Question

The international finance function can be carried out in a centralised or a decentralised fashion. What are the advantages and disadvantages of each way of operating and what can be done to mitigate the disadvantages of each of these ways of organising?

Answer 1

Finance icentralization irefers ito ithe ico-location iand iconsolidation iof ifinancial iprocesses iacross imultiple ientities iinto ia isingle ilocation. iThis ienables iorganizations ito iprovide ioptimized, istreamlined iservices iacross ithe imultiple ilocations ifrom ia isingle isite.

In ia icentralized iorganization, ithe idecision-making ipowers iare iretained iin ithe ihead ioffice, iand iall iother ioffices ireceive icommands ifrom ithe imain ioffice. iThe iexecutives iand ispecialists iwho imake icritical idecisions iare ibased iin ithe ihead ioffice.

Advantages iof iCentralization

1. iA iclear ichain iof icommand

A icentralized iorganization ibenefits ifrom ia iclear ichain iof icommand ibecause ievery iperson iwithin ithe iorganization iknows iwho ito ireport ito. iJunior iemployees ialso iknow iwho ito iapproach iwhenever ithey ihave iconcerns iabout ithe iorganization. iOn ithe iother ihand, isenior iexecutives ifollow ia iclear iplan iof idelegating iauthority ito iemployees iwho iexcel iin ispecific ifunctions. iThe iexecutives ialso igain ithe iconfidence ithat iwhen ithey idelegate iresponsibilities ito imid-level imanagers iand iother iemployees, ithere iwill ibe ino ioverlap. iA iclear ichain iof icommand iis ibeneficial iwhen ithe iorganization ineeds ito iexecute idecisions iquickly iand iin ia iunified imanner.

2. iFocused ivision

When ian iorganization ifollows ia icentralized imanagement istructure, iit ican ifocus ion ithe ifulfillment iof iits ivision iwith iease. iThere iare iclear ilines iof icommunication iand ithe isenior iexecutive ican icommunicate ithe iorganization’s ivision ito iemployees iand iguide ithem itowards ithe iachievement iof ithe ivision. iIn ithe iabsence iof ia icentralized imanagement, ithere iwill ibe iinconsistencies iin irelaying ithe imessage ito iemployees ibecause ithere iare ino iclear ilines iof iauthority. iDirecting ithe iorganization’s ivision ifrom ithe itop iallows ifor ia ismooth iimplementation iof iits ivisions iand istrategies. iThe iorganization’s istakeholders isuch ias icustomers, isuppliers, iand icommunities ialso ireceive ia iuniform imessage.

3. iReduced icosts

A icentralized iorganization iadheres ito istandard iprocedures iand imethods ithat iguide ithe iorganization, iwhich ihelp ireduce ioffice iand iadministrative icosts. iThe imain idecision-makers iare ihoused iat ithe icompany’s ihead ioffice ior iheadquarters, iand itherefore, ithere iis ino ineed ifor ideploying imore idepartments iand iequipment ito iother ibranches. iAlso, ithe iorganization idoes inot ineed ito iincur iextra icosts ito ihire ispecialists ifor iits ibranches isince icritical idecisions iare imade iat ithe ihead ioffice iand ithen icommunicated ito ithe ibranches. iThe iclear ichain iof icommand ireduces iduplication iof iresponsibilities ithat imay iresult iin iadditional icosts ito ithe iorganization.

4. iQuick iimplementation iof idecisions

In ia icentralized iorganization, idecisions iare imade iby ia ismall igroup iof ipeople iand ithen icommunicated ito ithe ilower-level imanagers. iThe iinvolvement iof ionly ia ifew ipeople imakes ithe idecision-making iprocess imore iefficient isince ithey ican idiscuss ithe idetails iof ieach idecision iin ione imeeting. iThe idecisions iare ithen icommunicated ito ithe ilower ilevels iof ithe iorganization ifor iimplementation. iHowever, iif ilower-level imanagers iare iinvolved iin ithe idecision-making iprocess, ithe iprocess iwill itake ilonger iand iconflicts iwill iarise. iIt iwill imake ithe iimplementation iprocess ilengthy iand icomplicated ibecause isome imanagers imay iobject ito ithe idecisions iif itheir iinput iis iignored.

