Decentralization marks an extension of the process of delegation. Under decentralization, the central unit of an organization distributes functions, responsibility, accountability and matching authority to regional and local units situated away from it.
E.F.L. Brech: Decentralization is the pattern of responsibility arising from delegation.
Allen: Decentralization is the systematic effort to delegate to the lowest levels all authority, except that which can only be exercised at central points.
Koontz and O Donnel: “Decentralization of authority is a fundamental phase of delegation.”
Decentralization is the very opposite of centralization. In a centralized organization, decision-making authority is vested in a few hands at the top. As against this, in a decentralized organization, there is dispersal of decision-making authority, which means greater powers to persons and places away from the centre. It also means that a greater number of important decisions will be made at the lower levels without awaiting approval from the superiors at the central unit.
In the context of a business organization, decentralization may take the form of
(a) Departmentalization or divisionalisation of activities
(b) Arrangement of activities in terms of places where these are performed
(c) Dispersal of decision-making powers among executives at various levels
(d) Sometimes, separate annual financial statements in case of each decentralized unit.
The term decentralization refers to dispersal of decision making authority down to the level where work is to be performed. Allen observes that decentralization is a systematic effort to delegate, to the lowest levels, all authority except that which can be exercised only at central points.
Sometimes important decisions also must have to be made at the lower level. There must be no interference in such decisions made. Only if delegation of authority is company wise, we can say that there is decentralization of authority.
Principles of decentralisation of authority:
(1) The power to take the decisions regarding the decentralisation must be vested with the top management.
(2) Subordinates must be competent and capable enough to take the decisions.
(3) Responsibilities should also be assigned along with authorities to the subordinates.
(4) Mutual understanding is essential for decentralisation. The main function of staff must be to advise and counsel with the line staff so that the line staff may take independent decisions and may improve themselves if required.
(5) Authorities must be delegated in order to execute the arrangement of decentralisation.
(6) Top officers must delegate their authority to their subordinates in the real and true sense.
(7) Decentralisation depends on the assumptions that the collective decisions are better than the decisions taken by one person.
(8) Personnel policies be decided on standard basis and must be changed from time to time according to the need. There must be a provision of reward to the efficient workers and inefficient workers be punished.
(9) Efforts be made that the decisions should be taken at the right time with the right intention and after careful thought, otherwise the arrangement of decentralisation will not be successful.
(10) The arrangement of decentralisation depends on the need of organisation objectives, organisational structure and the policies of enterprise.
Essential Characteristics of Decentralization:
(i) Decentralization Not the Same Thing as Delegation:
It is something more than delegation. Delegation means demi-transfer of responsibility and authority from one individual to another. But decentralization means scattering of authority throughout the organization. It is the diffusion of authority within the entire enterprise. Delegation can take place from one person to another and be a complete process. But decentralization is completed only when the fullest possible delegation is made to all or most of the people.
Under delegation control rests entirely with the diligent, but under decentralization, the top management may exercise minimum control and delegate the authority of controlling to the departmental managers. It should be noted that complete decentralization may not be possible or desirable, but it certainly involves more than one level in the organization.
(ii) Decentralization is Distinct from Dispersion:
Decentralizing is often confused with the separation of physical facilities which is not correct. Dispersion occurs when plants and offices are located at different places with physical distance between them. Performance of work in dispersed plants and offices does not necessarily lead to decentralization.
Decentralization can proceed without separation of facilities and facilities can be separated without decentralization. A company may be highly decentralized even though all physical facilities and employees are located in a single building. Thus, decentralization can take place even without dispersion.
(iii) Decentralization is not a Type of Organization:
Some people believe that a company can decentralize by changing its organizational structure. This is not true. Decentralization may be achieved even without changing the organizational structure as it refers primarily to the systematic delegation authority throughout the organization industries in which markets are less uncertain, production processes technologically less dynamic and competitive relationships more stable, tend to become more centralized.
The extent of decentralization is determined by:
- What kind of authority is delegated?
- How far down in the organization it is delegated?
- How consistently it is delegated?
Since decentralization refers to the delegation of authority at the lowest levels, subordinate managers must be allowed to exercise authority and to make decisions of their own.
Decentralization reflects attitude and philosophy of the management. It has to select what types of decisions must be delegated to lower levels of management and what to be reserved at the top.
Decentralization, to be effective and fruitful, requires development of managerial talents to shoulder the responsibilities entrusted to them. Hence, people must be selected and trained.
Adequate controls must be established to ensure performance of the work delegated. Decentralization does not mean abdication of responsibility.
Centralization, on the other hand, is reservation to withholding of authority at central points in the organization. “Everything that goes to increase the importance of the subordinates’ role is decentralization, and everything which goes to reduce it is centralization”. According to Koontz O’ Donnel, “decentralization is a fundamental concept of delegation; to the extent that authority is delegated, it is decentralized”.
The factors affecting decentralisation can be:
- External factors and
- Internal factors.
The factors external to the organisation are:
If customers and suppliers are dispersed, competition is not intense, markets provide wide scope for company to sell (by adding new products), the organisation can prefer to decentralise.
- Regulation of the Government:
If Government has strict policies and procedures for business firms, managers cannot take the risk of delegating decision-making powers to people at lower levels. They have to strictly observe the rules. The tendency to decentralise in such cases is low.
