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The Multilocal Challenge Managing Cross Border Functions


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The Multilocal Challenge Managing Cross Border Functions

  1. 1. multilocal management - The multilocal challenge: Managing cross-border functions - Or... Page 1 of 8 Welcome, Log Out My Profile Member Center About Us Help Member Edition 28 March 2008 Home » Organization » Postmerger Tools 3/28/2008
  2. 2. multilocal management - The multilocal challenge: Managing cross-border functions - Or... Page 2 of 8 The multilocal challenge: Managing cross-border functions Companies are learning to adapt their organizational design to capture cross-border synergies and to protect local sources of profitability. Giancarlo Ghislanzoni, Risto Penttinen, and David Turnbull March 2008 The need to grapple with the organizational challenge of doing business in several countries is hardly new. People who write about the management of multinational companies have long debated organizational choices such as a geographic versus product focus, the role of country managers, and the pros and cons of the transnational model.1 This perennial topic in the management literature, however, is now top of mind for senior managers at a growing number of companies that are expanding abroad or seeking to deepen their cross-border integration. These executives are trying to take advantage of increased scale and cross-border synergies while simultaneously protecting the value of steadfastly local activities—separate product lines, production facilities, or supply chains; strong company cultures; or some combination of these. In Europe, among other places, local elements in sectors such as power utilities, retail banking, insurance, and telecommunications represent sizable profit sources that the blanket application of multinational best practices and global processes could easily undermine. We call these kinds of companies multilocals, to reflect their international and domestic character. Such organizations have strong roots in national or regional companies but often expand abroad because they have the resources to pursue mergers and acquisitions but only limited growth potential at home. They hope to take advantage of the opportunities provided by changing regulation and converging consumer tastes. Today, they are especially active in Europe, though we have also encountered them in South America and parts of Asia. The challenge facing executives at the multilocals is to manage their dual local–international focus. Our recent experience and research offer fresh insights into how they can handle what could be a delicate balancing act. Lessons from the multilocal approach could also be useful for organizations (such as big packaged-goods companies) that are already global and routinely face critical decisions about whether to manage functions at the country, regional, or international level. Companies must first identify their sources of local and cross-border value and then grasp and address the barriers that may hinder the level of integration they desire. At the same time, they must learn to manage the complexity of the multilocal approach by grouping businesses in geographic clusters where appropriate, fine-tuning management’s accountability, and introducing a common culture, but only where it would have a positive impact. The approach we lay out is more nuanced than the blanket centralization of certain functions and may therefore be better suited to capturing the value of cross-border integration while protecting domestic value. Pushing across borders What makes the issue of multilocalism especially noteworthy today—and adds urgency to the search for solutions—is the surge of cross-border acquisitions by businesses that serve individual (as opposed to business) customers. This gives the local dimension critical significance. Several forces have spurred international expansion in these sectors. In some cases—Europe’s mobile-telecom industry, for instance—previously national players have expanded by acquiring similar companies elsewhere as home markets became saturated. (For this reason, many Chinese companies are looking to grow abroad as well.) Meanwhile, more liberal government policies in Europe have made it easier and more lucrative for companies to operate across borders in hitherto-fragmented markets. During the mid-1990s, for example, the Scandinavian countries adopted a regulation establishing the Nord Pool power exchange, a unified market infrastructure that made it possible to trade in power and derivative products across the entire Nordic region: 3/28/2008
  3. 3. multilocal management - The multilocal challenge: Managing cross-border functions - Or... Page 3 of 8 Denmark, Finland, Norway, and Sweden. Although local tastes and preferences remain a reality for many multilocal companies, the expectation of greater convergence among consumers has also fueled many deals, notably in retail banking. Several banks have already integrated their IT and other operations across borders in areas such as mortgages, asset management, trade finance, and cash management. This wave of M&A has had a striking impact on Europe’s corporate landscape. The 25 largest European banks derive almost half of their business from outside the home market. Over the past decade, the share of international assets in their total asset base has increased to 43 percent, from 28 percent. In the power utility sector, nondomestic revenues accounted for 38 percent of the combined turnover of the ten leading European players in 2006, up from only 9 percent in 1995. While not nearly as geographically diverse as long-established multinationals in, say, oil and gas or consumer goods, companies in sectors such as banking and power now operate in a rapidly growing number of countries. Their need to protect sources of local value jealously means that they are developing fresh solutions to an issue that more established multinationals may have had longer to address yet continue to find difficult. Bringing multilocal organizations to life Centralizing accountability for a