Centralizing versus decentralizing IT

“Contrariwise, if it was so, it might be; and if it were so, it would be; but as it isn’t, it ain’t. That’s logic.”

– Through the Looking Glass by Lewis Carroll

IT leaders, IT suppliers, and IT-related services providers may well begin to sound like Tweedledee in their confusion about the flavor of the day in IT organizational structure. The IT centralization versus decentralization debate is not a simple one. At least three distinct elements are associated with the debate: control, physical location, and function. For the discussion to be reasonable and produce a satisfactory outcome, it is absolutely essential that everyone understand which of these three elements is in play and which are not. Otherwise, there is every possibility for misunderstanding, and, even worse, a decision could be made with which no one identifies.

The business environment in which an organization operates dictates the way in which it is expected to respond. This, in turn, has profound implications for the locus of decision making and, generally, for the way in which the organization is structured. It is no longer appropriate to ignore the demands of external forces when considering the structure of an IT organization. As a critical element of a business (and, in some instances, as the business), the IT organization must demonstrate an ability to stay in tune with the ebbs and flows of the business environment.

Where product innovation is the major characteristic of the market (making for an unstable business environment), flexible, rapid decision making is essential. On the other hand, management decision making tends to be more structured in companies competing for markets in which there is little product innovation, and the primary areas of competition are price and service (making for a stable business environment).

Department goals, cycle times, and communication frequency and patterns as well as information needs differ in organizations operating in relatively stable business environments. However, the differences are likely to be greater between similar departments in organizations operating in unstable business environments. The basic tasks performed by functional departments in organizations producing standard, unchanging products are better defined and more structured than the tasks performed by similar departments in organizations faced with constant product innovation. These factors might combine to support the argument that a centralized IT department would best serve an organization operating in a relatively stable business environment.

Organizations that are forced to compete through product innovation generally have less rigid bureaucracies with fewer managerial levels than organizations that produce standard, unchanging products. Furthermore, organizations facing constant product innovation generally find there to be greater differences in the goals, decision-making time frames, and interpersonal relationships among their functional departments (for example, finance, marketing, research and development [R&D], and manufacturing) than are found in organizations for which product innovation is relatively unimportant. As a result, a highly centralized IT department may not be able to satisfy adequately the varied information needs of user departments in organizations characterized by rapid product change.

Under these circumstances, a “federation” type of IT structure might be the ideal solution. Departments can continue to manage and operate their own IT systems. At the same time, these systems are integrated through a corporate IT department that establishes overall standards, documentation, and operating procedures and design parameters. The corporate IT department also has responsibility for ensuring an adequate interdepartmental flow of information.

Obviously, between the extremes of a loosely coordinated federation-type IT system and a single, centralized corporate service department, there are numerous organizational variations that may better satisfy an organization’s particular needs. In defining the organizational relationships between the IT department and the lines of business, it is important to consider the constraints and opportunities driven by the business environment.

Because circumstances can change quite dramatically in fairly short time frames, it is important to assess the effectiveness and appropriateness of the selected approach to IT management on a regular basis, making changes as needed. Initial evaluations after six months and one year of operation are probably appropriate, with subsequent assessments every two years or during discussions associated with significant shifts in either corporate or IT direction.

IT is everywhere; consequently, the variety of uses is staggering – everything from electronically arranging meetings, recording their dates, times, and locations, and sending email messages to analyzing billions of bytes of research data or customer information and managing an organization’s accounts receivable and payable. IT is pervasive, diverse, and universally “owned”; no longer a mystery, IT’s untapped potential is exploited through the creativity and imagination of its users.

As the harshness of current economic conditions becomes ever more unyielding, expense reduction is essential for every organization and, in some instances, is the key to survival. In this environment, it is easy to conclude that centralization is the answer because it promises to eliminate duplicate positions, redundant activities, non-standard procedures, and inefficient practices. Proponents of decentralization, of course, suggest that this would be entirely the wrong approach, that effectiveness absolutely requires that IT be in close proximity to the business functions it supports.

It is important to ensure that IT enhances both the individual and collective abilities of the organization and its organizational parts to compete successfully. The value is in the information and processes that IT supports, and the governance model and related organizational structure must respond to the role that IT plays in increasing its accessibility and enhancing its capability.

Organizations that develop good, solid partnerships with IT suppliers – sharing information and inviting them to the table when strategy is being discussed – will reap the many benefits of a two-way, long-term commitment. A supplier that is truly a partner will empathize but, more important, will know your business well enough to participate in a meaningful way in developing a long-term, win-win solution. Your suppliers should be prepared to assist in estimating lifetime cost of ownership, comparing centralized and decentralized options, and to help with the preparation of complex business cases. Your IT suppliers can also be very helpful in developing alternative funding strategies, particularly if you are considering procurement of new hardware or software.

One thing is for sure: If IT is viewed and treated as an entity unto itself, and an insular approach to learning, relationships, and dependencies is permitted, it will be difficult – if not impossible – to develop the bridges that are essential to IT/business alignment. Is there a “right” organizational design for the IT function? The arguments for and against centralization and for and against decentralization all appear to be sound, but none are certain, and perhaps all are inappropriate. Don’t cut the heart out of your future by limiting your perspective.