5. iImproved iquality iof iwork

The istandardized iprocedures iand ibetter isupervision iin ia icentralized iorganization iresult iin iimproved iquality iof iwork. iThere iare isupervisors iin ieach idepartment iwho iensure ithat ithe ioutputs iare iuniform iand iof ihigh iquality. iThe iuse iof iadvanced iequipment ireduces ipotential iwastage ifrom imanual iwork iand ialso ihelps iguarantee ihigh-quality iwork. iStandardization iof iwork ialso ireduces ithe ireplication iof itasks ithat imay iresult iin ihigh ilabor icosts.

Disadvantages iof iCentralization

1. iBureaucratic ileadership

Centralized imanagement iresembles ia idictatorial iform iof ileadership iwhere iemployees iare ionly iexpected ito ideliver iresults iaccording ito iwhat ithe itop iexecutives iassigned ithem. iEmployees iare iunable ito icontribute ito ithe idecision-making iprocess iof ithe iorganization, iand ithey iare imerely iimplementers iof idecisions imade iat ithe ihigher ilevel. iEven iwhen ithe iemployees iface idifficulties iin iimplementing isome iof ithe idecisions, ithe iexecutives iwill inot iunderstand ibecause ithey iare ionly idecision-makers iand inot iimplementers iof ithe idecisions. iThe iresult iof isuch iactions iis ia idecline iin iperformance ibecause ithe iemployees ilack ithe imotivation ito iimplement idecisions itaken iby itop-level imanagers iwithout ithe iinput iof ilower-level iemployees.

2. iRemote icontrol

The iorganization’s iexecutives iare iunder itremendous ipressure ito iformulate idecisions ifor ithe iorganization, iand ithey ilack icontrol iover ithe iimplementation iprocess. iThe ifailure iof iexecutives ito idecentralize ithe idecision-making iprocess iadds ia ilot iof iwork ito itheir idesk. iThe iexecutives isuffer ifrom ia ilack iof itime ito isupervise ithe iimplementation iof ithe idecisions. iIt ileads ito ireluctance ion ithe ipart iof iemployees. iTherefore, ithe iexecutives imay iend iup imaking itoo imany idecisions ithat iare ieither ipoorly iimplemented ior iignored iby ithe iemployees.

3. iDelays iin iwork

Centralization iresults iin idelays iin iwork ias irecords iare isent ito iand ifrom ithe ihead ioffice. iEmployees irely ion ithe iinformation icommunicated ito ithem ifrom ithe itop, iand ithere iwill ibe ia iloss iin iman-hours iif ithere iare idelays iin irelaying ithe irecords. iIt imeans ithat ithe iemployees iwill ibe iless iproductive iif ithey ineed ito iwait ilong iperiods ito iget iguidance ion itheir inext iprojects.

4. iLack iof iemployee iloyalty

Employees ibecome iloyal ito ian iorganization iwhen ithey iare iallowed ipersonal iinitiatives iin ithe iwork ithey ido. iThey ican iintroduce itheir icreativity iand isuggest iways iof iperforming icertain itasks. iHowever, iin icentralization, ithere iis ino iinitiative iin iwork ibecause iemployees iperform itasks iconceptualized iby itop iexecutives. iIt ilimits itheir icreativity iand iloyalty ito ithe iorganization idue ito ithe irigidity iof ithe iwork.

Finance icentralization irefers ito ithe ico-location iand iconsolidation iof ifinancial iprocesses iacross imultiple ientities iinto ia isingle ilocation. iThis ienables iorganizations ito iprovide ioptimized, istreamlined iservices iacross ithe imultiple ilocations ifrom ia isingle isite.

In ia icentralized iorganization, ithe idecision-making ipowers iare iretained iin ithe ihead ioffice, iand iall iother ioffices ireceive icommands ifrom ithe imain ioffice. iThe iexecutives iand ispecialists iwho imake icritical idecisions iare ibased iin ithe ihead ioffice.

