UK: THE CENTRAL QUESTION.

UK: THE CENTRAL QUESTION. - In the complex web of company structure, head offices are falling victim to a new pattern. But how far should downsizing go at the centre?

by Geoffrey Foster.
Last Updated: 31 Aug 2010

In the complex web of company structure, head offices are falling victim to a new pattern. But how far should downsizing go at the centre?

Troops up at the sharp end seldom have any strong affection for the general staff. It's much the same in commerce and industry. The visiting fireman from head office might be made welcome by operating managers out in the sticks but the chances are they will be relieved to see the back of him. He's liable to be dangerous. He carries the threat of upheaval like a contagion. He could well have the power to hurt, too, by the award of black marks. Yet such apprehensions should be less widespread today than they once were, for the simple reason that there are significantly fewer people left at head office.

In all probability there are not as many in the operating units either. Until a dozen or so years ago the reflex of senior managers in manufacturing industry to the first sign of a downturn was to squeeze out indirect workers from the plants. As the economic weather deteriorated they would put a stop on investment, allow stocks to run down and lay-off production workers.

If conditions worsened further, factories would begin closing. Corporate staffs were apt to be the last to feel the axe.

Not any longer. These days, head office personnel can be just as vulnerable as those who operate machines - or check-out tills in the retail sector: indeed, being 'indirects', they may be more at risk. In the age of the lean enterprise a capacious head office - accommodating quantities of planners and co-ordinators and their assistants - is considered a characteristic of the corporate dinosaur. Companies earn high marks by reducing top-hamper. A public announcement that head office numbers are to be pruned by a further 10% is frequently good for a few points on the share price.

Some functions that used to be the preserve of head office may be better performed closer to the action. If the company has competent operating managers, why should it pay well-qualified staff to second-guess them? In many instances several functions can be rolled into one, or they may be farmed out to providers of specialist services, or simply done without altogether. Yet there obviously comes a point at which the head office cannot contract further, not if statutory obligations are to be met, and not if the organisation is to retain any cohesion and sense of direction - and the chief executive any semblance of control.

Naturally, most managements have considered these matters. The strange thing is that they have come up with such radically different answers. A study of over 100 major UK companies which appeared towards the end of last year found that 13 of them with payroll numbers of between 10,000 and 50,000 had headquarters staffs of l00 or less. One of these head offices amounted to no more than 25 all told. On the other hand, five companies in the same size bracket - measured by the length of the payroll - each gave employment to over l,000 head office workers. The biggest head office in the entire survey totalled more than 25,000. The smallest consisted of just 10.

As the authors of the report (Effective Headquarters Staff, published by Ashridge Strategic Management Centre) point out, differing business characteristics go a long way to justify such disparities. Obviously, other things being equal, the bigger the company the bigger its head office is likely to be. But other things are seldom equal. It's similarly to be expected that the more multinational a company's scope the greater the number required at the centre. For historical reasons, companies that have only quite recently emerged from the public sector are apt to have exceptionally generous head offices. But it's also true that other companies which lean heavily towards one particular sector of industry, such as banking or insurance or the retail trade, tend to have significantly larger headquarters staffs than diversified industrial groups of equivalent size. That's partly because the head offices of single-business companies are typically much involved in operational details - to the extent that it can be difficult to draw a precise line between the centre and the periphery.

In a multi-business company, of course, much of the staffwork may be carried out at divisional level, or in the headquarters of subsidiaries, which could make up for a lot of the savings that go with having a slimmed-down corporate office. But none of this fully explains why companies in the same industry, and of closely similar size and composition, should quite often have head offices of vastly different proportions. Why should one need a cast of thousands while another can manage very successfully with a skeleton crew at the centre? How can BTR, perhaps the most celebrated example of the second category, get along with as few as 80 staff at its Westminster head office (it was 50 before the acquisition of Hawker-Siddeley) to oversee and account for a worldwide group employing 130,000 people?

Ever since it forced its way into the ranks of major British companies via a succession of audacious acquisitions in mature sectors of the industry, BTR has operated according to a very simple principle. The job of the centre (statutory requirements aside) was two-fold: to steer the development of the group and to inspire the managers of existing operations to achieve stretching financial targets. The latter called for tight financial controls and frequent prodding by the men at the top. It was left to the subsidiary businesses to provide themselves with whatever services they needed, always bearing in mind the impact on the bottom line.

In the late '80s and early '90s, the BTR formula has emerged as a kind of industry standard - although frequently honoured in the breach. The chief executives of countless conservatively managed companies have been acting like takeover artists in the wake of some famous victory, and taking knives to corporate offices that happen to be their own. A company move would sometimes provide the occasion, allowing the CEO to apply the principle of 'Give 'em less space and they won't all get in'. In any case, it hasn't always worked very well: how many head offices have overspill departments, maybe tucked away in some provincial town, whose chief contribution probably appears in the company's travel bill? And if it worked, it won't always last. As soon as the pressure comes off, numbers invariably creep back up again.

