Everything you need to know about decentralisation of authority. Decentralisation is passing of authority to make decisions to the lowest possible level in the organisational hierarchy.
Decentralisation is delegation of authority to the maximum possible extent. 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.
“Decentralisation refers to the systematic effort to delegate to the lowest levels all authority except that which can only be exercised at central points.”— Allen.
1. Introduction to Decentralisation of Authority 2. Meaning of Decentralisation of Authority 3. Definitions 4. Characteristics 5. Principles 6. Factors Affecting Degree of Decentralization
7. Conditions and Guidelines 8. Types 9. Measurement 10. Advantages 11. Disadvantages 12. Efforts to Make Decentralisation More Effective.
Decentralisation of Authority: Meaning, Definitions, Types, Advantages, Disadvantages and Other Details
- Introduction to Decentralisation of Authority
- Meaning of Decentralisation of Authority
- Definitions of Decentralisation of Authority
- Characteristics of Decentralisation of Authority
- Principles of Decentralisation of Authority
- Factors Affecting Degree of Decentralization
- Conditions and Guidelines of Decentralisation of Authority
- Types of Decentralisation of Authority
- Measurement of Decentralisation of Authority
- Advantages of Decentralisation of Authority
- Disadvantages of Decentralisation of Authority
- Efforts to Make Decentralisation More Effective
Decentralisation of Authority – Introduction
At present, the nature of business enterprise has become very complex. Now-a-days business and trade have become an international affair. Under such circumstances it is not possible and practicable for the top management of an enterprise to look after all the activities of the enterprise. Therefore, it has become necessary that the top management of the enterprise must pay its attention only to the important problems of the enterprise.
Decisions must be taken on every level of management and the subordinates must get full powers and responsibilities. They must be empowered to take the decisions connected to their field of activities and they must be responsible for their fields. This arrangement in an enterprise is known as the decentralisation of authority. Under this arrangement, the authorities are delegated by the top management to the subordinates.
In other words, it can be said that decentralisation is opposite to centralisation where there is no concentration of authority instead diffusion is planned and executed.
E. F. L. Brech has rightly put decentralisation as “the pattern of responsibilities resulting from is delegation.” Decentralisation emerges from the principles of delegation.
In the words of Satya Saran Chatterjee – “Decentralisation is the pushing down of authority and power of decision making to lower levels of organisation.” Delegation plays the role of a pace-maker in decentralisation. Without which decentralisation might have been a distant possibility. Delegation makes the subordinate feel that he too is important for the organisation. His ego is satisfied. He is encouraged to take more and more interest in his job and to maximise his efforts.
Further, Henri Fayol has said – “everything that goes to increase the importance of the subordinate’s role is decentralisation.” He has obviously referred the division of authority which certainly is the essence of decentralisation.
Mc. Farland has defined it – “as a situation in which ultimate authority to command and ultimate responsibility for results in localised as far down in the organisation as efficient management of the organisation permits.”
According to Louis A. Allen – “Decentralisation refers to the systematic effort to delegate to the lowest level all the authority except that which can be exercised only at central points. Decentralisation is concerned with a placement of authority with reference to responsibilities.”
Koontz and O’Donnell has said – “Decentralisation of authority is a fundamental phase to delegation. To the extent that authority is not delegated, it is centralised.”
As postulated by E.F.L. Breach, decentralisation is the pattern of responsibilities resulting from delegation. Execution of this entrustment, a forerunner without which decentralisation might not be possible. Giving due importance to the principle of decentralisation Henry Fayol made the statement that everything that goes to increase the importance of subordinates’ role is decentralisation.
In a centralised organisational set up, decision making authority is concentrated in a few selected top executives, whereas in a decentralised organisation there is delegation of this authority to subordinates
Decentralisation of Authority – Meaning
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.
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”.
Decentralisation of Authority – Definitions Provided by McFarland, Allen, Strong and Earl P
Decentralisation implies the dispersal of decision-making power at lower levels of management. When the power to take decisions and formulate policies does not lie with one person at the top but is passed on to different persons at various levels, it will be a case of decentralisation. The decisions taken at lower level should not only be more in number but they should be important also. If insignificant decisions are allowed to be taken at lower levels then it will not be a case of decentralisation.
McFarland, “Decentralisation is a situation in which ultimate authority to command and ultimate responsibility for results is localised as far down in the organisation as efficient management of the organisation permits.” The delegation of authority and responsibility is allowed downward up to a level it is necessary. In McFarland’s views the degree and extent of delegation should be determined as per the needs of the situation.
Allen, “Decentralisation refers to the systematic effort to delegate to the lowest levels all authority except that which can only be exercised at the central points.”
