A decentralised organisation is composed of operational units led by managers who have some degree of decision-making independence. The degree to which a company is decentralised depends on top management philosophy and on the ability of unit managers to perform independently. Decentralisation provides managers the chance to develop leadership qualities, creative problem-solving abilities, and decision-making proficiency.
Decentralisation does not necessarily mean that a unit manager has the right to make all decisions relating to that unit. Top management selectively decides the types of authority to pass on and the types to deny. It also lets the individual closest to the operational unit make decisions for that unit, thereby reducing the time spent in communicating and making decisions. Decentralisation can, however, extend responsibility too thinly throughout the organisation; can effect in antagonism among managers that might lessen organisational goal congruence, and could create high costs of incorrect decisions made by the decentralised unit managers.
As with any management method, decentralisation has advantages and disadvantages, which should be measured in order to reach an optimal degree of decentralisation (Horngren et al.2003). Firstly, added responsibility and decision-making authority often outcome in increased job satisfaction and provide greater incentive for the manager, hence increases the motivation and productivity of personnel and unit performance. Also greater decision-making opportunity provides valuable training for managers as they rise in an organisation.
One more advantage could be the better sensitivity to unit needs as the information is a key for decision-making. Decisions are best made at the level in the organisation where a problem or an opportunity arises; the local manager typically has more information upon which to base a decision. The closer to customers, suppliers and employees the better chances to improve quality and decrease costs of production. Decentralisation also increases the speed of making decisions, although it depends on the autonomy delegated.
An additional advantage of decentralisation is the flexibility and concentrated management focus of the smaller unit. It has the ability to adapt itself quickly to a fast-opening market opportunity. At the same time, top management can be involved in making strategic decisions and is free to concentrate on long-range planning and coordinating efforts for the entire organisation. Particularly in larger organisations, the benefits of decentralisation usually outweigh the disadvantages. Nevertheless, it is important to be aware of the potential problems with decentralisation.
As a main disadvantage management should consider the possibility of suboptimal decision-making, i.e. unit benefits from decision but the costs/loss for organisation, as a whole is higher. Lower level managers may not understand the "big picture," leading to decisions that are inconsistent with the company's strategy. Lower level managers may have different objectives than top managers and may pursue their own objectives to the detriment of the objectives of the overall organisation.
It should be pointed out as well that top managers might have different objectives than the owners. Decentralised decision-making may lead to a lack of coordination among different units as well and another possible disadvantage is the increased cost and time for top management to gain information about different units in order to coordinate them. If decentralised units are really independent-minded and autonomous, there may be little communication and cooperation among the units. Innovative ideas may spread more slowly through a highly decentralised organisation than an organisation in which top managers feel free to impose innovation.
Last but not least, decentralisation can be extremely expensive regarding costs of training and recovering from making poor management decisions. Managers of the various subunits have a responsibility to achieve the overall firm's goals, not to better their own unit's position in a manner that works against the good of the entire company (i.e., goal congruence). Responsibility accounting provides a method of encouraging goal congruence by setting and communicating the performance measures by which managers will be measured. The segments under such a system are referred to as responsibility centres-units whose managers are held accountable for specified financial results.
Responsibility accounting systems provide information on the revenues and/or costs under the control of unit managers. Responsibility reports reflect the upward flow of information from each decentralised unit to the top management. Managers receive information regarding the activities under their immediate control as well as the control of their direct subordinates. The information is successively combined, and the reports allow the application of the management by exception principle. All unit managers should perform their function within the agenda of organisational goal congruence, although there is a possibility of suboptimisation of resources (Horngren et al.2003).