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Corporate Parenting: Complex Structures

I' Introduction: The role ofcorpot'ate palenting has, in lecent years, become nrore complex as companies evolve lionr: Self-contained SBU-based structures where the parent' role is ofassuring that the necessary legal and linancial responsibilities ofthe corporate body are fulfllled, ilto InterdePendent structures that are more complex in terms of relationships betweer1 SBU's and Parent and SRU's. In such structures the parent's role is extended to add value 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, geographical units and infrastructure units etc.

2. Parenting roles:

Minimum roles: Involve fulfilling legal and regulatory requirements and basic governance
tunctions such as shareholder interests. The top management must: . Establish a structure for the company,

. r o r .

Appoint senior management, Raise capital, handle investor relations,

Lnplement control pl'ocesses,
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 corporate structure by the development, implernentation and nronitoring of value-added policies such as manufactuling excellence, TQM, technical standardi, bland extension etc. No SBU is allowed to develop systems that difrer from such corporate parental policy requirements.
3. The nature of parenting in complex interdependent structures: In such structures there are fbur particulal 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. For example, the parent may play an active role in creating an integrated strategy that will be accepted throughout the cornpany and may establish policies and constrainis that regulate the decisions of all SBU's. An example of this can be shown with Infineum, a joint venture between Exxon and Shell. a. Infineum is a global leader in a range of additives sold to the oil and petrochemicals i ndustry. b. It is organised into three product groups that are broken down into I 5 separate profit centres.

c. d. e.

f.

The product groups and p'ofit centres are mainly concerned with mar.keting. R&D, manufacturing and sales are all centralised and are core resource units. Decisions about rvhat research projects to pursue, where to position mauuf'acturilg units around the world and how the sales fbrce should approach conlmon customers are all shared between profit centles, product groups ald the celtral functions. . Since the structure is not based on independent SBU's, the parent is more willing to pursue a wider. range of value-added opportunities.

In structures like this the cEo cannot avoid playing a key role and retaining some vital responsibilities. 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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units) 7 Production
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b)

Guiding co-ordination: with more interdependence between operating units, the parent
also usually plays a more active role in guiding co-ordination and networking between units. Group management lvill establish the nature of the relationships between units, define the key processes for collaboration and be involved in promoting some linkages in disputes. The extent of a parent's role in guiding co-ordination depends on the importance and difficulty of linkages between units. For example, In Motorola, a Cornmunication Group was set up in 1998 that included all Motorola's communication products and services. It was organised around major customer groups. These customer-facing business units replaced product business units and rvere set up to provide n.role integrated solutions to customers' communication needs. There was a need 1br co-ordination between business units to co-ordinate subscriber needs, develop platforms. and develop system infrastructure and

o o .

r o r
c)

standards.

This was achieved by the top management in the Communications Cr.oup ovelseeing all horizontal co-ordination in all these areas. This process gave more emphasis to integrated customer solutions and created better links across Motorola's communications business. The process added value by facilitating links between units.
processes are harder and more

Control processes: In interdependent structures, control

complicated. For example, core resource units' profitability measures are imelevant. Therefore, in such structures. SBU specific measures ofperformance need to be complemented with perfbrmance measures for groups of SBU's that work with each other. Judgement about the contribution of ditlerent units to group-wide results is also
needed.

d)

Organisational design: In interdependent structures, there is more need for constant flne tuning of the design to make sure that it is achieving the purposes for which it was established. 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?

reorganisation.

o Should a sirnpler, less interdependent structure be considered? Managing.redesigns in interdependent structures is a difficult task. The parent can add substantial value by creating designs in which interdependencies allow the whole to be worth more than the sum o1.the parts. For example, in Unilever, the balance between the product dirnensio. and the geographical dimension of the organisation is always under constant review. In the last decade Unilever has implemented major reorganisations to reinforce tne proauci dimension and return to a more regional struciure. In addition, product group overlay units have been used in some regions initially to give a focus for product group strategic planning and to give gradually increased power ti the product groups. In this way, small ad-iustments to the tilt of the unilever matrix were introduced without n naamentat

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

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u, runy corporate shfras comp.anies.with little interdepenrlence. Furthermore, the level"anJiil;; functional influence is a driving factor in^shaping t staff. For example, companies that guide nrost IT decisions from "uoqrurt.rs the-centre have IT o.pu.tr*tr'iriui o.. more than ten times larger than companies with a more decentraliseJ Lead SBU's: It is possible for specific SBU's to take the lead on u.t uitottt,. pur.nt on issues such as plodtrct developrnent o, .rrtor.. liaison. An SBU with a strong technology in a certain area may be given u r.rponriuiiity and a budget to help other SBU's to develop products that.use its technology. r-.uo sgu', may act as a core resource or shared service providers, or may take on added-value would otherwise have been perfbrrned by the parent.