function at headquarters may be an obvious solution to the problems of operating in more than one country, but it isn’t always the right one. Excessively tight central control risks tearing apart processes that have been optimized locally and stifling the entrepreneurship, initiative, and local adaptations that create local value. While a company that generates electric power might seem to have strong economic reasons for centralizing its fuel purchases, for example, individual plants may require locally determined supplies to operate in the most efficient way. How can multilocals capture value abroad while protecting the benefits of a national organization? Two elements of particular importance emerge from our work: establishing an organizational design that strikes the appropriate local–global balance and countering complexity and ambiguity. Designing a balanced organization To get the balance right in a multilocal organization, companies should identify their specific sources of local and international value and then understand and address organizational barriers that may obstruct the capture of cross-border value or risk destroying local value. Find the value. To start, managers must understand, subfunction by subfunction, the size and nature of the cross-border and local value at stake. The greater the cross-border value, the more appropriate a relatively centralized2 model is likely to be. Take the example of a European mobile-phone operator that succeeded in using its cross-border purchasing power to secure discounts for network gear. The equipment was similar in all territories—there was little local value to protect—so the company centralized procurement and no longer allowed executives in individual countries to use their own discretion. By contrast, the procurement of handsets was less straightforward. Bulk buying power could yield some discounts, but consumer taste—including which handset to purchase—varied from country to country, so it made sense to give local representatives a say in the process. In the end, the center coordinated purchasing decisions across countries, ensuring that the company captured some economies of scale, while country organizations made the actual choice of handsets. As this example suggests, when companies look closely at their options, they may be surprised to find shades of gray between the black and white of the centralized and decentralized models. Understand the barriers. In addition to identifying a company’s potential sources of cross-border value, executives must identify the organizational barriers to achieving it. Our experience and research in Europe’s power, banking, and telecom sectors have helped us identify three such barriers: a lack of awareness, poor motivation, and an inability to execute. Some managers told us that they found it hard to spot opportunities across disparate country units and that no one in their companies had responsibility for taking a cross-country perspective. Without an awareness of cross-border opportunities, managers overlook the chance to 3/28/2008
  4. 4. multilocal management - The multilocal challenge: Managing cross-border functions - Or... Page 4 of 8 collaborate with colleagues in other parts of the organization; surprisingly few people, particularly in companies new to international expansion, have the knowledge or perspective needed to consider a truly cross-unit, cross-functional approach. Nonetheless, some multilocal companies in the power industry, for example, recognizing the similarity of the skills required in all of the markets where they operate, have moved rapidly to centralize the trading function in the wake of international expansion. The second barrier is motivation. During interviews at many companies, employees told us that management saw little value in organizational integration. Warnings from local regulators were also a problem. So was opposition from local power bases fearful of missing their targets, for the difficulty of designing incentives that encourage individual employees and teams to uphold a company’s interests and not their own can hobble teamwork. Typical issues include worries that a unit might lose its autonomy and the ability to manage its own profitability if procurement specifications changed to promote groupwide sourcing or if a single center of excellence for developing products were to set their specifications. No matter how clear the benefits of integration to the overall company, it takes courageous managers to sacrifice the interests of their own units for the greater good. Poor execution is the third barrier: even if people know they should work together and have strong incentives to do so, they won’t necessarily collaborate. Differences in language and culture are common reasons for this problem, of course, but executives shouldn’t underestimate the sheer difficulty of getting dozens of people to cooperate for a common goal. Unclear accountability and a shortage of managers with international experience can hinder execution, as well. Consider the full range of organizing options. Some managers of multilocals, seeing only a choice between outright centralization and complete local independence, take an unrealistically narrow view of the way companies can organize functions. In reality, the choices and designs should be more nuanced. Exhibit 1 shows four main options, from a strong central structure to total decentralization. A number of organizing mechanisms can help companies achieve the best of both. Effective ways of moving toward organizational integration, without full centralization, include sharing best practices in formal and informal networks, rotating key people within functions from one country to another, training managers who can hold responsibilities over and above those of their main job, and creating a corporate academy to develop common work patterns that facilitate cross- border cooperation. Standardized approaches to corporate improvement, such as productivity drives and sourcing- or commercial-excellence programs, can play a role as well. In the example of mobile-handset procurement cited earlier, in which the value of cross-border procurement was moderate and encouraging collaboration fairly easy, the activity could remain largely decentralized, with the center limiting itself to encouraging alignment. A company could 3/28/2008
