Who Decides What: Centralized vs. Decentralized Authority

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Who Decides What: Centralized vs. Decentralized Authority

Principles of Management · Chapter 7: Designing the OrganizationSection 7.2 · lesson 34 of 11712 min · free with a free account

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In this lesson

Centralized vs. decentralized authority.

  • Distinguish centralization, delegation and empowerment
  • Identify the 6 factors that should place a decision
  • Explain the accountability principle and its failures
  • Assign decisions to the appropriate level

Transcript

Everything said in the video, section by section (1,697 words). Read along, or search it.

Designing the Organization

Who Decides What

Every organization makes thousands of decisions. This section is about where each one should be made. We'll start by treating centralization as a continuum, not an organization-wide setting. We'll separate it from two terms it's often confused with, delegation and empowerment. Then we'll set out six factors that should determine where a decision sits. We'll look at the accountability principle, and the common ways placement goes wrong. And we'll end with a practical habit. Mapping decisions, instead of declaring a philosophy.

A Continuum

Centralized for Some Decisions, Not Others

Centralization is the degree to which decision authority is concentrated at the top of an organization. The essential point to establish first is that it's a continuum, not a binary setting. An organization is never simply centralized or decentralized as a whole. It's centralized with respect to some decisions, and decentralized with respect to others. So the question, should we be a centralized organization, is the wrong one. It applies a single philosophy uniformly, regardless of what's actually being decided. The genuinely useful question is asked decision by decision. Where should the authority for this particular decision sit? Hold on to that framing. Everything else in this section builds on it.

3 Terms

Centralization, Delegation, Empowerment

Three related terms are worth separating precisely. Centralization, as we've just defined it, describes where authority generally sits across the organization's decisions. Delegation is the assignment of authority for a specific decision, from a manager to a subordinate. It's a deliberate, individual act, not a structural default. Empowerment is a standing condition of a role. The position is designed from the outset to carry a defined scope of independent decision authority. Authority isn't handed over case by case. Empowerment is developed fully in Subchapter eleven point ten. It's distinguished here because it's easy to confuse with decentralization. The two are related. A genuinely decentralized organization tends to design many of its roles as empowered ones. But decentralization describes how authority is distributed across the organization. Empowerment describes a property built into a specific role.

Placing a Decision

6 Factors That Should Decide Where It Sits

Six factors should determine where a given decision's authority sits. First, where the relevant information is. Who actually has the knowledge the decision requires? Second, the cost of a wrong decision. How much damage would an error cause? Higher-stakes errors generally warrant more senior review. Third, the speed required. How quickly must the decision be made? Routing it upward adds delay. Fourth, the need for consistency across units. Must the decision come out the same way, whichever part of the organization makes it? Fifth, the capability at the lower level. Are the people closer to the decision actually equipped to make it well? And sixth, the value of developing that capability. Pushing a decision downward, even at some short-term risk, can build judgment that pays off in decisions still to come. Notice that these factors can pull in opposite directions for the same decision. That's why placement takes judgment.

2 Strongest Arguments

Information Pulls Down, Consistency Pulls Up

Of the six factors, where the information is makes the strongest argument for pushing a decision downward. A decision should sit where the information needed to make it well already exists. Push it upward past that point, and two things happen at the same time. You decide with worse information. And you add delay. The person with the least direct knowledge of the situation is asked to decide about it. And only after the time it took to relay whatever partial information reached her. Neither cost is hypothetical. Both follow mechanically from separating a decision from the information it depends on. Against this sits an equally real argument pulling the other way, which is consistency. Decisions that must come out identically across every unit belong at the center, wherever the local information sits. Think of a price that must be uniform for legal or brand reasons, or a safety standard that can't vary by location. A local manager may understand her own market better than anyone at headquarters. But in these cases, the value of uniformity outweighs the value of locally informed judgment.

Figure 7.2.1

A Decision Map at Harborline Manufacturing

Figure seven point two point one is a decision map for a fictional firm, Harborline Manufacturing. It places decisions by the level that should own them. Top, middle, and frontline. At the top sit entering a new international market, and setting companywide safety standards. In the middle sit allocating the quarterly departmental budget, and reorganizing two conflicting teams. At the frontline sit covering a shift after a same-day absence, and approving a routine leave request. The map states its reasoning for two of the placements. Entering a new market sits at the top because of its high stakes and long horizon. Covering a same-day absence sits at the frontline, because that's where the relevant information is, and where speed is needed. So the placement isn't determined by seniority alone. Each decision goes where the six factors actually point.

Accountability

Authority Must Match Responsibility

Wherever a decision's authority is placed, one principle has to hold. The accountability principle requires that authority match responsibility. It's a direct application of Fayol's authority-responsibility relationship, from Subchapter three point five. Put authority at one level while holding a different level accountable, and the principle is violated. That's true whichever of the six factors justified the placement. Three failure patterns recur in how organizations get placement wrong. The first is responsibility delegated without authority. Someone is held accountable for an outcome, while the decision that determines it sits above her. She's responsible for something she can't control. The second is authority delegated without capability or information. The decision is pushed down to a level lacking the skill or knowledge to make it well. The result is poor decisions dressed up as empowerment. The third is the reserved decision nobody has stated is reserved. In practice it's always made or overruled at the top, but no one has ever said so. So lower levels waste time and judgment on a decision that was never genuinely theirs to make.

