One problem I have seen repeatedly in fast growing companies is the tendency to centralize some functions as the company grows. Just as the Soviet Union collapsed under the weight of centralization, and it severely negatively impacted their economy, many companies should put a brake on growth by centralization.
Functions range from marketing to HR to finance to product to tech. The underlying hypothesis is that the company will enjoy economies of scale, share knowledge better and can build stronger expertise in functional areas. The reality is that it often leads to extra unnecessary headcount, bureaucracy that puts a time burden on anyone without noticeable benefit, an “us versus them” mentality, losing touch with your customers and weakness in the functional areas.
Problems with centralization
While the lure of centralization is greater efficiency and lower cost, the reality is almost the opposition both in business and government. The key issues that come up when creating central services include
- Extra headcount. Although the perception is that moving a function to a central service, it almost always leads to more employees (and thus expense). When decentralized, people often play multiple roles. I know I have taken on the roles of marketing, finance, user acquisition, sales and community, all in one day. When creating dedicated central functions, each of these functions now needs to be staffed fully. So rather than shifting efforts by individuals on a regular basis to get the work done, dedicated resources have to be hired. Moreover, in most companies and with many individuals, a group or person’s perceived importance is based on the size of the unit. Thus, there is a lot of pressure to add staff (commonly referred to as empire building) so people can improve their place in the organization.
- Moving at the speed of a turtle. Speed is one of the crucial elements to succeeding in the current environment. You need to get your product to market quicker than your competitors. You need to introduce new features before your competitors do. You need to move quickly to conserve resources (the longer it takes, the longer you are paying people). In a centralized environment, speed is usually the victim, as communications and approval get mired down in a molasses like environment. By centralizing, you are putting yourself at a competitive disadvantage.
- Inhibiting innovation. In an industry like the game industry that moves so quickly, that is so unpredictable, where ideas come out of left field, which relies on the genius and insight of very few people, bureaucracy is deadly. By the time an idea gets approved, if a new idea can even get raised, it is often 1.5 years after someone else has started on it.
- Bureaucracy. Bureaucracy is the enemy of productivity. It is completing forms, unnecessary layers of approval and just added layers to getting things done. It can be as simple as having to fill out three forms to get a stapler or needing the approval of five business units to enter into a licensing agreement. When you centralize functions, one of their first tasks usually is to put procedures in place. The problem is that these procedures are not necessary and take people off the effort of creating value for your company.
- “Us versus them.” One of the most defining elements of the former Soviet Union was the way bureaucrats (e.g., shop owners, planners) treated people. There are books written about how condescending and abusive these central employees were towards the population. Ironically, the same thing happens in private companies when functions are centralized. Rather than everyone being part of one team towards one goal, the central functions often need to prove themselves by exerting power over the business units. And as they say, power corrupts.
- Disconnecting with your customers. Another problem with centralization is that the central functions often do not have a strong understanding of the customer. Whereas the people creating the product often understand how it is used or played because they have focused on building something for their customers, central functionaries often do not have that customer intimacy. They have not spent as much time learning the customer of a specific product, or game, and cannot devote that time to it because they are supporting multiple products that probably have different consumers. Given the importance of customer intimacy in so many functions, this centralized disconnect can make efforts like marketing, customer service, etc., weaker.
- Less responsibility. In a social or mobile gaming company, the team is focused on creating a game that optimizes customer lifetime value(LTV) and the gap between it and the cost of acquiring a user. When functions start to get centralized, the game team no longer has control over whether its game has a great LTV. Responsibility for the success of the game is spread across multiple people and units, and when many people have responsibility, nobody has responsibility.
- Weak functional areas. While the goal of creating centralized functional areas is creating a stronger unit, it often results in weakness in that area. First, the talent that made your company great is probably your strongest talent. Bringing in new talent for the functional area often results in weaker team members, though that is a problem you always deal with when growing. To go back to the Soviet Union example, the best and the brightest never found their ways into the planning halls and companies, and you will probably find the same in your company. The rock stars are not that interested in being part of a central service.
Think twice when centralizing
I am not saying you should not centralize any functions. Certainly finance needs to be centralized, at least partially. You can make the same case for marketing. As you grow, it is inevitable that certain functions need to be centralized. You should, however, be cognizant of the cost of centralization and avoid it when the benefits do not exceed these costs. You should also look internally and make sure every function you are now centralizing would not be more efficient if dispersed to your business units. When you do centralize certain functions, understand the downsides and structure to minimize them.
Most importantly, encourage individual thinking, collaboration and experimentation, but always leave the final decision up to those people who are closest to the product and the customer, people who “own the outcome.”