Michael Wilson posted this comment on my “Quest for Synergy” blog post:
This is not a black and white issue (i.e., there are functions that can be centralized to save money, payroll comes to mind), but in my experience customers are better served by companies when the operating unit owns all aspects of the customer experience.
My belief is this: if centralizing a function into “corporate” (where “corporate” means an entity that looks across several business units) can save money, then outsourcing should be seriously considered by the Business Unit.
The willingness of of a Business Unit to centralize, by nature, means that the function is non-strategic to the Business Unit. Why have “corporate” do these non-strategic functions? Without doubt, corporate does not have a true competency in these areas. Equally without doubt, firms exist whose sole function is to be highly competent in a particular area. ADP Total Source is an expert in Human Resources. DataVail handles database administration. Custom Call focuses on billing. I could cite many more examples.
If you believe efficiencies can be gained by centralizing, pick a firm that specializes in the functional area. Let them do the service for you. Manage them aggressively so that the maximum benefits are attained. Most importantly, keep corporate out of it.
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Brilliant! A simple framework for decision making.
Is your belief then that each business unit should be capitalized independently of one another? For example, a typical balance sheet for a network company and a managed services company would/could be very different. Yet there are pricing and flexibility benefits to doing larger financings at a holding company level if an entity owns both types of businesses. Should Level 3 capitalize its SBUs differently with debt facilities at each SBU like Time Warner Corp. does?
Kevin, you raise an excellent point. My answer isn’t simple. I will address the question in through a 2 or 3 blog posts, probably next week.
Thanks for reading the blog and for posting the commment.
Dan, the examples you site are all support…billing, HR, payroll. However outsourcing a service that can create a new revenue stream is also a wise decision providing it:
• can be private labeled
• is an industry leader in product functionality, service delivery
• meets margin requirements
TD
Tim,
I agree. I did not mean to imply this is the ONLY reason to outsource….only that a red flag taht something should be outsourced is a willingness to let corporate handle.
Excellent comments.
I’ve experienced first-hand the destructiveness of centralized support functions. Misaligned goals, fighting for limited internal resources, unresponsive centralized functions, and all of the cost allocations that went with it. It created an extremely inwardly focused culture.
Michael,
Thanksfor the comments. I agree. “Centralized” functions take on a life of their own. Have you ever heard a company describe their centralized function as “sub-par”? Most companies conclude they are good at these functions–and who is to say otherwise, as their is no competitve reality to act as a true measure.
If a Business Unit wants a service, they should choose who they want it from and they should pay for it. Corporate should only offer the service if they are able to provide this service to 3rd parties and prove they are highly competitive in non-affiliated situations.
Thanks again, and I am enjoying your blog posts on wwww.managedvideoblog.com.