The purpose of a corporate centre is to ensure that resources are invested to maximise profitable growth and long-term value.
In spite of their clear purpose and value, corporate centres often get a vote of no-confidence. In these VUCA (volatile, uncertain, complex and ambiguous) times, it is not easy to keep abreast with all the changes impacting the present and future of the business. The primary goal of a corporate centre is governance and protecting shareholder value. Today, though India Inc is uniquely positioned with its conglomerate structure, it has few umbrella brands with diversified businesses under them. One can see a similar situation in Korea and to some extent in China and Japan. However, there is a need to understand the logic behind corporate centres.
One Size Doesn't Fit All
Corporates, especially conglomerates, are forced to deconstruct due to their size or diversification, investor engagement as well as strategy and governance issues. But it is rare to find clearly-defined roles at headquarters and business units. Moreover, corporate centres often over-extend themselves; this leads to inefficiencies, wastage of resources and poor decision-making at business units. A quick look at the governance models should help simplify the problem at hand.
General Governance Models
A general governance model defines how the business should be organised and run so that it can achieve its strategic intent. The idea is to build and use shared capabilities to achieve synergies and economies of scale and support "one company way". This ensures a scalable model and balances cost efficiency with effectiveness.
The interplay between corporate core, business units and enterprise/enabling functions is determined by the governance model. There are, in general, four models, each with its own rationale.
For a financial holding company, the primary aim is to establish and enforce a disciplined management model to protect shareholder interests. A set of mechanisms is used to manage the relationship among stakeholders and determine the strategic direction and performance.
The parent company should not only add value to a business unit but also add more value than any other potential parent.
While the corporate core sets broad policies and financial & operational goals, the business units are accountable for achieving results, thereby committing to multi-year strategy plans. The support functions provide specific services, ensuring economies of scale.
In a strategic management company, adding value by leveraging synergies between units is the focus area. The corporate core sets key financial and operational metrics while ensuring strategic coherence across entities. The business units are accountable for results. However, they are constantly challenged by the corporate core within the annual planning cycle.
Providing guidance to business units by sharing expertise is the driving force as far as an active management company is concerned. Here, the corporate core sets out to guide and actively support sector strategic plans and budgets while undertaking joint projects with business units. The support function delivers on expertise services with the corporate core, while also carrying out bundling and standardisation of transactional services.
By making key decisions for business units, an operational involvement company finds value by creating corporate expertise and control with an aim to achieve cost/operational efficiency. Apart from being responsible for financial and operating performance, the corporate core dictates and manages sector strategic plans and budgets. While business operations are closely aligned across business units, the support function has an explicitly stated policy where business operations are more specific in nature.
Shapes and Sizes of Corporate Centres
Depending on how the corporation is structured, and the strategic imperatives of corporate centres, there are different ways a corporate core adds value. In the paper, 'From Corporate Strategy to Parenting Advantage', Marcus Alexander, Michael Goold and Andrew Campbell argue that the parent should not only add value to a business unit but also add more value than any other potential parent - they call this 'Parenting Advantage'.
Portfolio coordinators create value by altering the composition of the portfolio by separating the business from operational entities, creating new businesses or buying/divesting businesses. Such decentralisation gives centre managers the freedom to make their own decisions, as long as their profit-planning ratios and bottom lines are satisfactory. The parent interferes only when it sees ways to enhance performance.
On the other hand, many business units in several conglomerates have reached a scale where they can compete as standalone entities with the balance sheet support of sibling business units. A strategic leader will have an influence to enhance the standalone performance of both national and international businesses. Value creation is done by making strategic decisions such as appointment of managers and approval of major capital expenditures.
Through linkage influence, an active advisor links systems, data and best practices across businesses and geographies for economies of scale. The corporate parent seeks to create value by fostering coordination and synergies between its businesses.
Another approach is to establish cost-effective central services and functions. The corporate value in the key manager model is created through the provision of administrative and managerial services to the businesses.
Which type of influence is best for value creation? The answer is complex and is determined by a number of factors depending upon reconciliation of the multiple paradoxes of parenting advantage - control versus empowerment, responsiveness versus synergy, and portfolio versus core competence.
Key Challenges
The absence of a standard model of corporate centre prevents a consistent approach to managing the various businesses. There is also a need to establish and document a common set of practices and standards. However, there is a distinct lack of real impact at the unit of implementation, that is, the workplace. Corporate centres need to assist businesses in implementing these work practices.
Therefore, the critical issue when it comes to corporate centres isn't whether the work they're doing is important to the business. It is how to ensure that their effort isn't duplicating and taking decision-making away from the independent businesses. Thus, the real challenge is to engage with various businesses in a manner that aligns capabilities, strategy, culture and people.
Defining the Corporate Centre
The purpose of a corporate centre is to ensure that resources are invested to maximise profitable growth and long-term value. Its missions relate to strategic leadership (corporate and operational strategy), control (financial and operating unit strategic measures), capital (allocations and investments), identity (corporate brand), and capabilities (develop personnel). These define the general purpose. In order to fulfil these missions, the focus and required capabilities are, again, dependent on the role of the corporate core opted from the four core models, thereby increasing the level of hands-on management.
The Litmus Test
In reality, corporate centres are unable to find a symbiotic way to create value for the portfolio of businesses under it. The quest for finding the right balance throws up some vital questions for corporates:
- Do business units see value in centres of excellence or see them as a traditional, mandatory central function in new guise?
- Are shared service centres creating more value than the external service providers?
- Are economies of scale being annulled by additional interface of staff cost at corporate centres and reduced flexibility?
Role of HR
The corporate HR has its task cut out. Corporate centres offer good prospects to the company in terms of:
- Building "one company way" of managing people across businesses, geographies as an essential element that can only be addressed at a corporate level.
- The issue of "creating next-gen leaders" has always been inadequately addressed. The onus is on the corporate to create a leadership talent pipeline that will future-proof the enterprise.
- Creating an "alignment" of goals and purposes with the top team. The individual and collective motivation and energy of executives across business units have to be a corporate responsibility.
- Deploy "shared capabilities" to build synergies and economies of scale and support the common vision of HR. Not every business and market can hire the best; hence, the corporate centre can create specialised skills that effectively partner with the business.
The predominant purpose of a corporate centre is to create responsible stewardship to create long-term value for employees and shareholders. A detailed, meticulous, and participative "operational governance" approach is a prerequisite to efficient and harmonious collaboration between the corporate centre and the rest of the organisation. The corporate centre needs to ensure that the whole is worth more than the sum of its parts.
(The writer is CEO, Aon Hewitt India for BT)
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