Six ways to make corporate centres profitable

More than half of all companies have unprofitable corporate centres. No wonder 2011 was a record year for corporate divestitures. When the corporate centre is unprofitable, there’s not much point in having one! On the other hand, 45% of all companies have profitable corporate centres. What do they do that the unprofitable ones don’t? Six things.

First, they are sparing in their use of centralized services such as receivables, payables, financial reporting, payroll, IT, legal, HR, R&D, manufacturing, sourcing and sales. They know that there are many large and hidden costs of over-centralizing.

Second, they do a better job of allocating capital than the “invisible hand” of a vast, liquid and ruthless capital market. They think of capital allocation as investing, not rationing.

Third, profitable corporate centres use the full breadth of the company’s business portfolio when developing and deploying human capital. They offer a variety of flexible and rich career paths, they nurture the corporate brand as a recruiting asset, and they actively match the company’s strongest talent to its most important priorities. They do all this with a small, lean corporate HR team.

Fourth, business unit governance processes are a key function. Profitable corporate centres continually ask themselves, “How can we ensure that we are governing the BUs in ways that enable them to outperform in their respective markets?” Unprofitable headquarters ask, “How can the BUs help us do our job in running the company?” They think of their governance role primarily as one of control and compliance rather than as one of adding value.

Fifth, profitable head offices actively identify enterprise capabilities anywhere in their organizations that can benefit all their businesses. (Examples are Frito-Lay’s direct-to-store delivery capability, Apple’s user design capability, and IBM’s C-suite sales capability.) They stay on alert for acquisitions that would enhance their businesses’ most important capabilities. They organize centres of excellence to nurture certain essential capabilities. They manage costs and capital to ensure that they are investing more effectively in their capabilities than any other company can.

Finally, a profitable corporate centre shapes the corporate portfolio with businesses that gain the most from their company’s enterprise capabilities. For example, the Danaher Corporation owns only businesses that benefit greatly from Danaher’s enterprise capabilities, such as its goal deployment process and Lean Six Sigma expertise. Disney’s magic comes from owning entertainment businesses that all benefit from its uncanny capability to create and monetize family-friendly, child-engaging characters. Berkshire Hathaway oversees a mix of highly capital-intensive businesses (such as trains, utilities and retail) and substantially cash-generative businesses (such as insurance and reinsurance), all of which gain a lot from Berkshire’s undeniable investment prowess.

Corporate centre profitability is the acid test of whether a company is truly adding value or just functioning as a collection of individual businesses. Do you know which is true for your company?

This article originally appeared in strategy+business, by the global management consulting firm Booz & Company

Author: Ken Favaro is a senior partner with Booz & Company based in New York and global head of the firm’s enterprise strategy practice.

Image: Office buildings are reflected in the windows of a building in Tokyo’s business district REUTERS/Kim Kyung-Hoon