From a cost centre to value creation: how should the corporate centre add value to the business units and create more value?

At present, companies appear to be caught up in an almost permanent change process to ensure continuity. As a result, more and more interest is being shown in the roles performed by the head offices (Corporate centres) of large companies; the Business Units want to see what the specific added value is that the head office provides. Studies show that there are great differences in the added value created by those head offices, and wide variations in its size. Due to the crisis and to create more transparency in the company, business units demand more and more information concerning the added value of the activities of the headquarter.

A major role in creating added value through synergy is set aside for the Corporate Centre (also known as the Headquarters), which consists of the Management Board and the central advisory and support staff. The head office acts as an intermediary, by influencing decisions and strategies originating in the business, and it stands between the business and the capital provider.

There are two kinds of synergy:

  • Horizontal synergy is the added value that is created between the separate units of the group. Initiation and allocation.
  • Vertical synergy is the added value that is created by actions taken within the top level of the group and the individual units. Integration and coordination.

The basic principle should be that the business performs better under the wings of a head office than it would do if it was an independent entity, and that value created by the head office more than offsets the costs it generates.

Vertical synergy must lead to both corporate and portfolio leadership, and also means that a head office should pay attention to the decision-making in the business units and provide support for it. The main component of added value provided by the head office is the corporate strategy that has to be determined by the Corporate Centre (the policymaking role). Another main aspect of the vertical synergy is the parenting style provided from head office (the influencing role).

At some companies, all the managers questioned in a research (data available) were critical of the head office’s performance. The head office is seen rather as an unnecessary cost item that is too remote from the business, and furthermore one that keeps interfering in important decisions. Financial control is at the top of its agenda. Business Units are not brought into the policymaking process nearly enough.

Bottom-up initiatives by managers generally get stuck somewhere in the pyramid on the way to the top level. It often appears that the focus of interest on the market, and on the stock exchange in particular, results in less attention being paid to the employees within the organization. Even before a newly acquired organization has been properly bedded in, new takeovers are being announced or business units are being sold off. There appears to be a growing need for more attention to be paid to the Business Units and subsidiaries. Getting the job done together, showing an interest, involving the business unit in choices in certain cases or using its input to refine the head office’s own plans all appear to be recipes to increase the value creation for the enterprise as a whole. This is a challenging task for the Corporate Centre management.

The challenge to the managers of the Corporate Centre and its management consultants is to pay more attention to the dilemmas facing the head office. After all, there is still far too much value being destroyed by Corporate Centres.

Luuk Verburgh MMC CMC

April 2010

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