Corporate Parenting: Complex Structures

I' Introduction: The role ofcorpot'ate palenting has, in lecent years, become nrore complex ascompanies evolve lionr:

r Self-contained SBU-based structures where the parent' role is ofassuring that thenecessary legal and linancial responsibilities ofthe corporate body are fulfllled, ilto

o InterdePendent structures that are more complex in terms of relationships betweer1SBU's and Parent and SRU's. In such structures the parent's role is extended to addvalue to each level of the corporate whole. Here there is a need for more 'hands-on'parenting as coltaboration is extended into product units, customer units, geographicalunits and infrastructure units etc.

2. Parenting roles:

Minimum roles: Involve fulfilling legal and regulatory requirements and basic governancetunctions such as shareholder interests. The top management must:

. Establish a structure for the company,

. Appoint senior management,r Raise capital, handle investor relations,o Lnplement control pl'ocesses,r Guard against fiaud and. Check that delegatetl responsibilities are satisf'actorily exercised.

Value-added parenting roles: Here the parent extends its role to difTerent levels of corporatestructure by the development, implernentation and nronitoring of value-added policies such asmanufactuling excellence, TQM, technical standardi, bland extension etc. No SBU is allowed todevelop systems that difrer from such corporate parental policy requirements.

3. The nature of parenting in complex interdependent structures: In such structures there are fburparticulal challenges associated with both minimum and value-added parenting roles. These are:

a). Responsibilities: These are retained by the parent or shared with other units. Forexample, the parent may play an active role in creating an integrated strategy that will beaccepted throughout the cornpany and may establish policies and constrainis that regulatethe decisions of all SBU's. An example of this can be shown with Infineum, a jointventure between Exxon and Shell.

a. Infineum is a global leader in a range of additives sold to the oil andpetrochemicals i ndustry.

b. It is organised into three product groups that are broken down into I 5 separateprofit centres.

c. The product groups and p'ofit centres are mainly concerned with mar.keting.d. R&D, manufacturing and sales are all centralised and are core resource units.e. Decisions about rvhat research projects to pursue, where to position mauuf'acturilg

units around the world and how the sales fbrce should approach conlmoncustomers are all shared between profit centles, product groups ald the celtralfunctions. .

f. Since the structure is not based on independent SBU's, the parent is more willingto pursue a wider. range of value-added opportunities.

In structures like this the cEo cannot avoid playing a key role and retaining some vitalresponsibilities. Indeed, the organisation design makes it essential for the corporate parent to

exercise certain responsibilities in order fbr the company to function.

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b) Guiding co-ordination: with more interdependence between operating units, the parentalso usually plays a more active role in guiding co-ordination and networking betweenunits. Group management lvill establish the nature of the relationships between units,define the key processes for collaboration and be involved in promoting some linkages indisputes. The extent of a parent's role in guiding co-ordination depends on the importanceand difficulty of linkages between units. For example,

o In Motorola, a Cornmunication Group was set up in 1998 that included allMotorola's communication products and services. It was organised around majorcustomer groups.

o These customer-facing business units replaced product business units and rvereset up to provide n.role integrated solutions to customers' communication needs.

. There was a need 1br co-ordination between business units to co-ordinatesubscriber needs, develop platforms. and develop system infrastructure andstandards.

r This was achieved by the top management in the Communications Cr.oupovelseeing all horizontal co-ordination in all these areas.

o This process gave more emphasis to integrated customer solutions and createdbetter links across Motorola's communications business.

r The process added value by facilitating links between units.

Control processes: In interdependent structures, control processes are harder and morecomplicated. For example, core resource units' profitability measures are imelevant.Therefore, in such structures. SBU specific measures ofperformance need to becomplemented with perfbrmance measures for groups of SBU's that work with eachother. Judgement about the contribution of ditlerent units to group-wide results is alsoneeded.

Organisational design: In interdependent structures, there is more need for constant flnetuning of the design to make sure that it is achieving the purposes for which it wasestablished. The questions that need to be addresses are:

r Are responsibilities, relationships and pelfbrmance measures clear enough?. Are any clitical links between SBU's being under-managed?r Should the parent play a more active part in setting up co-or.dination

mechanisms or influencing the SBU's to collaborate?. Are perfbrmance measures arrd control processes stliking the right balance

between simplicity and sophistication?r Do relevant powers and responsibilities of overlapping units need to be

adjusted?

c)

d)

o Should a sirnpler, less interdependent structure be considered?Managing.redesigns in interdependent structures is a difficult task. The parent can addsubstantial value by creating designs in which interdependencies allow the whole to beworth more than the sum o1.the parts.For example, in Unilever, the balance between the product dirnensio. and thegeographical dimension of the organisation is always under constant review. In the lastdecade Unilever has implemented major reorganisations to reinforce tne proaucidimension and return to a more regional struciure. In addition, product group overlayunits have been used in some regions initially to give a focus for product group strategicplanning and to give gradually increased power ti the product groups. In this way, smallad-iustments to the tilt of the unilever matrix were introduced without n naamentatreorganisation.

