Decentralization is an extension of delegation. It refers to the degree to which the authority is delegated to lower levels. It gives added responsibility to managers at all the levels below the top. Only those responsibilities are left, which can be exercised centrally only or by top management. The centers of decision-making are dispersed throughout the organization. It is considered the 'Golden Calf' of the management philosophy of the new era.
Concept of Decentralisation:
Decentralization can be comprehended as the logical and systematized assignment of power and authority all over managerial levels in the institution. It presents how the power is distributed at various managerial levels. It is the opposite of centralization, where power is concentrated at the center. Hence, it includes disseminating the authority and function from the organization's center to various levels. This diffusion can occur horizontal and vertical. Hence, under decentralization, there is diffusion or dispersion of authority.
According to Louis A Allen, "Decentralisation refers to tire systematic effort to delegate to the lowest levels all authority except that which can be exercised at central points."
Factors Affecting Degree of Decentralisation:
- The cost involved in decision-making and decentralization. It also depends on the background and history of the enterprise, its size and change in the environment.
- It checks if the organization has many managers.
- It checks whether the subunits desire independence and whether the subordinates can cope with the change?
Types of Decentralisation:
Responsibility Center: It is a component or subdivision of the firm where the superior has responsibility, accountability and authority. They also compromise the departments. These centers of sub-units have their own goals and procedures to be followed. It is a functional entity and the sub-units are entrusted with specific tasks. They are categorized into profit, cost, revenue, investment and contribution center.
Profit Center: This is the company's division that aims to calculate profits. Such division is accountable for its own earnings and results. They deal with decisions of allocation of resources to profitable units and determine whether the activities should be discontinued or not. Hence, the sub-unit generates its own profits and is accountable for them.
Cost Center: It is a sub-unit that doesn't lead to the addition of profit but contributes to an organization by performing its function efficiently. They are not profit-generating centers such as R&D Department and Human Resource Department. They indirectly help in revenue generation by assisting in business research and hiring competent personnel but do not generate actual revenue. Cost centers are responsible and accountable for working within the budgets. The key focus is keeping the expenditure minimum and curtailing and controlling costs.
Revenue Center: This department is formed to increase the organization's revenue. It has no accountability for production. The managers of the revenue center do not focus on the cost of the product but control the marketing/sales-related expenses. This department works on increasing sales with efficient marketing strategies. The manager is responsible for generating revenue only and not the cost of the production. All the incomes from various products and services are gathered and analyzed.
Contribution Center: This department is associated with generating contribution, which is the difference between sales and variable cost. The manager's accountability lies in increasing the contribution. The more contribution, the more will be the profit. He has authority, responsibility and accountability about generating contribution only and not production. The manager has no control and responsibility for fixed costs. However, he is entitled to see that the contribution center works at the optimum level and generates the maximum level.
Investment Center: It is the uttermost comprehensive department as it collects and analyzes information about costs, revenues, profit, and various assets. It focuses on generating returns on the investment made by the company. The authority, responsibility and accountability lie with sales, costs and revenue and where the money is invested. The responsibility is to generate returns by efficiently allocating resources.
Advantages of Decentralisation:
- It reduces the workload of overburdened senior executives.
- It brings the decision-making process closer to the actions without any delays.
- It facilitates product diversification. Each product division has separate management.
- It allows individuals to learn by doing through the freedom of decision-making and better control.
- It often results from adequate controls and performance measurements at lower levels.
- The most significant advantage is of profit center principle for large multiproduct firms.
- It facilitates quick decision-making and better control.
- It develops the managerial skills of the subordinate.
Disadvantages of Decentralisation:
- Conflicts between divisional heads.
- Costs increases due to the large group of managerial staff of the division.
- Decentralization demands training programs that may be time-consuming and highly expensive.
- Increase risk as tasks is delegated.
- It is not suitable for services that require specialist knowledge.
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