  5. 5. multilocal management - The multilocal challenge: Managing cross-border functions - Or... Page 5 of 8 achieve this goal by, for example, convening a network of practitioners to share best practices. To show which local units of functions were particularly adept or unskilled and which could help others, the center might compile and publish rankings of units on key performance indicators. When the value of a cross-border effort is greater but harder to capture, organizations might use centralized decision making tempered with local execution. This approach stops short of full centralization, since country organizations continue to play an important role in implementing decisions or policies and may have discretion to vary them within centrally defined limits. Nonetheless, the center lays out clearly what it expects from the country organizations. To set base prices, for example, steel companies provide a certain level of central direction and coordination, achieved, in one case we know, through a group-level pricing office. But the company attaches equal importance to retaining flexibility at the country and regional levels so that it can take specific local-market circumstances into account. After weighing, function by function, the benefits of integration and centralization against the local value at risk, one financial institution recently created a global-transaction-services unit, comprising almost 800 people in ten legal entities and three countries, responsible for the whole group’s cash management and trade–export finance. This careful process determined which functions should belong to the global unit and which should remain with the local banks responsible for sales and distribution. It also specified the nature of the interaction processes and the rules linking the global and local value chains. The development and structuring of products across all product groups and geographies was located centrally, for example, along with the product specialists and technical support for customers who themselves did business in a number of countries. Sales activities for cash, credit, and structured products were all situated locally. Countering complexity and ambiguity These design steps are intended to create the best organization for extracting cross-border synergies and, at the same time, protecting local value. But since some functions require a more centralized solution and others a more local one, this approach may generate hybrid structures full of complexity and ambiguity. Businesses can counter these problems by looking for opportunities to cluster countries within a geography, by clarifying the accountability of key individuals, and by enforcing a common culture where needed. Geographic clustering. Complexity and ambiguity are obvious dangers when the number of country units in a multilocal company expands. Complexity increases further if the units are of very different sizes and have different growth objectives and other goals. Managers easily end up with a wide span of control, meetings are hard to arrange, and the need for travel expands. What’s more, different types of businesses—for instance, those in stable, low-growth countries, on the one hand, and in emerging markets, on the other—require different strategies. We believe that regional clustering, an approach falling between full centralization and full localization, can help multilocals manage this complexity (Exhibit 2). The benefits of geographic clustering are fourfold: stronger integration of the relevant functions across countries, the avoidance of duplication and excess costs, a greater ability to lead and manage the performance of units in a large number of countries, and opportunities to provide attractive senior- management roles for experienced, well-performing country heads. In this way, too, companies can simplify their span of control, focus more successfully on businesses at different stages of development, and cut travel budgets. Four people (one from each of four clusters of 3 countries) can also coordinate their diaries more easily than one representative from each of 12 countries. 3/28/2008
  6. 6. multilocal management - The multilocal challenge: Managing cross-border functions - Or... Page 6 of 8 Accountability and pivotal positions. Recent empirical work published in The McKinsey Quarterly has highlighted the motivational benefits of telling employees who play complex roles exactly what is expected of them and making sure they are clearly accountable for results.3 But in a multilocal that chooses to organize functions neither wholly centrally nor wholly locally, management accountability can become fuzzy. Who is responsible for what? How do senior managers in hybrid positions—for instance, the heads of group functions, procurement leaders, and leaders of cross-country improvement programs—reconcile conflicting demands in a way that serves the best interests of the whole company? Much has been written in the management literature about the role of one linchpin position: that of country managers, who lie at the heart of decision making in a multilocal organization. Defining their reporting lines and responsibilities in a clear way is critical. Often this executive is the former boss of what was previously a strong national business and now has less autonomy. Some of the functions and processes that country managers may have controlled previously will be centralized. But they must collaborate with the rest of the organization in other areas, such as procurement, production- and sales-improvement programs, joint product development and common service models, and the cross-country rotation of best talent. Adopting a narrow, executional view of the role, however, may undermine the country manager’s motivation. If anything, the job may be more demanding than that of the head of a national business: the challenge is not only to maximize value within the country but also to ensure that the local organization works smoothly with the centralized functions and the cross-country structures. The country manager must ensure, for example, that the country organization both contributes to and draws enthusiastically from groupwide best practices. To build an integrated, well-functioning multilocal organization, the country manager should also play broader roles within the group. These will probably involve a mixture of formal responsibilities (such as helping to evaluate and provide developmental opportunities for high- potential talent or leading cross-country initiatives) and informal ones (such as actively identifying new ways of creating cross-border value and encouraging employees to collaborate 3/28/2008