Advantages iof iCentralization

1. iA iclear ichain iof icommand

A icentralized iorganization ibenefits ifrom ia iclear ichain iof icommand ibecause ievery iperson iwithin ithe iorganization iknows iwho ito ireport ito. iJunior iemployees ialso iknow iwho ito iapproach iwhenever ithey ihave iconcerns iabout ithe iorganization. iOn ithe iother ihand, isenior iexecutives ifollow ia iclear iplan iof idelegating iauthority ito iemployees iwho iexcel iin ispecific ifunctions. iThe iexecutives ialso igain ithe iconfidence ithat iwhen ithey idelegate iresponsibilities ito imid-level imanagers iand iother iemployees, ithere iwill ibe ino ioverlap. iA iclear ichain iof icommand iis ibeneficial iwhen ithe iorganization ineeds ito iexecute idecisions iquickly iand iin ia iunified imanner.

2. iFocused ivision

When ian iorganization ifollows ia icentralized imanagement istructure, iit ican ifocus ion ithe ifulfillment iof iits ivision iwith iease. iThere iare iclear ilines iof icommunication iand ithe isenior iexecutive ican icommunicate ithe iorganization’s ivision ito iemployees iand iguide ithem itowards ithe iachievement iof ithe ivision. iIn ithe iabsence iof ia icentralized imanagement, ithere iwill ibe iinconsistencies iin irelaying ithe imessage ito iemployees ibecause ithere iare ino iclear ilines iof iauthority. iDirecting ithe iorganization’s ivision ifrom ithe itop iallows ifor ia ismooth iimplementation iof iits ivisions iand istrategies. iThe iorganization’s istakeholders isuch ias icustomers, isuppliers, iand icommunities ialso ireceive ia iuniform imessage.

3. iReduced icosts

A icentralized iorganization iadheres ito istandard iprocedures iand imethods ithat iguide ithe iorganization, iwhich ihelp ireduce ioffice iand iadministrative icosts. iThe imain idecision-makers iare ihoused iat ithe icompany’s ihead ioffice ior iheadquarters, iand itherefore, ithere iis ino ineed ifor ideploying imore idepartments iand iequipment ito iother ibranches. iAlso, ithe iorganization idoes inot ineed ito iincur iextra icosts ito ihire ispecialists ifor iits ibranches isince icritical idecisions iare imade iat ithe ihead ioffice iand ithen icommunicated ito ithe ibranches. iThe iclear ichain iof icommand ireduces iduplication iof iresponsibilities ithat imay iresult iin iadditional icosts ito ithe iorganization.

4. iQuick iimplementation iof idecisions

In ia icentralized iorganization, idecisions iare imade iby ia ismall igroup iof ipeople iand ithen icommunicated ito ithe ilower-level imanagers. iThe iinvolvement iof ionly ia ifew ipeople imakes ithe idecision-making iprocess imore iefficient isince ithey ican idiscuss ithe idetails iof ieach idecision iin ione imeeting. iThe idecisions iare ithen icommunicated ito ithe ilower ilevels iof ithe iorganization ifor iimplementation. iHowever, iif ilower-level imanagers iare iinvolved iin ithe idecision-making iprocess, ithe iprocess iwill itake ilonger iand iconflicts iwill iarise. iIt iwill imake ithe iimplementation iprocess ilengthy iand icomplicated ibecause isome imanagers imay iobject ito ithe idecisions iif itheir iinput iis iignored.

5. iImproved iquality iof iwork

The istandardized iprocedures iand ibetter isupervision iin ia icentralized iorganization iresult iin iimproved iquality iof iwork. iThere iare isupervisors iin ieach idepartment iwho iensure ithat ithe ioutputs iare iuniform iand iof ihigh iquality. iThe iuse iof iadvanced iequipment ireduces ipotential iwastage ifrom imanual iwork iand ialso ihelps iguarantee ihigh-quality iwork. iStandardization iof iwork ialso ireduces ithe ireplication iof itasks ithat imay iresult iin ihigh ilabor icosts.

Disadvantages iof iCentralization

1. iBureaucratic ileadership

Centralized imanagement iresembles ia idictatorial iform iof ileadership iwhere iemployees iare ionly iexpected ito ideliver iresults iaccording ito iwhat ithe itop iexecutives iassigned ithem. iEmployees iare iunable ito icontribute ito ithe idecision-making iprocess iof ithe iorganization, iand ithey iare imerely iimplementers iof idecisions imade iat ithe ihigher ilevel. iEven iwhen ithe iemployees iface idifficulties iin iimplementing isome iof ithe idecisions, ithe iexecutives iwill inot iunderstand ibecause ithey iare ionly idecision-make