Delegating responsibility by decentralizing carries with it both advantages and disadvantages.

Advantages

• Delegation of Decision-Making. Decisions can be made at the point where problems arise. It is often difficult for top managers to make appropriate decisions on a timely basis when they are not intimately involved with the problem they are trying to solve. Top management can be more removed from day-to-day decision-making at lower levels of the company and can manage by exception. When top management is not involved with routine problem solving, it can devote more time to long-range planning and to the company’s most significant problem areas.
• Economies of scale. Decentralized organizations can be much larger than centralized management and can therefore take advantage of the economies of scale. Economies of scale are cost advantages that occur as costs are spread over a larger number of goods. For instance, if a Human Resources (HR) department has the capacity to serve 600 to 1,000 employees, and the company buys another company that brings total staff to 900, the HR function of the parent company can take over for both, reducing fixed costs and increasing profits.
• Specialization. Different skill sets are required to run a Human Resources Department and a Production Department. Small business owners often have to handle personnel issues and production issues. Larger, decentralized organizations can have entire departments dedicated to specialized issues, such as HR, production, accounting, sales, capital planning, budgeting, and so on.
• Career Paths. Managing segments trains managers for high-level positions in the company. The added authority and responsibility also represent job enlargement and often increase job satisfaction and motivation.

Disadvantages:

• Decreased ability to keep goals aligned. Upper management has to rely on divisional managers to pursue the goals and objectives set by upper management.
• Slower Decision-Making. Depending on how the organization is run, sometimes lower-level decision-makers who have the most current and accurate information have to wait for that information to be processed up the chain of command, where a decision is made that may not be timely or even effective.
• Decreased individual responsibility and motivation. Decentralized organizations can leave employees feeling like a cog in a giant machine, and although there may be clear career paths for some, those paths can be limited and seem out of reach for many employees.
• Increased costs due to duplication of effort. This is the opposite of economies of scale. Often, divisions desire autonomy, and so each division may have its own HR department, for example, defeating the cost-savings benefit of centralized internal service departments.

It is important for upper management to understand all of the ramifications of managing decentralized operations. They must know how to monitor and control each segment and make sure information flows from the detailed sales and production reports of each operation, through the information system, to the highest levels as quickly and as accurately as possible, in some kind of summary form that makes sense for decision-making. That is the ultimate job of the managerial accountant.

There are many ways to organize a company, and decentralization is not limited to just large companies. Even small, privately-held companies with multiple employees can have departments and divisions that will need some kind of monitoring and accountability measures. Here is a brief overview of some of the most common organizational structures:

You can view the transcript for “Organizational Structure” here (opens in new window).

The kinds of information that accountants provide to upper management for decision-making can be separated into two categories: leading indicators and lagging indicators.

However, before you move on to identifying leading and lagging indicators, check your understanding of managing decentralized operations.