- Market features:
If firms operate in a market where homogeneous products are produced by all the firms, the power to make decisions can be decentralised to lower level managers.
- Bargain with trade unions:
If trade unions agree to bargain with lower level managers, decision-making power can be decentralised but if trade unions bargain only with top management, the organisation tends to be more centralised.
The factors internal to the organisation which affect decentralisation are as follows:
- Size of the organisation:
As size of the organisation increases, it becomes difficult for managers to take decisions single handedly. Decision-making will be time consuming. Large organisations have geographically dispersed units with large number of levels in each unit. Coordinating with every level of every unit is complex and time consuming.
This results in delayed decision-making which can be costly for the firms. Therefore, with increase in size of the firms, decision-making power should be delegated to functional managers and lower level managers. This increases efficiency of the organisation since top executives can concentrate on strategic matters and routine matters can be managed at the lower levels. Managers will be close to strategic decision-making points and coordination is facilitated through dispersal of decision-making authority at the point where it is required.
- Cost control:
Costly decisions where financial outlay is large, for example, the decision to buy a plant or machine, are normally taken by top executives and decisions where financial outlay is not too large can be taken at lower levels. Thus, if firms want to maintain strict cost control, the degree of decentralisation will be less. To maintain financial control, organisations can frame a policy that spending some amount on petty items is the discretion of lower level managers but expenditure beyond this amount has to be sanctioned by top managers.
- Philosophy of management:
Management philosophy refers to management’s desire to centralize or decentralise. Some managers prefer to retain power and authority to make decisions and, therefore, believe in centralisation of authority. Others, who want the decisions to be taken at lower levels, to improve their creative skills, decentralise the decision-making authority.
- History of the enterprise:
Enterprises which have always worked as centralized organisations continue to do so in future also. Past precedents are followed in future and are not easily changed unless a strong desire or outside influence is created within or outside the organisation.
Self-made business empires show higher tendency towards centralisation. Organisations which expand through external mergers, acquisitions and amalgamations report higher tendency towards decentralisation. Different managements join together and retain their decision-making authority as they enjoyed prior to external growth measures (mergers, amalgamations etc.). Autonomy to make decisions shows tendency towards decentralisation.
- Functional areas:
Some degree of centralisation or decentralisation is essential in every functional area. However, some areas like finance and personnel tend to be more centralised while others such as production and sales tend to be more decentralised.
- Ability of subordinates:
If lower level managers are inspiring and innovative, decision-making power can be given to them. There is greater tendency for decentralisation. Decisions can be effectively made at lower levels and managers also enjoy the power of autonomous decision-making.
This is a strong motivational force that promotes commitment and loyalty towards the organisation. Though organisation tends to be decentralised when lower-level managers are competent to make decisions, decentralisation also increases the competence of managers to make sound management decisions.
- Growth of enterprise:
Top managers of a growing enterprise in terms of financial and physical parameters spend more time on important and strategic organisational matters. Thus, there is greater tendency for decentralisation. Growing organisations adapt to the dynamic environment and most of the decisions may be non-programmed in nature.
Since all these decisions cannot be taken by the managers at central locations, they require participation of managers at different levels. Decentralisation facilitates faster decision-making in case of growing organisations.
In case of stable organisations, most of the decisions are programmed in nature and can be taken without much involvement of people at larger scale at larger levels. There is, thus, tendency to centralize the organisation.
- Communication system:
An effective communication system helps to coordinate diverse organisational activities. An organisation whose communication system is based on modern management information systems can decentralise its operations.
- Control system:
An effective system of control where regular appraisal of performance against planned performance is done facilitates decentralisation. Performance of units at different levels can be regularly monitored so that organisational activities remain coordinated. Contemporary management is facilitated through advanced control techniques based on computer system which promotes decentralisation.
Process of Decentralisation of Authority:
The following steps make the decentralization process:
Initially, the organisation starts as a centralised structure. The power and authority to make decisions vests with the top management. As it grows, the need for delegating operating authority arises while strategic decisions related to planning, organising motivation etc. are exercised by the top management. This ensures uniformity in the working of organisation.
Following are the strategic areas where decision-making should remain centralised:
(a) Centralisation of Planning:
To ensure consistency and uniformity in the operations, the framework of planning consisting of policies, procedures, programmes, schedules, etc. is developed by top managers, whatever the degree of decentralisation in the enterprise. It is within the overall planning that different units make sub-plans to synthesize with the broader plans.
(b) Centralisation of Organising:
The organisation structure: creating departments, definiting authority-responsibility relationships, the levels to be created (span of control) are decided by top management and the task of actually working within that structure is delegated to lower levels by dividing the work into sub-units and assigning each task to different individuals.
(c) Centralisation of Coordination:
More the degree of decentralisation, more the problem of coordinating the business activities. Chief executive should retain power to coordinate the activities of different divisions and departments. This avoids duplication of efforts exercised by different divisions.
(d) Centralisation of Motivation:
People are motivated by different factors. While financial rewards are important for some, non-financial rewards of acceptance and recognition are important for others. Various motivational factors should be thoroughly analysed and policy for motivating employees of different nature should be made. Motivational plans are, thus, centralised.
(e) Centralisation of Control:
Authority to make overall plans is reserved with top management. Managers also ensure that plans are achieved optimally. Setting measures of control to ensure that actual performance conforms to planned performance is centralised with the top management.