10 icaew.com/fmfac

ORGANISATIONAL STRUCTURE

LOCAL VS GLOBAL:STRIKING THE RIGHTBALANCE

11FINANCE & MANAGEMENT June 2011

Cost-saving concerns and the rapid pace of technological development meanorganisations increasingly see a more centralised corporate structure as bothnecessary and achievable. But there can be a trade-off in terms of local serviceand customer satisfaction. Mark Goodridge and Gary Ashton discuss how tostrike the right balance.

Gary Ashton is a partner at OE CAM LLP.gary.ashton@oecam.com

FEATURES

The traditional role of country general managers(GMs) of international businesses was to ensure thatthe company adapted successfully to local conditions.However, with a drive for cost efficiencies, and thegrowing technological capability to standardiseactivities internationally, the increasing push towardsglobalisation has meant that the role of the countryGM is being hollowed out. In other words, their role isbeing weakened with them having authority overfewer and fewer business levers. We see many battlesraging between the global centre, regional centresand local companies as they attempt to dominate oneanother in order to meet their own performancetargets. This was the case for a telecoms firm, whichhad grown through a series of geographically spreadacquisitions. At the point of acquisition each companywas a stand-alone entity with the supply chain withinits direct control. The country GMs continued to befully accountable for business performance, reportingto regional CEOs and thus through to the group CEO.The business model was simple, but it struggled togenerate the efficiencies, cost-savings and assumedbenefits expected at acquisition.

Like this firm, it is common for large companies tocollect widely dispersed operations through organicgrowth and acquisition, but then fail to address theissue of how to organise and manage them. Theproblem? Too often targets, organisations andaccountabilities are not aligned. The challenge isgetting the balance right between local autonomy andglobal scale. The issues usually revolve aroundstructure and people. How do we make this structurework? How do we get the right people for theincreasingly complex role of the country GM?

The consequence of this challenge has been a swingaway from local autonomy and towards global power,with variations in between, as described in Figure 1(following page). But as companies shift from the local

towards the global, the journey is not necessarily asmooth one, and, in some cases, they experience aswing back and forth between centralisation and localautonomy. This is often caused by the centristenthusiasm – and its apparent clarity and simplicity onpaper – being undermined by poorer customerexperience. For it becomes increasingly difficult forcentralised functions to manage the trade-offs necessaryat a local level to provide the end-to-end customerservice needed to ensure customer loyalty and retention.(See box, overleaf, ‘Case study – A step too far’.)

It took the telecoms firm in question approximatelyfour years to get its balance right and finally benefitfrom synergies achieved through centralising variousfunctions. To get there, they went through threephases, as outlined below.

Phase 1 – CollaborationIn the initial phase the idea is that synergy capture willbe achieved by encouraging the key players (mainlycountry GMs) to co-operate within the formalcentral/global organisational boundaries. By creating aseries of cross-business synergy committees, allcountry leaders together explored areas where therewas synergy potential. Much talking was done, ideaswere formed, but little action followed. It was hard forlocal country GMs to introduce recommendations,which not only (they felt) diluted their control, butalso weakened their influence on a business for whichthey ultimately carried the can.

Phase 2 – Integration and hard-wiringIn this phase the synergy committees gave way tohard-wired structures where different aspects of thevalue chain were increasingly controlled by globalfunctions. The first point of global integration was thebrand. Each company was required to share acommon name, logo, design and set of brand values.This had the effect of removing one of the elementsfrom the country GM’s portfolio. This was the start ofthe global matrix, with global (centralised) defining ofthe brand, and local companies executing the brand.

The next step was products and services. These alsobecame defined globally, as costs were too high foreach country to develop its own (and which in anycase would only serve to dilute the brand). Suppliersof elements of those products and services were alsocontracted globally, which meant another pillar of thelocal company was removed. This obviously createdtension, with the trade-off being between loss ofspeed/adaptation to local markets versus the benefit of‘develop only once’.

Mark Goodridge is chairman of OE CAMLLP.mark.goodridge@oecam.com

12 icaew.com/fmfac

Phase 3 – Striking a global versus local balanceIn general, over time function after function has becomeincreasingly influenced by global executives working onbehalf of the world rather than a local market. The roleof the country GM has therefore been hollowed out,leaving either a country sales/marketing manager or, inextremis, a figurehead and facilities manager where allthe key business decisions have been made.

Of course, as with this particular business, countryGMs can and do rebel against some of the moreextreme globalisation of the organisation, as vanilla(one size fits all) solutions make little sense in somelocations. But having gone through the three phases,the telecoms organisation now has a much healthierdynamic between global, regional and countrybusinesses as they develop a stronger mutualunderstanding, and a better set of relationships onwhich to broker the shifting sands of globalisation.

The spectrum of optionsThe question for many international companies is towhat extent do they centralise? That depends on anumber of factors and where you are on the spectrum inFigure 1 (opposite). The more to the right you are(closer to option 5), the more your functions arecentralised. And this depends on a series of assumptions:• that there is a global demand for the group of

products or services and its nature is similar;

• that there is little duplication of those products andservices when there is more than one business stream;

• that the routes to market for different productstreams are distinct and can support their ownseparate sales channels;

• that there are few local modifications/applicationscustomisations required; and

• that there are supply chain efficiencies in supplyingproducts/services in a common and integrated way.

Of course, not all global companies fulfil all of theseconditions, which is why we see a spectrum of globalbusiness models where different parts of the business’svalue chain may be global and others quite local. It isthe balance of these that determines the option yougo for. As Figure 1 (opposite) illustrates, option 5 is thetruly global business that fulfills all the conditions setout above. Option 1 is the collection of separateindependent companies reporting into a corporatecentre that is largely operating a holding company. Itis the options in-between that preoccupy mostcompanies, and usually the point at which they seekexternal help.