Minimum corporate ;rarenting staff: one irnportanti.ole fbr.the parent's f u'ctioral --'-'' support 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 with 50000 emproyees, about 43 parenting staff is "o*puny as a minimum. Value-added parenting staff: Research'eeded shows that, companies with a high level of linkage requirements and interdependence have twice

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

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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 sorre companies' the parenting role is divided between.two iiftbr"nt rin", or:r.porting that results ir.r a marrix structure 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.

'

and intermediate parents: ln very large companies, the role of parent is often shared between one, or mor.e, levers in Philips, there are severar levels ofparent management. "f There are dangers here for every extra lever of parent management can bring ouiti.ution Ideally, the corporate 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 For example, Jack welch concentrared or.r a smail number oi.orporui.-*il; propositions such as 'workout' and 'Boundaryress' whire the main groups, ,u.r, u, de capitar services, played a croser parenting role for.their SBU's. Noie that if the group portfblio consists of two or more groups of business with d.ifferent parenting needs, it may well be desirable to create an lever of parenting for each gr""-p-"iieu,s. philips illTediate has done this for its lamp SBU's. (See philips crample).

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Span of control breakers: Companies oflen establish intermediate parenting levels to reduce the humber of direcl reports to a manager. Some managers argue that spans of control should be no more than five but they can range up to thirty in flat organisations. It is 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 or

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more. If the parenting role is more'hands on'with value-added intluence, then the span can be narrower with a maximum number of reports of about eight being the norm. 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 breaker managers. Instead of 24 SBU's all reporting to a CEO, three sub-groups could be 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. They conduct formal reviews of the business together with the CEO as a unified parenting team, but are able to have more extensive in formal contacts with SBU's than would be possible 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 of the CEO and span breakers. r For group and division managers to be clear about whether they are intermediate parents with a sepalate added-value role ol simply span breakers working with the CEO.

Divided reporting: In multi-dimensional structures, operating unit managers sometimes report to more than one boss. This is particularly so in matrix structures. In such
situations, the two bosses share the parenting tasks. For example: The countr),boss may be the primary line fbr of reporting fbr. budget approval and monthly monitoring, while The global product division boss may take the lead on stl.ategy and investment allocation.

. .

Divided reporting is not easy. To work well it requires clear agreement about who is responsible fbr what. It also needs a process fi'o reaching a collective view on parenting responsibilities that are shared between the bosses. Such agreements may be possible in principle but: They are liable to break down in practice in the face ofcrises and specific

issues.

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

Less than 10% of USA and ABB has abandoned it.

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companies now have matrix reporting processes. Even

main 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)c issues. For example: A business function head may report to a business unit general mapager. but Have a dotted-line relationship to a corporate pafent function boss.

Dotted-line reporting: With dotted-line reporling there is a clear line of reporting to the

r r

Dotted-line is usually identified as secondaly reporting and is easier and more common than divided (dual boss) reporting. It can be a good way to implement and legitimise certain types offunctional influence. For example, a financial head in an SBU is part of the SBU team but can also have a secondary reporting role to the corporate Finance Director. The corporate FD can use this relationship to check on the financial parameters being followed by the SBU.

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The Lamps Business Group has 28,000 employees but only five employees work at the Business Group 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 the
Business 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 are committees 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 and OEM customers with sub-units in each country. These sub-units keep track of local margins and costs. 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, for different lamp types is tracked by the accounting system. The Philips structure, therefore, has three levels ofparent. These are Corporate, Product Division and Business Group. Each level has a distinctive role above the Regional Lamps SBU's. There are also profit-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. 2. 3. 4. 5'

The role ofthe parent is vital in designing and managing eft'ective interdependent structures Where an organisation seeks value-added excellence, the parenting lole needs to be extended to different levels ofthe corporrte structure. 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 links betlveen SBU's exercising control and adjusting the organisation to the changes it faces. Without the necessary skills and competencies in the parent, value destruction is a real possibility. Practising corporate parenting provides the best way ofachieving value-added excellence in
the organisation.

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