  7. 7. multilocal management - The multilocal challenge: Managing cross-border functions - Or... Page 7 of 8 with colleagues abroad to deliver it). Companies need country managers who are neither all-powerful (as they might be in a purely national organization) nor largely divorced from the running of the business and focused solely on providing shared services, as happens in many multinationals. The required qualities include a willingness to reach out to many parts of the organization and the ability to resolve problems across networks of people from different units and to cope with greater ambiguity than traditional country heads face. While companies need extra precision to define linchpin roles like that of the country manager, they may find that creating a complete, detailed accountability matrix saps energy: the risk is a rigid organization transfixed by the rule book and incapable of responding nimbly to change. And if they treat accountability as a zero-sum game, with winners and losers, their employees may become disillusioned. A selective common culture. Many multinationals, thinking of themselves as a single family, tolerate little deviation from corporate cultural norms. Multilocals, by contrast, inescapably inherit a number of local or corporate cultures, which local regulation and, in some cases, co-ownership by national or municipal governments often make stronger. Common practices and norms can be a powerful way of making international groups cohesive. Yet we have learned from our work with multilocals that they should pursue cultural integration, at least initially, only in certain parts of an emerging global organization—typically, those where cross-border interactions are frequent and involve people in linchpin roles. This approach aims to develop a group of employees who can work comfortably in a number of countries, where they mix and collaborate with their opposite numbers. One multilocal retailer, for example, identified the key interface roles as those of the country managers and of the managers involved with supply chain operations, marketing, human resources, and finance, both centrally and in-country.4 In these interface roles, the incumbents often needed to interact across units and had to ensure that the company captured the value of integration; they could, as one country manager put it, be either “a lubricant or a source of friction.” To help them interact better, the company encouraged such managers to rotate among units, sent them together for training to what eventually became a corporate academy, and introduced a consistent language and framework to describe the performance of the business. It also evaluated them, in part, on their effectiveness as interfaces across the organization. Taking all of these steps throughout the company would have been costly and disruptive; focusing the effort on a small group appeared to make more sense. Segmenting an organization in this way offers advantages. Managers can pursue cultural change more rapidly if it is limited in scope; such efforts are harder to undertake at scale, since they rely on personal interactions. This restricted approach is also less disruptive, because it affects only parts of the organization. At a later stage, multilocal companies sometimes decide to create a more homogenous culture—an exercise that, as we have seen in our work, benefits from the lessons learned and progress made during the earlier, more limited phase. Striking an appropriate balance between the protection of local value and the integration of selected cross-country processes and functions is challenging; the organizational response to create the right linkages must be subtle and avoid blunt centralization. Companies should also consider geographic clustering, ensure clear accountability where it really matters—in linchpin roles—and build common ways of working in critical cross-border processes while allowing the local units to maintain their own cultures. These principles will help to limit the complexity and ambiguity often felt during the formation of multilocals. About the Authors Giancarlo Ghislanzoni is a director in McKinsey’s Milan office, Risto Penttinen is a principal in the Helsinki office, and David Turnbull is a consultant in the London office. 3/28/2008
  8. 8. multilocal management - The multilocal challenge: Managing cross-border functions - Or... Page 8 of 8 The authors wish to thank Iacopo de Francisco, Florencio Martinez Mendiaga, Daniel Steiners, Carsten Sürig, and George Tsopelas for their contributions to this article. Notes 1 See John A. Quelch and Helen Bloom, “The return of the country manager,”, May 1996; Christopher A. Bartlett, Sumantra Ghoshal, and Julian Birkinshaw, Transnational Management: Text and Cases, 4th edition, New York: McGraw-Hill Education, 2004. 2 Here and throughout this article, “centralized” means that the people involved with a function report to a central organization, not necessarily that they work at corporate headquarters. 3 Suzanne Heywood, Jessica Spungin, and David Turnbull, “Cracking the complexity code,”, May 2007. 4 Store operations (where the vast majority of the employees worked) and country-specific home delivery services, for example, were not considered to have key cross-country interface roles. Back to Top Copyright © 1992-2008 McKinsey & Company Home | Site Map | Terms of Use | Privacy Policy | | 3/28/2008