4' Parent functions: The corpo|ate parent consists ofsenior line managers such as the cEo anddivision heads supported by stafffunctions. In complex structures, the parent,s support functions canplay a variety of roles, some of which overlap with^sgu roles. we "unioot at parent functions fromthe perspective of the specific roles of parenf functions, minimum ..qui..rn.nrr, value-addedrequirements, and the role played by lead SBU's.

r The role of parent fulrctions: The pulpose ofparent functions is to developspecialist expertise in activities relevani to minimum parenting tasks or pu,:J,.,tingpropositions' They assist senior managers in discharging obligator-y compliarce anddue diligence tasks and in adding value to the operati"ng units.

' Minimum corporate ;rarenting staff: one irnportanti.ole fbr.the parent's f u'ctioralsupport is to develop specialist expertise relevant to the rninimu1n .o.porui" --'-''

parenting activities. Research s.uggests_that for a company with 1000o empioy".,only about l5 corporate parenting stafr is needed. For'u "o*puny

with 50000emproyees, about 43 parenting staff is 'eeded

as a minimum.r Value-added parenting staff: Research shows that, companies with a high level oflinkage requirements and interdependence have twice u, runy corporate shfrascomp.anies.with little interdepenrlence. Furthermore, the level"anJiil;; ;i;;;;-*.functional influence is a driving factor in^shaping t "uoqrurt.rs

staff. For example,companies that guide nrost IT decisions from the-centre have IT o.pu.tr*tr'iriui o..more than ten times larger than companies with a more decentraliseJ uoo;;il:'' Lead SBU's: It is possible for specific SBU's to take the lead on u.t uitottt,. pur.nton issues such as plodtrct developrnent o, .rrtor.. liaison. An SBU with a strongtechnology in a certain area may be given u r.rponriuiiity and a budget to help otherSBU's to develop products that.use its technology. r-.uo sgu', may act as a coreresource or shared service providers, or may take on added-value p".."il.gi;l;rh*would otherwise have been perfbrrned by the parent.

5' Parenting levels and reporting relationships: In some companies there is more than one le'el ot.parent' For example, corporate group ancl division may each be separate levels above SBU,s. In sorrecompanies' the parenting role is divided between.two iiftbr"nt rin", or:r.porting that results ir.r a marrixstructure at the upper levels. It is quite comrnon for.the nrain p"r."ti; ,Jltionrnip to u.complemented by a so-calred 'dottecr line' or.secondary pare'ting relatio'ship.

' corporate parents and intermediate parents: ln very large companies, the role ofparent is often shared between one, or mor.e, levers "f

;"d.;;;:ioi.*un'pt., inPhilips, there are severar levels ofparent management. There are dangers here for everyextra lever of parent management can bring ouiti.ution un;;;rrd";t;. Ideally, thecorporate parent should concentrate on minimum cofporate parenting and a few high_level.parenting propositions, while the inte'mediate parents tttouiJ.-o".."trate on more'hands on' parenting plopositions that relate specifically to their b;;;rr. For example,Jack welch concentrared or.r a smail number oi.orporui.-*il; ;;;i;; propositionssuch as 'workout' and 'Boundaryress' whire the main groups, ,u.r, u, de capitarservices, played a croser parenting role for.their SBU's. Noie that if the group portfblioconsists of two or more groups of business with d.ifferent parenting needs, it may well bedesirable to create an illTediate lever of parenting for each gr""-p-"iieu,s. philips hasdone this for its lamp SBU's. (See philips crample).