Reverse Delegation

When a Delegated Decision Comes Back Up

Reverse delegation happens when a subordinate returns a decision that had formally been delegated to her. She asks her manager to decide instead of deciding herself. It's tempting to treat that as an inconvenience. It's more useful to read it as a diagnostic signal. It often tells you something about how the earlier delegation was received. There may be a fear of being blamed for an outcome the manager won't actually stand behind. There may be a lack of confidence that the delegation was genuine, rather than a test. Or there may be a real gap in the information or capability the decision requires. Each of those calls for a different fix. A manager who accepts every reversed decision without asking why it came back hasn't solved the underlying problem. She has simply absorbed its symptom.

Table 7.2.1

Which Way Each Factor Pushes

Table seven point two point one summarizes which way each factor pushes a decision, with an illustrative example. Where the information is pushes toward whichever level actually holds it. A frontline scheduling call that depends on floor conditions. The cost of a wrong decision pushes toward more senior review as stakes rise. A multi-year capital investment, or a market-entry decision. The speed required pushes toward the level closest to where the decision must be acted on. An immediate customer-service resolution. The need for consistency pushes toward the center, when uniformity itself has real value. A companywide safety standard, or a brand requirement. Capability at the lower level pushes toward whichever level is actually equipped to decide well. That might be a technical judgment that needs specialist expertise. And the value of developing capability pushes toward the lower level, even at some near-term risk. The aim is to build judgment for the future, as with a stretch decision assigned to a developing manager.

The Cost on Each Side

Every Placement Has a Price

Each side of the continuum carries its own characteristic costs. Centralization produces decision queues at the top. Too many decisions get routed upward, more than a small number of senior people can process promptly. It also produces atrophy of judgment below. Levels that never actually decide anything lose whatever capability they might otherwise have developed. Decentralization carries the mirror-image costs. Inconsistency, as units make similar decisions differently. Duplication, as separate units solve the same problem independently, without coordinating. And divergence from strategy. Locally sensible decisions accumulate into a pattern the organization as a whole never actually chose. Neither set of costs disappears. Placement is about choosing which costs a given decision can best afford.

Sorting, Not Choosing

Shared Services, Centers of Expertise, Decision Maps

Some structures avoid an all-or-nothing choice altogether. Shared services and centers of expertise centralize some decisions, while decentralizing others within the same function. A shared services arrangement centralizes routine, transactional activity, payroll processing for instance. That captures consistency and scale. A center of expertise centralizes deep specialist judgment on a narrow topic, one that few units could access on their own. In both cases, the surrounding, context-dependent decisions stay with the units themselves. So neither arrangement is centralized or decentralized as a whole. Each sorts specific decisions to the placement that fits them. That points to the practical exercise behind this whole section. List the organization's actual, significant decisions, and place each one deliberately against the six factors. That's what the decision map did for Harborline Manufacturing. The alternative is a general stance toward empowerment or control, applied uniformly. And that's exactly what to avoid.

Case Vignette

Held Responsible for a Decision Made 2 Levels Above

Here is a composite case, constructed for instruction. Farah managed a regional distribution center. She was formally accountable for its on-time delivery rate, a metric tied directly to her own performance review. But the carrier contracts her center relied on were negotiated and renewed centrally. A procurement function two levels above her handled them, with no input from her, and no view of her center's delivery patterns. Then a newly renewed carrier contract introduced a slower delivery tier, to cut cost. Farah's on-time rate fell sharply, through no decision of her own. She had no authority to pick a different carrier, renegotiate the terms, or override the central choice. She could only manage around the consequences as best she could. This is a clean instance of the accountability principle violated. Responsibility for the outcome sat with her. The decision that most directly determined it sat two levels above her. And there was no formal channel for her operational knowledge to reach the people who made it.

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FAQ

Questions students ask us

About Who Decides What: Centralized vs. Decentralized Authority

What is the difference between centralization and decentralization?
Centralization concentrates decision authority at the top of an organization, while decentralization distributes it to lower levels. It is a continuum rather than an either-or setting: an organization is centralized for some decisions and decentralized for others. The useful question is where the authority for each particular decision should sit, not whether the whole organization should be centralized.
What is the difference between delegation and empowerment?
Delegation is a manager assigning authority for a specific decision to a subordinate, a deliberate, case-by-case act. Empowerment is a standing feature of a role, designed from the start to carry a defined scope of independent decision authority. Both differ from decentralization, which describes how authority is distributed across the whole organization rather than within one role or decision.
How do you decide what level of management should make a decision?
Six factors guide where a decision should sit: where the relevant information is, the cost of a wrong decision, the speed required, the need for consistency across units, the capability at the lower level, and the value of developing that capability. Information and speed tend to push decisions down, while high stakes and a need for uniformity, such as companywide safety standards, pull them up.
What is the accountability principle in management?
The accountability principle holds that authority must match responsibility, an application of Henri Fayol's authority-responsibility idea. It is violated when someone is held accountable for an outcome decided above them, when authority is pushed to people lacking the information or skill to use it, or when a decision is quietly reserved for the top without anyone saying so.

About the Principles of Management course

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