McKinsey Quarterly

The power of an independent corporate center

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The independent, hard-nosed perspective that executives need to make decisions about a corporation’s businesses is often elusive. It can’t be delegated to the business units, whose managers have competing interests and may lack a corporate-wide perspective. Nor can it be folded into the existing strategy process, which is frequently a bottom-up, business unit–oriented exercise that starts with the assumption that each unit’s claims on capital and resources won’t differ significantly from year to year.

A corporate center does have the potential to cut through the tensions, lobbying, and logrolling that often bedevil resource allocation discussions and lead to inertia (for more on resource allocation challenges, see “How to put your money where your strategy is”). But few are well organized to play this role. Some are little more than a collection of central functions (such as treasury, legal, and human resources) that don’t fit elsewhere in the organization. Some are more strategy focused but primarily prepare board papers and support special initiatives for the CEO, the chairman, or the board. At the opposite extreme, certain corporate centers meddle in the tactics of business units. Others revolve around a CFO who manages the balance sheet, aggregates financial reporting, courts investors, and provides tax and treasury services—but seldom gets involved in strategy. Too often missing are the intense reviews, debates, and challenges that lie at the core of value-creating corporate-strategy decisions.

Changing this picture will sometimes require a reconfiguration of the corporate center—including the addition of staff and capabilities—that is beyond our scope here. (For ideas from a CFO and a business head, see “Breaking strategic inertia: Tips from two leaders.”) However, a few more modest changes can help most corporate centers stimulate better dialogue, tougher decision making, and more effective resource reallocation. Here’s what that takes:

Executive ‘ownership.’ The architects of this work must be willing to bring forward recommendations that are bold—not incremental—and potentially unpopular with division or business unit heads, who in most companies dominate the group that makes decisions to reallocate capital and talent. So the effort must be led by a respected senior executive, such as the chief financial or strategy officer, who can bring an outsider’s point of view: challenging status-quo projections, establishing decision rules, and proposing concrete portfolio changes. Personal attributes that can help an executive shape these discussions are more important than titles. The main point is that someone needs to be explicitly accountable for the work. All too often, these responsibilities slip through the cracks.

The right kind of ownership can be extremely powerful. Take the case of the “two Bobs” at the mining company Rio Tinto, in the early 1990s. Rio’s chairman, Bob Wilson, saw an opportunity to reshape its portfolio and build a series of new growth platforms through a combination of bold organic and inorganic moves. Bob Adams, the executive director for planning and development, generated many of the ideas that underpinned the company’s repositioning and supported the corporate agenda by building a world-class capability to evaluate and develop businesses. Armed with independent analyses, the two Bobs helped counteract the forces of inertia.

A transparent mandate from the CEO. The corporate-strategy process and the top team that drives it have an implicit contract with a company’s shareholders to do two things: to change its portfolio of businesses (and growth platforms) and to stimulate appropriate and occasionally significant shifts in the resources devoted to each business—even well-performing ones. Both the contract and the processes should be clear to division and business unit leaders and visibly supported by the CEO.

The central team should not attempt to develop alternative strategic plans or budgets for business units; it won’t have the detailed knowledge to do so. It should focus instead on the arguments for and against making significant changes in R&D spending, capital investments, or top-talent assignments within the existing portfolio. It’s also important for the team to identify—before shareholders do—businesses that should be divested. In other words, the team should set up processes ensuring that the right new businesses are seeded, nurtured, pruned, or weeded as objectively as possible. To do so, the team must include people who can help it form its own analytical views about the performance of business units. There will be some duplication of effort in this new mandate, but it is the only way to have a constructive debate.

An inquisitive posture. Stimulating a better dialogue requires a direct challenge to what may be long-held assumptions. Business unit–planning processes—and perhaps even “crowdsourced” strategy approaches such as those described in “The social side of strategy”—can help leaders grapple with some of these issues. But sometimes the focus of questions at the business unit level is more microlevel and less likely to uncover a need for wholesale shifts out of one business area and into another. The corporate center is better positioned to wrestle with questions on behalf of the organization as a whole—and to propose tough solutions that business units would be unlikely to arrive at independently.

  • How are the macroeconomic, consumer, and technology trends that drive growth and returns for our businesses likely to change in the next two to five years?

  • In what ways do we expect our industry’s competitive dynamics to change in the next several years? For example, will maturation lead to overcapacity?

  • Are we starving nascent growth platforms by maintaining the flow of resources to historical core businesses?

  • How does each business unit stack up against its traditional peers and new attackers on performance measures such as product quality and innovation, the effectiveness of distribution, and cost levels?

  • Could other companies extract more value from any of our businesses—and acquire them for a premium that we could invest better elsewhere?

  • How do individual business units affect the performance, positively or negatively, of other parts of our company?

  • Which units absorb more than their fair share of senior management’s time and attention relative to their potential for creating value?

The corporate center is the logical owner of a company’s resource allocation process. Even many centers that now lack the structure, organization, or capabilities to play this role fully can materially boost their effectiveness with a few modest changes.

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