MIT Sloan Review has an interesting article about corporate functions (Are CEOs Getting the Best From Corporate Functions?). Many of the larger organizations I worked with have a central R&D organization that focuses on longer term, disruptive or innovative research. Some of the lessons in the article are quite useful to these organizations. Overall it appears that most corporate functions feel that they are not tightly coupled in to the business and their performance is rarely evaluated for their true contributions:
In our survey, fewer than one in 10 function heads felt they had received sufficient guidance on how their function should contribute to the company’s overall strategy. Instead, they were expected to develop their own ideas and functional strategies.
The root cause seems to be poor strategic alignment and inadequate guidance from the executive team. The result is that the corporate functions become self serving and are not incentivized to provide practical support to business divisions:
Without sufficient guidance, corporate functions can become — often unintentionally — self-serving. Instead of developing policies and processes to give divisions the practical support they want and need, corporate functions measure themselves against industrywide best practices or implement initiatives that increase their influence or simplify their own work. The result is often a lack of cooperation from operating managers.
Here is my interpretation of the four suggestions from the article to address this situation:
1. Define key performance measures beyond division (P&L) goals: Develop a strategy for how the corporation can function better. Express the strategy in three to seven sources of corporate value creation. Ask each corporate functions to develop a plan on how they will contribute to the said value creation. In case of corporate R&D, this can be as simple as number of technologies or innovations transitioned into product development. We have discussed many such metrics for R&D in the past. We can even develop similar approaches for functions such as training:
A Danish company recently defined three main sources of added value at the corporate level: helping businesses make better capital investment decisions, ensuring that businesses drive down costs even in good years and building a pool of executive talent superior to its competitors’. All corporate functions were then asked to assess their activities against these objectives. Significant changes resulted.
2. Monitor and guide corporate function performance to meet the defined measures: The article suggests at least annual reviews to ensure that functions are progressing along the defined strategy. As we have discussed in the past, large reviews and meetings tend to waste a lot of time, so these reviews need to be focused:
Most companies occasionally conduct a major review of the size and value of the corporate headquarters. However these large-scale projects can engender a defensive response that gets in the way of the objective, and any staff reductions that result often disappear again in the following years. Annual reviews allow the CEO and the heads of divisions to nudge corporate functions regularly toward better performance.
3. Develop a comprehensive approach to corporate improvement initiatives: Many disjointed initiatives from different functions may reduce the effectiveness of initiatives AND reduce morale in corporate functions. We have discussed that organizations need to build a sense of urgency before taking on change initiatives. This article suggests that the corporations develop a central matrix of all ongoing initiatives and coordinate their impact:
This helps different functions take an integrated approach and helps anticipate potential problems. For example, the CEO can see whether an initiative is likely to place unreasonable demands on an individual business unit, given the unit’s commercial pressures. The head of IT can assess whether IT resources are sufficient to support all initiatives.
4. Break out shared services from corporate functions: Pretty self explanatory. Services should be managed differently from functions.
The result is often an order of magnitude change in performance: better service at lower cost in the shared-services division, as well as clearer policies and controls that focus on adding value within the remaining corporate functions. In the early 1990s, Shell was one of the first companies to create a separate services division, transforming its sprawling corporate functions into a headquarters team of 100 and a professional services division of some thousands. More recently, the Dutch specialty chemicals company DSM completed a major project to separate all of its corporate services into a shared-services division.