Inside business: Headquarters can seriously damage your wealth

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The Independent Online
THE TRICKY balancing act involved in running a corporate headquarters was well illustrated by a story in The Independent last week (15 September) that Regent Inns was doubling head office expenditure and strengthening its accounting controls. The pubs operator, which issued a serious profits warning earlier in the summer, wanted to ensure that previous errors with sales figures were not repeated.

As obvious a response as this may be, it actually flies in the face of much of the current management wisdom. For example, Michael Fradette, co-author of a recently published book, The Power of Corporate Kinetics (Simon & Schuster, pounds 17.99), sees the corporate machine as the enemy of the sort of flexible, adaptive and innovative behaviour that he believes is essential for the survival of the modern business.

And certainly the lesson managers are always being urged to pick up from the likes of the engineering group ABB is that - when it comes to the centre - less is more.

But, of course, there is a thin line between innovation and chaos and between people being given responsibility for their own actions and duplicating what others are doing elsewhere. Which is where the corporate centre should come in.

The latest contribution to the area comes from the newly created accounting firm, PricewaterhouseCoopers.

In its new booklet Corporate Centre Transformation it points out that "corporate centres can seriously damage organisational wealth" and that the "universal role" for corporate centres should be to add value to the group.

While many succeed in this aim, recent experience suggests that there are significant numbers of under-achievers which are destroying up to half of a company's capitalised value. "The hurt, however, runs much deeper than this, as consistent exposure to a mediocre headquarters will not only stunt development, but also kill creativity, and threaten long- term survival," the booklet says.

And chief finance officers questioned in a recent survey by the firm are alive enough to the problem that about two-thirds of them said they were at least "somewhat dissatisfied" with the headquarters environment.

According to PwC, the three key causes of the damage are excessive costs resulting from corporate centres being too large; lost opportunities stemming from a mismatch between the skills and resources at the centre and the needs of the actual and potential business units; and damaging influences associated with the centre's traditional role of seeking to transfer policies and strategies from one area of the business to another.

"Often such guidance has proved to be inappropriate, as strategies that have worked in one business are not seen to work in another," says the report. It adds that, while past attention has rightly focused on excessive costs, lost opportunities and damaging influences have been largely ignored.

So how does an organisation go about dealing with this? According to the booklet's author, David Pettifer, a partner specialising in cost management, corporate centres need to see themselves as middlemen justifying their existence through adding shareholder value. And the key to this is measurement, Mr Pettifer says.

"Bureaucracy and over-confidence can easily debilitate the centre," writes Mr Pettifer. "Centre managers must remember that their key role is to add value rather than develop procedures. Core activities should be defined and sized, given continuous objectives and bench-marked to see if they are still in line with peer companies."