally based experts on national (regional) processes and decision-making need to invest extra time and effort to connect with local experts to engage them in the work and to build their personal human capital on local issues. Locally based experts who know their markets best need to invest extra time and effort to connect with national (regional) decision makers and involve them in the work and to build their personal human capital on national (regional) issues.

Another Dimension to Consider

Up to this point, we’ve addressed the tension between centrally focused and locally focused decision rights and leadership development. That framing is the right one for organizations that have well-established matrix organization designs. However, many organizations are still in the early stages of defining an effective matrix and the culture needed to support it for the first time. They face their own set of challenges under COVID-19.

Many name-brand companies — more than you likely realize — have spent much of their history operating in an overly decentralized way, having never established an effective matrix decision-rights structure. One segment of these companies evolved to a position of strength in their market through acquisition. But the challenges of effective integration meant that they frequently opted for “lighter touch” integration — erring on the side of preserving local decision rights rather than forcing the efficiencies of standardized processes on operations that never had a say in whether their legacy organization should have been acquired in the first place.

Another segment expanded primarily through organic growth but evolved to face similar challenges with overly decentralized decision-making. The original approach of decentralized decision-making grew out of a strategic need to give local leaders the freedom to develop their business without too much second-guessing from corporate headquarters. Once their local market positions were developed, though, that history of having a more-autonomous operating model created the presumption that decentralized decision-making was the best approach and thus resulted in a strong cultural resistance to more centralization.

Before COVID-19 hit, both of these groups of highly decentralized companies were wrestling with the challenges of establishing a healthy matrix design for the first time and standardizing processes through a formal set of matrix decision rights. Much like Nestlé and Unilever, whose fundamental strength is in localized decision-making, these companies have been forced by the pandemic to revert back to a historical approach that overly devolves decision-making to local leaders, undermining the efficiencies of standardized processes that a well-functioning matrix structure can deliver.

What is unique about these companies is that they have no history of centrally driven processes and decision rights, unlike Nestlé, Unilever, and other companies that figured out years ago how to have both strong local and central decision-making. For these companies struggling to establish an effective matrix for the first time, COVID-19 represents much more of an existential threat to that work, since there is no history — no “muscle memory” — of centralized decision-making to fall back on when travel is greatly restricted and key leaders cannot be brought together in person. Focusing on preserving progress made in building an effective matrix may seem unimportant in the face of business threats created by the disruption of COVID-19, but the strategic importance of an effective matrix is actually highlighted by the pandemic: An overemphasis on local decision-making means missing out on the efficiencies and economic returns of consistent processes across all geographies.

Operating for the Short and Long Terms

There is always a tension between centralization and decentralization for organization and operating model design. The travel restrictions under COVID-19 have created a sudden, unexpected shift toward greater decentralization. If continuing on the previous path of building global or local decision-making and expertise is now harder while the effects of COVID-19 are so strong, would it be better to hold off and wait until travel is back to being easy again? Absolutely not.

Though the COVID-19 operating environment is very new, there are already a great number of organizations making very rapid changes. Leaders are implementing strategies and changing processes around socially distant operations, operating remotely in ways that just one year ago were deemed very difficult or even impossible to accomplish. If this can be done for the company’s core operations, stronger global and/or local decision-rights and decision-making processes can be established as well.

The silver lining is the huge potential future ROI from tackling these challenges now. Every insight your organization gains now into how to develop leaders and better decision rights when operating remotely can pay huge dividends in perpetuity once the pandemic is over. Companies will then be able to implement a combined strategy of the old get-on-a-plane approach with the new figure-it-out-remotely approach, greatly expanding who can participate in the work and increasing a team’s ability to make progress when not meeting in person.