The Multilocal Challenge Managing Cross Border Functions
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The multilocal challenge: Managing cross-border
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
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
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
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:
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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
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
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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
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
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
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
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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.
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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
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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
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
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.