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Federal Decentralization: Requirements

As a minimum the unit must contribute a profit to the company rather than merely contribute to the profit of the company.

Federal decentralization has stringent requirements. Federal decentralization is applicable only where a company can truly be organized into a number of genuine “business.” This is its basic limitation. As a minimum the unit must contribute a profit to the company. And it must be a genuine profit determined by the objective judgment of the marketplace.

Federal decentralization will work only if the top-management job is clearly defined and thought through. Federalization, if properly applied, makes top management capable of doing its own job precisely because it does not have to worry about operations, but can concentrate on direction, strategy, objectives, and key decisions for the future. The federal principle demands great responsibility from the operating units, the autonomous businesses. They are given the maximum of autonomy; and this requires that they assume the maximum of responsibility. Federal decentralization requires centralized controls and common measurements. Both the managers of the autonomous businesses and top management must know what is expected of each business, what is meant by “performance,” and what developments are important. To be able to give autonomy one must have confidence. And this requires controls that make opinions unnecessary. A federal unit of a company is autonomous, but it is not independent and should not be. Its autonomy is a means toward better performance for the entire company.

ACTION POINT: Ensure that executives of your autonomous units have maximum autonomy and maximum responsibility. Implement this by establishing a system of controls that makes performance or the lack of performance very evident.

Management: Tasks, Responsibilities, Practices

* Source: The Daily Drucker by Peter F. Drucker

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