Allen says that authority should be delegated to the lower levels of management and top management should retain only those powers which cannot be exercised at lower level. In his view decentralisation will involve systematic delegation of authority.
Strong, “Decentralisation means the division of a group of functions and activities into relatively autonomous units with overall authority and responsibility for their operation delegated to a head of each unit.”
Earl P, “Strong relates decentralisation to the working of different units of an enterprise. He says that decentralisation will require the delegation of authority to the persons in charge of different units. They should have sufficient authority to run the units independently.”
Decentralisation of Authority – 3 Essentials Characteristics
For decentralization to be present, a number of decisions must be made by lower levels of management hierarchy.
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.
The extent of decentralization is determined by:
i. What kind of authority is delegated?
ii. How far down in the organization it is delegated?
iii. 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.
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.
Decentralisation of Authority – 10 Important Principles Described by Prof. Ralph. J. Cardinar
Prof. Ralph. J. Cardinar has described the following 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.
Thus, if all the above principles of decentralisation are followed, the enterprise may get success in achieving its pre-determined objectives.
Decentralisation of Authority – Factors Affecting the Degree of Decentralization: Nature of Growth of Organization, Extent of Diversification and a Few Others
The degree of decentralization in an organization is determined by a combination of the following factors:
Factor # 1. Nature of Growth of Organization:
If the organization has grown in size through expansion of activities through diversification, etc. it may continue to retain its original structure until it faces difficulty in their effective management. On the other hand, if it has grown in size due to acquisition or absorption of different businesses, it will prefer creating independent departments and divisions to benefit from the expertise of people working in those units while still retaining control over them.
Factor # 2. Philosophy of Promoters or Top Management:
If the top management believes in uniformity, or if it seeks unified management and control, it may opt for a centralized set-up. On the other hand, if it believes in granting freedom in decision-making to departments and divisions, it will settle for decentralization.
Factor # 3. Effect of Size of Business Organization:
Decentralization in case of a small organization may not be advisable. A better course for it would be to adopt a functional structure by grouping its activities under production, marketing, finance, etc. and assign their management to centrally controlled departments. But in a large organization having work-units operating at a number of places, creation of separate divisions and departments will add to their efficiency and profitability.
Factor # 4. Extent of Diversification:
If an organization is producing a number of diverse products—from salt to software, as in case of Tatas—creation of functional departments may not serve its purpose because they would not be able to do justice to production and distribution of all products and services. The alternative in such a case would be to have a separate department or division for each product and service.
Factor # 5. Nature of Functions:
There should be greater decentralization of the basic functions, e.g., production, marketing and finance. That way, employees engaged in these activities would be encouraged to perform more efficiently. On the other hand, in the case of staff functions like personnel recruitment, research and development, centralization may produce better results.
Factor # 6. Availability of Competent Managers:
Decentralization will be possible only when middle level managers of the organization are capable and experienced enough to make important decisions. Where such managers are not to be found, centralization—and not decentralization—would be more beneficial.
Decentralisation of Authority – Conditions and Guidelines
Decentralisation should be undertaken under the following conditions:
(1) Relief to Top Executives:
When the burden on top management has to be reduced. Overdependence upon committees is another indicator to reduce the burden on top executives.
Decentralisation can facilitate the diversification of the company’s business. Decentralisation must accompany divisionalisation if a company wants more effective diversification plans. It is not the size but diversity of business which is the compelling force for decentralisation.
(3) Emphasis on Product and Market:
Decentralisation has remarkable impact on product innovation and on the growth of its market share. The customer is concerned with price, quality, delivery, service, novelty of products. These demands are easily satisfied through de-centralisation.
(4) Management Development:
Shortage of managerial talents is a limiting factor in growth and diversification. Decentralisation alone can offer ample scope for development of managers. Only under de-centralisation, managers can develop initiative and enjoy freedom to try out innovations in methods and techniques. Decentralisation spreads decision making throughout the organisation and it can create managers. Centralisation can give us only messengers.
(5) Higher Motivation:
Decentralisation of authority and power enhances motivation of managers. Greater participation, communication and delegation motivate managers for achieving highest productivity. If an organisation structure fosters small groups, closer interaction and mutual interdependence, we have very favourable ground for higher morale and motivation.
