Wednesday, October 10, 2007

Corporate Planners, Plan Thyself (part 1)

There’s an old joke that circulates around the business world. It goes like this: What are the three biggest lies in the world? Answer:

1) I’ll respect you in the morning.
2) The check is in the mail.
3) I’m from Corporate, and I’m here to help.

I used to work for a company where the divisions hated the corporate office (which would probably describe most large companies). At the time, I was working at the corporate office and needed to fly out to the divisions to help them with their planning.

To try to break down the barriers between corporate and division, the first thing I would do when visiting a division office for the first time was to shake the hands of all of the division executives and say, “I’m from corporate, and I’m here to help.” At first I would get a lot of odd looks, because the division executives did not know where I was coming from when I said that old punch line.

Later, I would tell them that I used to be a division person and that I hated corporate as much as they did—maybe even more, because I had to deal with the corporate executives on a more frequent basis. After that, the barriers were broken and we got along just fine.

There’s a reason why most people at the division level hate corporate. They don’t perceive any value coming out of corporate. The logic at the division usually goes something like this:

1) Corporate really doesn’t understand what is going on out here in the field. As a result, they ask us to do things which make it harder to earn a profit. They don’t help us, they hurt us.

2) Corporate sucks all of the profits out of the division to pay for their lavish lifestyle at the corporate level. They live high on the hog while we slave away out here with insufficient funding.

3) The real profits are made out in the field where the paying customers are. Yet, instead of rewarding us for doing the deals, they pat themselves on the back and keep the big bonuses for themselves. In retailing, the phrase that was often used to describe this was “there are no cash registers at the home office.” If retail profits typically have to come via a cash register, then the people closest to the cash registers should be rewarded highly.

Whether or not you agree with these reasons is immaterial. If the divisions believe it, they will act accordingly. And you have to find ways to deal with that attitude, just as I did in the story above.

Divisions typically resent corporate because they do not perceive adequate value for the cost. This raises a valid question which all corporations should consider…how much value does corporate actually bring to the organization? Are all of the stakeholders getting a good return on the investment in corporate, including shareholders, customers and division employees? If corporate significantly shrank or disappeared, would the divisions be better off or worse?

This is the first in a series of blogs discussing strategic planning for the corporate function. We often talk about doing strategic planning of the business portfolio or of planning for individual divisions or departments. However, we also need to strategically position the corporate headquarters. We need to ask ourselves why the corporate function exists, how it is supposed to add value, and how to optimize that value-adding function.

In today’s blog, we will try to destroy the notion that large corporate operations running a number of divisions is an essential and inevitable way to run a business. On the contrary, large corporate functions are optional and should only be put in place if the value it provides exceeds the cost.

The logic behind this is as follows:

1) A knowledge economy is less dependent on such structure than the old manufacturing-based economy.

2) Technology and globalization make it possible to get work done without such a structure.

3) Many supposed corporate synergies actually turn out to be dis-synergies.

4) Networking can often achieve the same results without the costly infrastructure.

These points are briefly discussed below.

1) A knowledge economy is less dependent on such structure than the old manufacturing-based economy. In the old manufacturing economy, success depended on amassing a large number of resources. One needed large, expensive factories, large pools of unskilled labor, and access to lots of cash. Big companies with big corporate infrastructures were typically needed to pull this off. The corporate office used its clout to get the cash and provided the brains for the unskilled workers.

In a knowledge-based economy, the workers are highly trained experts in their fields, who know more about their expertise than corporate (corporate has less value to offer the typical employee). There is less of a need to amass huge factories and thousands of employees, so there is less of a need for a corporate function to coordinate this.

As we will see below, even if factories and money are needed, they are easier to come by. You can easily outsource manufacturing and there are many new sources of investment money which do no require your being a large publicly-traded corporation like venture capital, hedge funds, financial institutions, and so on.

2) Technology and globalization make it possible to get work done without such a structure. In the old days, one of the key functions of corporate middle management was to be an intermediary between the field and the top leaders. These middle managers would gather the data in the field and get it to corporate. Then, when the top leaders made a decision, their role was to relay the orders back to the field.

Modern technology virtually eliminates this corporate task. Data from the field is downloaded directly to headquarters via satellite or internet in real time. Cell phones, Blackberrys, Video Conferencing, emails and other such communication tools make it easy for top management to get directly in touch with the field on a very rapid basis. As a result, it is easy to flatten the corporate infrastructure and take out many layers of management which used to be necessary for relaying information back and forth.

Through the internet, it is easy to find information and sources for getting work done. Small businesses can outsource just about anything through the internet, such as product design, marketing, and manufacturing. There are even social networking sights so that you can find peers to bounce ideas off of. This allows a few people working in a garage access to the types of skill sets which in the past could only be found within a large corporate bureaucracy. For more on this topic, see the article on Minipreneurs from

3) Many supposed corporate synergies actually turn out to be dis-synergies. In an earlier blog (see “Sometimes It’s Not Nice to Share”) I talked about how many corporate headquarters try to create cost advantage synergies through “shared services.” In other words, instead of developing expertise in certain areas at each division, centralize the function at corporate and share it amongst the divisions. Although this sounds good in theory, that prior blog showed that in many cases the corporate approach destroys value rather than adding value, because it raises total costs, reduces flexibility, increases time to get something done, and generalizes functions which work better when specialized to the division. Hence, the corporate approach may be destroying functional values rather than increasing them.

4) Networking can often achieve the same results without the costly infrastructure. In another blog I wrote recently (see “Howdy Partner”) I pointed out the fact that networking with others can often be more productive than trying to create it all in-house via a corporate infrastructure. The idea was that control is more important than ownership, and as long as your network with others allows you to maintain sufficient control, it can be far more productive than when you try to own everything. Networks allow you to connect with dedicated experts, who can better suit your needs than a generalist visiting from corporate.

In today’s society, a large corporate infrastructure is no longer essential. There are often more effective ways to get many of those resources at a higher value. Therefore, the large corporate center is not a given. It should only exist if it fits into the overall strategy. It’s strategic function and purpose needs to be planned, just as much, if not more than the divisions.

Eddie Lampert’s ESL Investments, the multi-billion dollar fund that has the majority ownership of Seas Holdings, has only about 15 employees. Not a whole lot of corporate infrastructure there, but ESL Investments has made its investors very rich over the years.

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