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Simulated Decentralization

The main rule is to look upon simulated decentralization as a last resort only.

Whenever a unit can be set up as a business, no design principle can match federal decentralization. We have learned, however, that a great many large companies cannot be divided into genuine businesses. Yet they have clearly outgrown the limits of size and complexity of the functional or of the team structure. These are the companies that are increasingly turning to “simulated decentralization” as the answer to their organization problem. Simulated decentralization forms structural units that are not businesses but which are still set up as if they were businesses, with maximum possible autonomy, with their own management, and with at least a “simulation” of profit-and-loss responsibility. They buy from and sell to each other using “transfer prices” determined internally rather than by an outside market. Or their “profits” are arrived at by internal allocation of costs to which then, often, a “standard fee,” such as 20 percent of costs, is added.

ACTION POINT: Produce internal competition by using “micro” profit-centers when feasible. Attribute revenue to each unit and match revenue with its cost.

Management: Tasks, Responsibilities, Practices

* Source: The Daily Drucker by Peter F. Drucker

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