The following guidelines will enable top management to introduce decentralisation profitably:
i. We must have appropriate centralisation in all managerial functions at the top, i.e. centralised planning, co-ordination, control, motivation, etc. General Motors in the U.S.A. adopted centralised control and co-ordination and decentralised operations and administration. Each division is a profit centre but we have central co-ordination and control by overall policies.
ii. Managers capable of understanding the operations of the autonomous business units must be developed. We want capable managers at all levels to handle the delegated authority and responsibility efficiently.
iii. Company-wide programmes of planning, organising, motivating and controlling are the means of effective communication and co-ordination. Committee devices are special means of communication and co-ordination.
iv. Adequate controls at all levels alone can ensure best operations in profit centre terms.
v. Dispersion of location of plants will help a lot for operating units as profit centres. The units must be cut loose physically from headquarters.
When an organisation establishes subunits called divisions, when each division is regarded as a separate profit centre and enjoys considerable autonomy with regard to responsibility and authority in managerial decision-making, the organisation is considered to be de-centralised.
To the extent that an organisation does not delegate and withholds a large responsibility and authority in decision-making (with higher level managers), the organisation is considered centralised.
Decentralisation of Authority – 3 Major Types: Profit Centres, Cost Expense Centres and Investment Centres
There are three approaches to assign authority and responsibility to lower level people in an organization. It is quite possible to provide for decentralization in varying degrees among various departments in the organization. For example, production and sales departments may be decentralized because of the urgency to take quick decisions; finance department may be centralized due to the need to obtain funds for the organization as a whole.
Three types of decentralization are discussed below:
1. Profit Centres:
Under profit centre decentralization the organization is first divisional zed on a product basis; each division is given the management and physical tools and facilities it needed to operate as an integrated and self-contained unit.
Each division operates on a competitive basis; orders its own materials, schedules its operations and negotiates the sale of its finished products. It is accountable for the profit it earns or the loss it sustains.
To use ‘profit centers’ authorities suggest that each one possess:
(a) Operational independence having control over most operational decisions affecting profits (volume, production methods etc.)
(b) Complete freedom to buy and sell in alternative markets both inside and outside the organization.
(c) Separate, identifiable income, expense and assets from the organization so that they can operate independently and calculate their own profit.
Thus, a profit centre is a relatively autonomous organizational unit ‘that can be differentiated clearly enough from the rest of the organization so that costs it incurs or revenues it generates can be reasonably accounted for and associated with it.’ However, it is not always easy to find organizational submits independent enough from each other so that they may be almost as different business.
One important limitation identified in the profit-centre concept is cost. Creation of profit centres demands enormous doses of investment with no guarantee of adequate returns. On the positive side, profit centre decentralization provides a strong incentive to divisional management to improve the efficiency of its operations.
It is remarked that ‘The division head, instead of merely a production boss, is a manager in every sense of the word; actually, he operates in somewhat the same manner as the head of an independent business. This gives him the greatest possible encouragement to use every iota of management ability he can command’.
2. Cost Expense Centres:
Where it is difficult to find out revenue with a unit but is relatively easy to determine the costs of operation, cost centres are established. In the case of corporate legal staff or accounting staff it may be quite difficult to determine how much revenue is generated but it can be a cost centre since we can determine the costs necessary to run it.
In a cost centre, a manager would be responsible for using resources within the overall cost or budgetary limitations. By keeping the costs under specified limitations he incurs an additional responsibility to provide required support to the rest of the organization.
3. Investment Centres:
Investment centres are quite common in the case of multi product enterprises like General Motors, General Electric, Hindustan Lever Ltd. etc. In order to measure product performance, decentralization by investment centres is usually advocated and the managerial response-obligations would include responsibilities for the ‘acquisition, use, and disposition of fixed-use resources’.
Decentralisation of Authority – Four Tests for the Measurement of Decentralisation: Number of Decision Taken, Value and Importance of Decision and a Few Others
Louis A. Allen has written three criteria to judge the degree of decentralisation.
(1) What kind of authority is delegated?
(2) How far down in the organisation is it delegated?
(3) How consistently is it delegated?
These three criteria may be applied to know the degree of decentralisation in different areas like appointment of employees, promotion of employees, acquisition of capital equipment, procurement of raw materials, etc.
Measurement of Degree of Decentralisation of Authority:
The degree of decentralisation of Authority varies from organisation to organisation. Earnest Dale has written the following four tests to determine the degree of decentralisation.
They are as follows:
(1) Number of Decisions Taken:
More the number of decisions taken at lower levels of management, the greater is the degree of decentralisation.
(2) Value and Importance of Decision:
If important and valuable decisions are taken at lower levels then degree of decentralisation will be more. On the other hand, if insignificant decisions are allowed at lower levels then decentralisation will be much less.
(3) Decisions and Its Effect:
If decisions affecting more functions are allowed at lower levels then decentralisation will be more. On the other hand, if only operational decisions are made at lower levels then decentralisation will be less. When decisions involving finances are taken at lower level then degree of decentralisation will be more.
