Creating SBUs is not without its side effects

The normal response of companies to increased competition and business complexity  is creation of “verticals”. Verticals are sub-organizations in the form of strategic business units (SBUs) focused on a specific sets of customers headed by Chief Operating Officers (COOs). But are there any side effects ?  

Creation of SBUs helps push decisions closer to the front line where the decision makers have a better visibility of  their customers & competitors. However, the fallout is that the COOs - driven by the metric of “next quarter’s operating profit” tend to focus on short term behaviors like (a) sweating existing competencies and assets (b) doing things that fructify within a short term (c) deferring investments in development and maintenance of enabling   functions. Unless these tendencies are checked, the creation of verticals, in the long run, proves detrimental because it channels budgets towards short term operating outcomes and deprives budgets for programs aimed at building long term corporate level competencies. 

What corporate competencies get weakened under vertical structure? 

(a)    Building really-new businesses using corporate wide resources

(b)    Making long gestation adjustments in response to environmental changes

(c)    Corporate level acquiring & hiving off businesses  

(d)   Creating long term metrics of corporate performance and creating the right culture 

(e)    Managing stakeholder expectations and winning their support

(f)     Setting and adjusting the pace of corporate wide initiatives including support functions

Overcoming the ills of SBU Creation

The remedy is not to give up creating verticals but to overlay the vertical structure with a corporate structure called Corporate Performance Council (CPC) and the recipe is as follows.

 1.   The focus will be to budget all those projects - which are essential for the company to grow its market capitalization - but which normally will not get funded by SBUs because they are guided by quarterly / annual operating profits. Projects selected by CPC  are likely to be at the corporate level with gestation beyond an year.

 2.   CPC must carve out a discrete corporate-performance budget and form a project-management office to direct the process. The people needed to drive the initiatives will be recruited either by tapping internal talent or by spending money to recruit new talent from the outside.

 3.   When an initiative succeeds and goes operational, its ongoing activities and staff are moved out of the discrete corporate-performance budget and put back into the operating budget. Unsuccessful initiatives are terminated..

 4.   CPC needs to  meet once a month for a full day to select, deploy, review and revise 4-5 such initiatives. Selection is based on ideas bubbling up through the company.  The ideas are openly debated and sponsorship is assigned early in the process. Every six months or so, the group might review the entire active portfolio of initiatives and determine which need to accelerated, scaled, tweaked or dropped.

 5.   CPC Membership : consists of major business leaders and key functional staff. There can even be up to 25. The burden should not be only on line managers.  Any member of top management with important knowledge needed to inform, debate and help implement the decisions. Those who are in the best position to see and decide trade off between current and future performance.

 6.   CPC takes collective accountability for communicating and influencing the expectations regarding future results of relevant stakeholders like customers, regulators, media, employees, shareholders and directors.

 7.   CPC should create an atmosphere where managers wouldn’t be deemed to be performing well without sponsoring new initiatives and effectively helping to carry them out.

The idea for this article came from an article in McKinsey Quarterly "Managing for improved corporate performance" by Bryan and Hulme, August 2003