Cost of Centralization

This post actually takes me back to the roots of this blog, roots that most new readers probably have not seen much of.  I originally started this blog as place to share my lessons learned in starting, running, and growing a small business.  I still do some of that, but not nearly as much as I would like.

My company has about 25 line managers who each run the operations for one recreation area (these are spread over 13 states).  I give these managers nearly complete P&L authority.  I set base labor rates and most fee levels, and we have a very clear management process everyone follows.  However, line managers have the responsibility to do all the hiring for their area, as well as most purchasing.   One issue that comes up a lot for us as we grow is how much we should centralize some of these functions for efficiency, most significantly HR and purchasing.  In general, I have resisted efforts to centralize.  Here is why.

Human Resources

Several of my competitors, even ones smaller than I am, have centralized their hiring functions.  They have one person (or more) at central HQ who does all the hiring for the company's operations.  My managers often come to me and say "wouldn't it be more efficient to do this hiring in one place?" 
I say no.  The reason is one of accountability.  I want my managers fully accountable for their operations, and poor-performance excuse #1 is always "well, we're struggling because you saddled us with some bad employees."  No one uses this excuse in my company.  If you have an employee that sucks, you hired him/her and you have to deal with it. 

What I did instead was centralize the Human Resource support for our managers, making their lives easier without relieving them of accountability.  So I invested in some new web sites that capture potential workers and drive them to an application database that collects 10 resumes a day  (I am results 1,3, 4 &8 on Google for camp host jobs and results 5, 6, & 7 for campground jobs).  Then I built a system where all my managers can access these resumes.  I also centralized the HR record keeping and payroll processing.

Purchasing

Centralized purchasing has been a harder impulse to resist, but I still do so.  We order a lot of the same supplies in our various locations, and with more and more stores, many of the same goods for resale.  But I still have my local managers buy most of that stuff for themselves.

Am I crazy?  Well, I would have thought so when I was in business school.  After all, its fairly easy to demonstrate that vendors will give better rates for larger orders, and surely it's inefficient from a labor standpoint to disperse purchasing and to duplicate efforts.

First and foremost, though, I am still a stickler for accountability.  Much of my thinking was shaped by Chuck Knight at Emerson Electric, who was nearly always willing to trade centralized cost savings for accountability.  I would much rather my managers have no excuses than save a few pennies on toilet paper purchases.

However, there are a few things we can do.  We are starting to build a shared supplier database, where managers can share particularly good supplier deals with their peers.  We also have centralized purchasing of uniforms and forms, but even here we have been burned.  In the past, we assigned this task to a central person, who eventually built up a huge warehouse of crap it has taken us years to clean out.  Though we don't get quite as good of a deal, we now have printing and uniform contracts with negotiated corporate rates based on our combined corporate usage, but where managers place their own orders and shipping is directly to the field (rather to a central location for reshipment).  Net, we saved thousands in labor, shipping, and inventory getting out of the central break-bulk business.

For our resale items, I get a lot of presure from individual store managers to let them do purchasing of so-and-so product for the whole company in order to get quantity discounts.   I have allowed this in a few cases, but it may cause more problems than it is worth.  I immediately started getting complaints from manager A that manager B was buying all the wrong stuff, or whatever.  Soon, the folks doing the central purchasing started demanding that they needed more and better information, and started asking for written inventory reports from various store managers each month.  Eek! 

I think instead that I am going to mostly stick with the approach of negotiating corporate deals, and having local managers continue to do their own ordering using these deals.  I also work hard to make sure managers understand that in most cases the corporate negotiated products are optional, and that they may buy other products if they think those are better for their locations (I can guarantee that visitors in Northern California, Nogales Arizona, and Central Florida want different things).

  • TCO

    Amazing how people at the Firm, don't think of these types of things. You don't have to actually run a small business to consider these types of tradeoffs. But they would always assume that you could have cake and eat it too. Or have cake and "manage away" the tradeoff.

  • h

    The latest Forbes magazine has a profile of Mark Hurd's work at HP and he talks about the exact same stuff. Give your managers accountability and centralize very little

    -h

  • http://www.linesinthesand.net Doug

    I've found that efficiency is confused with effectiveness almost as often as correlation is with causation.

    You are fortunate your company isn't public. I've watched a company that operated much the way you describe with phenomenal results. Then it went public but resisted the lure of efficiency and performance stayed pretty consistent. Then along came SOX, which practically criminalizes decentralization and the effects have been obvious.

  • http://tjic.com TJIC

    Fascinating stuff; please keep up the small-business blogging!

  • http://politics.lel-hosting.com/ Matt

    Actually, the truth is that I'm often amazed, based on your descriptions, that your business is even one business at all, since the natural (to me, anyway) choice, given the nature of your operations, would be to decentralize as much as humanly possible...especially since (as you've explained at length in some of the best practical real-world anti-government blogging I've ever read) each campsite your company operates carries with it a completely different set of bureaucratic and regulatory burdens. I know that I for one would never establish a tax or employment nexus in even a single other state until I was so big I'd all but cornered the market in my home state.,..just not worth the hassle.

    But your philosophy here makes sense...centralize where it demonstrably makes sense to centralize, otherwise delegate to the guys on the ground...and be skeptical about any apparent benefits to centralization, since there are often hidden costs more than sufficient to counteract them.

    I've never understood the centralization mania, except as an effect of the agency paradox. The cost savings are never large enough to justify the risk (and in some cases the certainty) that the central authority's bad decisions will have a negative impact on productivity in the field. Sounds like your centralized purchasing scheme fell victim to that malady.