(4) Less Checking Required on the Decision:
When decisions are subject to the approval of superiors then decentralisation will be less. If subordinates are free to take decisions of their own the decentralisation will be more. The fewer the people to be consulted; and the lower they are on managerial hierarchy, the greater the degree of decentralisation.
Decentralisation of Authority – 7 Advantages of Decentralisation: Management Development, Higher Motivation, Ensures Effective Control, Minimizing Risks and a Few Others
1. It Reduces the Burden of the Top Executive:
The top executives are relieved of the routine and time consuming operations. They can now devote more time and attention to policy formulation, coordination, control and other such vital issues.
2. Management Development:
As powers and duties are decentralised, the junior managers have opportunities to develop their skills and talents. They learn best the art of management as they exercise decision-making authority. Thus decentralization facilitates development of potential managers.
3. It Facilitates Diversification:
Decentralization facilitates the growth and diversification of product lines. Where product lines consist of a variety of products, decentralization brings excellent results.
4. Emphasis on Product and Market:
Changing tastes, new styles, fashions etc., require prompt decision. Under decentralized set up, executives can take quick decisions and offer products that could satisfy customer’s requirements.
5. Higher Motivation:
Greater participation, communication and delegation leads to initiative, willingness to take responsibility and high morale among the subordinates.
6. Ensures Effective Control:
Decentralization promotes effective control. For judging performance of each unit or division, profitability and the rate of return on investment are the yardsticks.
7. Minimizing Risks:
It minimizes the risks of business by spreading them over a number of units. Loss in one unit may be offset by gain in another. Experiments can be tried out in one unit without affecting the progress of work in another unit.
Decentralisation of Authority – 4 Main Disadvantages: Lack of Co-Ordination, Difficulty in Control, Costly and Lack of Able Managers
1. Lack of Co-Ordination:
Under decentralisation each department, unit or section enjoys substantial powers. They have the powers to formulate their own policies and programmes. It becomes difficult to co-ordinate the activities of various segments. Moreover, every segment emphasises its own work only without bothering about others. This creates more difficulties in coordinating activities.
2. Difficulty in Control:
Since different units work independently it becomes difficult to control their activities. Top management will not be able to exercise effective control because it does not remain in touch with day-to-day activities of various segments.
Decentralised system involves heavy overhead expenses. Every decentralised division has to be self-sufficient for its activities like production, marketing, accounting, personnel, etc. A number of persons will be employed to man various activities. These persons are paid higher salaries involving huge costs. Decentralised system is suitable for large scale enterprises only. Small-scale business units cannot afford to spend higher overhead expenses.
4. Lack of Able Managers:
Decentralised system will succeed only if competent persons are employed to manage various jobs in different segments. Competent persons are not sometimes available as per the requirements. The system will fail if competent personnel are not available.
Decentralisation of Authority – Efforts to Make Decentralisation More Effective
In order to make decentralisation more effective following systems may be adopted:
(1) There Should be Appropriate Centralisation to Make Decentralisation More Effective:
Appropriate centralisation means formation of such policies and procedures which concern the whole organisation by which the control authority ensures uniformity of action and close co-ordination and control over the various operating units.
(2) There Should be Centralised Control in Basic Areas So that the Top Management May Know Where Its Various Units are Going:
Each unit must be controlled by the unit manager. Each unit must enjoy considerable autonomy within the framework of overall policy.
(3) The Availability of Qualified Managers in the Organisation is Essential:
Qualified managers are always needed whatever the structure is adopted and they will show good results. Qualified and experienced managers can turn out good results only when their abilities and potentials are properly utilised.
Managers should not be recruited from outside. They should be developed from within the organisation itself, by delegating authority and responsibilities and by allowing them to learn through experience in making decisions.
(4) There Should be Fair and Proper Competition among the Various Units:
The top management must develop such standards which may evaluate the performance of each unit objectively and independently. Suitable incentive package may be adopted to reward highly efficient units. This will form team spirit among units and department managers.
(5) Open Communication System Should be Established in the Organisation:
This will lead to ensure continuous interaction between the superior and subordinates should convey to subordinate executive’s necessary polices, framework and procedure to be adopted. Necessary advice and guidance should be given to subordinates from time to time.
On the other hand, necessary feedback on operating results should be made available to superiors so that they may be aware of the real situation in the units to enable them to exercise control over them.
(6) Effective Co-Ordination is Essential:
Effective co-ordination will prevent fragmentation and sub-division. Further, Committees, Liaison officers and other mechanism of co-ordination may be used to ensure effective co-ordination.