Span of control breakers: Companies oflen establish intermediate parenting levels toreduce the humber of direcl reports to a manager. Some managers argue that spans ofcontrol should be no more than five but they can range up to thirty in flat organisations. Itis best if the span is driven by the nature of the parenting tasks lather than some formula.For example,

r If the parenting role is minimal then it's best to have wide spans of ten ormore.

o If the parenting role is more'hands on'with value-added intluence, then thespan can be narrower with a maximum number of reports of about eight beingthe norm.

r If the corporate portfblio includes too many SBU's to allow a suitable span of'control then it makes sense to set up sub-groups and install span breakermanagers. Instead of 24 SBU's all reporting to a CEO, three sub-groups couldbe created. each with its own span breaker, that in turn report to the CEO.

In effect, the span breakers act on behalfofthe CEO and extend his/her reach. Theyconduct formal reviews of the business together with the CEO as a unified parentingteam, but are able to have more extensive in formal contacts with SBU's than would bepossible were the CE,O to act alone.For span breakers to work effectively it is necessary to:

. . Design reporting and influencing processes that closely integrate the roles ofthe CEO and span breakers.

r For group and division managers to be clear about whether they areintermediate parents with a sepalate added-value role ol simply span breakersworking with the CEO.

Divided reporting: In multi-dimensional structures, operating unit managers sometimesreport to more than one boss. This is particularly so in matrix structures. In suchsituations, the two bosses share the parenting tasks. For example:

. The countr),boss may be the primary line fbr of reporting fbr. budgetapproval and monthly monitoring, while

. The global product division boss may take the lead on stl.ategy andinvestment allocation.

Divided reporting is not easy. To work well it requires clear agreement about who isresponsible fbr what. It also needs a process fi'o reaching a collective view on parentingresponsibilities that are shared between the bosses. Such agreements may be possible inprinciple but:

. They are liable to break down in practice in the face ofcrises and specificissues.

. They can cause potential conflict for operating managers because ofthenature ofthe dual reporting process.

Less than 10% of USA and uK companies now have matrix reporting processes. EvenABB has abandoned it.

Dotted-line reporting: With dotted-line reporling there is a clear line of reporting to themain boss but there are other secondary or dotted-line reporting relationships. Usually,the main boss is the authority but the dottecl-line boss can have some inf'luence on speoif)cissues. For example:

r A business function head may report to a business unit general mapager. butr Have a dotted-line relationship to a corporate pafent function boss.

Dotted-line is usually identified as secondaly reporting and is easier and more commonthan divided (dual boss) reporting. It can be a good way to implement and legitimisecertain types offunctional influence. For example, a financial head in an SBU is part ofthe SBU team but can also have a secondary reporting role to the corporate FinanceDirector. The corporate FD can use this relationship to check on the financial parametersbeing followed by the SBU.

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The Lamps Business Group has 28,000 employees but only five employees work at the BusinessGroup level The main tasks of the Lamps Business Group is to improve cross-regional co-ordination.The lamps Business Group is held accountable fbrthe long-term value of the business. Below theBusiness Groups are the Regions.Regions al'e, in effect, SBU's. They are organised into Sales and Marketing and Supply Croups

(buying, manuf-acturing and distribution). For purposes ofcross-regional co-ordination, there arecommittees with representatives of the respective Regional Sales and Marketing and Supply Cror"rps.The Regions are primarily accountable tio profitability, measured by ROA.

Sales and Marketing consists of three Regional organisations serving retail, professional andOEM customers with sub-units in each country. These sub-units keep track of local margins andcosts. Within the supply chain, the organisation is broken down by lamp types.The Supply Group is a cost centt'e.

The profitability and asset utilisation, covering Sales and Marketing and the Qupply Group, fordifferent lamp types is tracked by the accounting system.

The Philips structure, therefore, has three levels ofparent. These are Corporate, Product Divisionand Business Group. Each level has a distinctive role above the Regional Lamps SBU's. There are alsoprofit-responsible sub-units for specific channels, countries and lamp types.It is not unusual for large MNC's to have four or more levels of profit responsible management.

6. Conclusions:

l. The role ofthe parent is vital in designing and managing eft'ective interdependent structures2. Where an organisation seeks value-added excellence, the parenting lole needs to be extended

to different levels ofthe corpor€rte structure.3. The parent should decentralise most decisions but, to make the structure work well, it must

letain its influence and authority in establishing clear SBU roles; facilitating difficult linksbetlveen SBU's exercising control and adjusting the organisation to the changes it faces.

4. Without the necessary skills and competencies in the parent, value destruction is a realpossibility.

5' Practising corporate parenting provides the best way ofachieving value-added excellence inthe organisation.

\...,r note was developed by reference to 'Parenting in Complex Structures'. Goold and Campbell(2002). Long Range Planning volume 35.