Today, CEOs have to make strategic business decisions considering the digital transformation. Being the CEO of a large company facing digital disruption can seem like being a gambler at a roulette table. You know you need to place bets to win, but you have no idea where to put your chips, states Mckinsey.
Should the company build digital initiatives within its business?
Once a company has defined its digital strategy, the next key question relates to integration versus separation of digital activities: Should digital activities reside within or outside the current organization?
Building digital capabilities internally, within an existing hierarchy, is usually the simplest way to integrate digital activities into a company’s strategy, execution, and talent development. But committing to the internal option leads to countless related choices about where and how best to position these digital activities.
Often, the first question about digital transformation that CEOs ask is whether they should appoint a chief digital officer. But that question becomes subdued to a broader question involving three options:
Does the company want to centralize its digital activities, distribute them throughout its business verticals, or split the difference to create a hybrid model?
If a company’s strategy requires significant coordination and synergy across businesses and functions, or if the company needs a big digital push, centralization may make more sense while planning for digital transformation.
Similarly, if the company does not hold strong digital expertise, centralizing probably makes sense. Finally, businesses that run on a command-and-control model tend to drift more toward centralization.
Pros & Cons:
A centralized approach has advantage of strong visibility among senior leaders, meaning that the digital team wouldn’t face resource constraints and expertise to create new capabilities and develop practices that can scale within organization and globally.
On the other hand, if centralized approach establishes a central team, a company runs the risk that line leaders within the organization will view that team as an ivory tower out of touch with the grind of business. To avoid this belief, the central team must maintain a constant engagement with line leaders and discuss to work on initiatives that those leaders consider relevant.
Decentralization is the mirror opposite of centralization. A decentralized approach does not depend on coordination across boundaries, and decision making is distributed across the organization. Organizations following decentralized approach have one or more centers of excellence (CoE) that provide leadership, best practices and support to line businesses for implementing their digital activities.
Pros & Cons:
Decentralized approach helps to embed digital culture throughout the organization and recruit digital team members who are accustomed to take front-line responsibilities.
The downside to this decentralized approach is that digital may not have an uphold in the executive suite which might put digital activities at a disadvantage in competition with other company priorities. In addition, organization fails to incorporate global practices while developing the organizational standards.
Under a hybrid approach, line businesses hold accountability to run their own digital activities, but they work closely with the center to take valuable learning on best practices and other forms of support. Center is responsive to push digital endeavors throughout the company and maintains a good balance between global consistency and local initiatives. Similar to decentralized model, however, digital in a hybrid system is at risk of competing with and losing out to other priorities.
Pros & Cons:
Companies that adopt a hybrid approach need to have clear and effective hierarchy of reporting, decision rights and accountability. Each part of the matrix must have a clear delineation of organizational mandate for digital activities.