execution (synchronization). These capabilities support a fault- tolerant approachto performance, allowing organizations to quickly adapt to changing conditions. This attribute is not necessarily efficient.
In other words, some waste and inefficiency may be essential to the fault tolerance that is needed if an organization is to survive and prosper.
An experimental physicist by training, Joe rightly notes that “organizational design and operation is all a question of trade-offs. No two high-perform- ing organizations are alike, and managers need to tailor solutions according to the individuals, the environment, and the mission to be accomplished.”
(See Joe’s briefing slide on measuring high performance.)
Lesson 4: High Performance Does Not Reside in Hierarchy (or the Lack Thereof)
At least for those who worry about the height and width of organizations, round two also produced another stunning defeat: Pitted against other structural characteristics, the number of management layers between the top and bottom of an organization had no significant bearing on organiza- tional performance. RAND does not believe in an ideal organizational form, whether it be flat or tall, wide or thin, centralized or decentralized. It sup- ports whatever form might be appropriate for the given task.
In military health care, for example, RAND’s Susan Hosek and Gary Cecchine find that a relatively flat organization structure provides better performance than a highly centralized pyramid.
Decentralization appears to be more efficient, for two reasons:
(1) any economies of scale in management within a centralized organization are apparently offset by the inefficiencies of cen- trally directing a large, geographically dispersed organization, and (2) local knowledge is critical for effective management of health care. Thus, operating units are established to manage local market areas. These local units report through regional managers to corporate headquarters; at each level, six to eight units report to a single manager.
Decentralization comes at a price, however. According to Hosek and Cecchine,
Decentralized assignment of responsibility is accompanied by strong accountability for outcomes that are clearly specified in advance and evaluated afterward. In the managed-care organiza- tions we visited, accountability is achieved through a standard annual business planning process. Performance is assessed using a limited number of key outcomes. Overall business success is meas- ured by profit (or net revenue for nonprofit organizations). . . . Beyond the financial bottom line, intermediate outcomes include the key factors in profitability (such as enrollment or pharmaceu- tical costs) and quality measures including patient satisfaction.
Thus metrics, not centralization, create accountability.
The same holds true for environmental management, where private firms tend to use whatever form is most appropriate to their situation.
“Proactive firms centralize environmental activities only if they are not closely related to their core activities, or if a uniform corporate environ- mental practice is cost-effective,” a RAND research team reports. Otherwise, they deploy environmental managers throughout the organization. How- ever, they centralize when it comes time to audit the organization’s progress.
“They draw on centralized data systems compatible with the corporate information architecture but draw auditors from throughout the corporation to enhance transfer of lessons learned between the divisions.” The team points to DuPont and Olin as examples.
DuPont and Olin sought to place financial and management responsibility with the business unit that creates a problem.
When relevant state and local regulations varied, it was often better to place these responsibilities with local units. But this had to be balanced against the visibility and control of costs and funding and the consistent application of policy that central assignment of responsibility supports. On balance, DuPont and Olin chose to centralize remediation responsibilities. Taking responsibility away from the active product units allowed them to focus on the environmental issues that were relevant to cur- rent and future production. That said, to ensure that its 19 indi- vidual business units maintained some awareness that remediation costs money, DuPont taxed these business units to cover 35 percent of ongoing remediation costs.
At least for these two firms, centralization was the best way to send the signal that environmental management was central to their mission.
It is difficult to overstate RAND’s lack of support for any one orga- nizational form. As former R AND researchers Francis Fukuyama and Abram Shulsky wrote in their 1996 study of virtual companies, there are benefits and costs associated with all organizational structures, be they hier- archical, flat, or networked.
Decentralization is not an end in itself; there are certain func- tions performed in organizations that are better performed by centralized authority than on a distributed basis. Centralized organizations generally can move more quickly and decisively than decentralized, and they can achieve scale economies more readily; on the other hand, they may adapt more slowly to changed circumstances, and problems at the “center” may tend to paralyze activity through the organization.
The choice of organizational form requires an assessment of the costs and benefits. There are times when centralization is essential, and other times when dispersion offers the highest returns. (See a modified version of Fukuyama and Shulsky’s briefing slide on centralization versus decentralization.)