Günter Müller-Stewens

At too many large companies, corporate functions like HR and IT don't get enough strategic direction from the CEO. Four basic steps can help. Few CEOs give enough direction to the heads of their corporate-level functions. That's the conclusion of a survey we conducted of more than 50 function heads at some of Europe's leading companies. We are referring here to larger companies in which corporate-level functions such as finance, human resources, information technology, strategy, purchasing and legal provide policies, controls and services to decentralized operating divisions. Fortunately, some CEOs have found ways to address the problem. In our survey, fewer than one in 10 function heads felt they had received sufficient guidance on how their function should contribute to the company's overall strategy. Instead, they were expected to develop their own ideas and functional strategies.

The CEO's dilemma-were the gains of centralization worth the pain it could cause?-is a perennial one. Business leaders dating back at least to Alfred Sloan, who laid out GM's influential philosophy of decentralization in a series of memos during the 1920s, have recognized that badly judged centralization can stifle initiative, constrain the ability to tailor products and services locally, and burden business divisions with high costs and poor service.1 Insufficient centralization can deny business units the economies of scale or coordinated strategies needed to win global customers or outperform rivals. Timeless as the tug-of-war between centralization and decentralization is, it remains a dilemma for most companies.

Corporate functions are the headquarters functions in a divisionalised company. These functions, such as corporate Finance, HR, IT, Marketing, and Strategy, have been increasing in their numbers, size and influence. While they can add significant value as part of the ‘corporate parent', they also often subtract value, interfering in unhelpful ways and imposing bureaucracy and delays. Our research, with 30 European companies, exposed four typical value traps that are the root causes of subtracted value. These value traps appear to occur because of the different challenges that corporate functions face at different stages in their life cycle.