The impact on financeThe shift from local autonomy, through to the matrixand towards full globalisation also has an impact onthe role finance plays and how it is configured. Whenthe business is managed at a local country level, therole of finance is pretty straightforward, with the localFD reporting and analysing performance at anoperating company level and comparing itself to itsfellow operating companies around the business.

However, as the business moves to the matrixmodel, things start to become more complicated. Thelevel of reporting increases, to be both geographicand global. And the need for understanding how thebusiness operates and how the global interfaces withthe geographic becomes more important. So financestarts to assume a role of providing greater insight intowhere the pressure points lie and provide advice onthe impact of trade-offs between global and localobjectives. This increases the importance for finance tonot only have the technical capability to understandhow the business operates, but also to have strongbehavioural capability in interpersonal impact andinfluence, so that the business leaders understand andtake on board finance’s insights.

As the business moves towards a fully globaloperation, the local FD role narrows, as more financesynergies are realised through centralised global back-office transactional activities. This allows the localfinance business partners to focus on having a moreforward-looking decision support role.

In its enthusiasm for striving for efficiencies, one industrialmanufacturing business went a step too far along the global journeyand so had to back-track to retrieve declining sales.

Initially the business was a separate set of country operatingcompanies, functioning independently. But it then realised somesynergies by clustering together countries into regions, each led by aregional GM, so reducing the country senior manager costs andcreating a more consistent way of working.

Its next step, however, went too far too quickly: it proceeded tocentralise its marketing, sales and logistics functions, relinquishing theneed for regional GMs, and having the regional marketing, sales andlogistics all report to their respective global functional heads.

In doing so, it drastically reduced its ability at a regional level to keepsales and logistics aligned locally to ensure customer services matchedthe sales promise.

The consequence was, despite improving its functional excellence,there was a significant deterioration in customer satisfaction thatquickly led to customers switching supplier.

Once the situation was understood, the company decided to take astep back and create a matrixed business by building back in theregional GM role to manage those trade-offs.

Box 1 CASE STUDY – A STEP TOO FAR

‘As companies shift from local to global, thejourney is not necessarily a smooth one,and some swing back and forth betweencentralisation and local autonomy’

13FINANCE & MANAGEMENT June 2011

2. What about the interdependence of these elementsand the extent to which they are subject to localtrade-off decisions?

ConclusionThere are no easy answers, but experience of workingwith many global companies suggests there is a solutionout there for every organisation. Ideally, cost savings andeconomies of scale will be achieved by centralising theright functions for your business. And there is a risk ofpotentially losing some adaptability to the local market.Ultimately, it’s about getting that trade-off and balanceright, and finding the most appropriate solution for yourorganisation. By explicitly working these issues through,you are more likely to strike the right balance for yourbusiness between local autonomy and global scale.

FEATURES

Common success factorsWhat is common across all the different organisationaloptions is a set of critical success factors. Theseinclude:• accurately locating accountability; • accurately locating the best place for decisions to be

made and how; • detailed consideration of the links and trade-offs;

and • clarity of role understanding – especially in the

linkages and interdependencies and hence howtrade-off decisions are going to be made.

It is through focusing on meeting these criteria thatyou can help to speed up your integration process andminimise the turf wars so evident in global companiesbetween functions, geographies and business units.

Of course, the resulting role of the country GM willvary considerably depending on the option you go for.Local business activities may be managed from global,regional or country levels, and the country GM has tobalance these different spheres of influence andsomehow weld it all into a coherent set of countrybased activities to meet local demands and localbusiness conditions.

The success of the new global business model,however, will be determined by two key questions:1. Which activities will continue to exist within the

geographical entities?

Figure 1 GLOBAL ORGANISATION OPTIONS

Group chiefexecutive officer(CEO) withreporting regions.Minimal centralfunctions.

Regional executivesprofit and loss(P&L) accountable.

Single teamdelivering full rangeof products/services.

P&L accountable.

1. Geographic

Global

Regional

Country

Countrymanager

2. Country/regiondominates

3. Business stream/geographical matrix

4. Global businessstream dominates

5. Global businessstream

Group CEO withreporting regions.Business streamproducts/services.Global functions.

Regional executives.P&L accountable.

Single teamdelivering business-stream-definedrange ofproducts/services.

P&L accountable.Working withbusiness streamexecutives.

Business streamexecutives P&Laccountable.Geographical headsP&L accountable.Global functions.

Regional reportingof business streams. Some regionalfunctions (eg, finance).

Single countryteam.Business streamleaders in countryteam.

Accountable fordelivery of countrystrategy.Works with businessstream executivesto achieve theirtargets in country.

Business streamexecutives P&Laccountable.Geographicalheads.Global functions.

Business streamexecutivesdrive business.Regional support todeliver businessstream strategies.

Business streamexecutives drivebusiness andprocure localservices.

Accountable fordelivery of localactivities (eg, salesand customerservice).

Business streamexecutives P&Laccountable.Global functionalheads.

Business streamexecutives P&Laccountable.Some regionalfunctions (eg, finance).

Multiple localbusiness streamteams as required.

Figurehead,facilities and co-ordinates.

FINANCE & MANAGEMENT FACULTYThis article was first published in Finance &Management, the monthly magazine of ICAEW’sFinance & Management Faculty. The faculty helpsmembers in business to perform at their best. Formore information on the benefits of membershipsee icaew.com/fmjoin