'Unless a company is seriously over-manned,' observes Michael Goold, co-author (with David Young) of the Ashridge Strategic Management Centre study, 'the result (of a simple head office slimming exercise) is going to be marginal change only.' To obtain a real and lasting benefit it's necessary to change what the head office does. One way of bringing this about is to reduce the number of top-level executives. 'Head offices respond to directors,' says Goold. 'The more directors you have, the more people you need to respond to them.' But 'the big reductions', he maintains, 'go along with the service functions.' The Ashridge analysis distinguishes between head office costs which are in effect obligatory (covering functions such as financial reporting, taxation and secretarial) and those which are not. Among the latter - which invariably account for the majority of staff - some are commonly perceived as providing a service to the head office itself (eg, corporate development, public affairs), others as assisting the operating units directly (pay and pensions administration, management services). In fact, perceptions about the orientation of particular services differ from company to company, also according to the nature of the industry. In single-business companies, a head office marketing function is invariably regarded as providing a service to the centre. In a multi-business company it might well be directed primarily towards the periphery. It is in services, especially those not aimed at assisting the workings of the centre, Goold implies, that the best potential for losing head office weight is probably to be found.

But not necessarily. Services such as public affairs are very easily bought in. And central services for the support of operating units can often be justified according to circumstances. Goold and Young quote the special operations staff at Williams Holdings, who have built up considerable expertise in manufacturing 'through assisting a variety of Williams businesses, many of which depend on similar manufacturing processes'. Another example: RTZ Corporation's technical department represents an important resource to the group's far-flung operations, even though these include the likes of CRA, an Australian public company (in which RTZ has a minority stake) and a substantial business with a whole raft of services of its own.

The reason is that mining is hugely capital-intensive, the more so at RTZ since the group is interested only in large-scale projects. That's because it aims to free itself, as far as possible, from the effect of fluctuations in metal prices by always being one of the lowest-cost producers. Consequently, top-quality mining technology is vital. Technical services is capable of taking on design, and every engineering aspect of a mining project as far as its closedown. And if the department doesn't have all the skills itself, says a manager at the group's St James's Square head office, 'it knows where to find them' - whether they're inside or outside RTZ.

Exploration is another central service. While most of the major operations have their own geologists and such, the efforts of the explorers are centrally co-ordinated by a department in Bristol (also the home of technical services) which, in addition, is itself active in parts of the world such as Eastern Europe and across much of South America - where the big subsidiaries and associates cannot reach. For a mining group, the head office man remarks, exploration is equivalent to research. 'There are of the order of 30 countries where we're exploring from here.'

These services are provided by head office because it's considered that they are necessary to the group, and appropriate that they should come under central control. Their raison d'etre, above all, is that they 'add value'. This is of course the standard justification for every discretionary head office function. But could they not add as much, or greater, value at less cost? The trouble is, as Goold points out, that cost-benefit analysis is far from being an exact science. If reliability, flexibility, confidentiality and so on cannot be left out when counting the benefits, any company that applies this technique to its own head office is quite likely to end up justifying the status quo. Goold and Young nevertheless advocate a 'case-by-case assessment of each function', with a zero-based budgeting approach to determine whether it should be provided at all, and if so by whom - corporate staff or external suppliers? At present, Goold notes in passing, 'those companies that do buy in a lot of services don't (usually) have substantially smaller head offices'.

But any company that sets out to redesign its head office from the ground up must beware. It's extremely important, the Ashridge authors maintain, that the structure and size of the head office should be accurately aligned with the strategy of the group (and preferably, therefore, be the outcome of a strategy review). An effective design - such as BTR's - is successful precisely because it's suited to the company's aims and behaviour: it might not fit another company as well.

RTZ's strategy, for example, is to invest massively in a limited number of large-scale, long-life projects with a good geographical and product spread. Top management is thus vitally concerned with spotting and assessing opportunities, also with putting together funding, and it requires appropriate support in these areas. But given the vulnerability of extractive industries to environmental pressures and national sensitivities, RTZ's relations with its operating units are very different from BTR's. The group works by co-operation and co-ordination, and 'on a personal-relationship basis'. Its structure has been likened to a gigantic wheel, with channels of communication running round the rim as well as up and down the spokes.

The size of RTZ's head office has fluctuated considerably over the years. At its highest, when the group employed in the region of 80,000 people worldwide (compared with some 45,000 today), there were well over 600 at the centre. Numbers shrank after the board decided to sell its chemicals, oil and gas, and various manufacturing activities, and to refocus on minerals. (The board itself was already shrinking, from about 35 to its present 13 - just under 50% of whom are non-executive.) The head office total came down to about 200, then put on 50 with the acquisition of BP's mineral interests.

Goold and Young have compiled some handy tables showing the extent to which the head office head count varies across British industry today. Data supplied by all 107 respondents to their survey were analysed to show the typical (median) numerical strengths - also the upper and lower quartiles - of the head offices of companies of different size, weighted for the nature of the business and its geographical spread. A companion volume, The Headquarters Fact Book, goes into greater detail, giving numbers in individual head office departments.

This 'ready reckoner' allows managers with a taste for benchmarking to compare their own vital statistics against the generality. According to Goold, it has caused some of them to realise that 'they may not be so lean after all'. Even were they to inaugurate an immediate strategy review and opt for a total redesign, they would hardly be in the happy position of Zeneca which came into being - a fully formed and mature business - with no head office at all. With little more, in fact, than a blank sheet of paper. Zeneca, it's true, did have the (doubtful) benefit of being spawned by ICI, so it's not surprising to find that each of the executive directors oversees a mixture of businesses and/or territories and functions. Nevertheless, top management decided that there would be no old-style ICI matrix. 'We took advantage of the demerger to make a step change,' says Hugh Donaldson, one of Zeneca's three general managers. It was accepted that 'the corporate office and the board-support function should be defined by the sort of company you (ie, 'we') want to operate' - which was a company in which the business units would enjoy maximum freedom of action. 'When you want to give business freedom to the operations, then the shape falls out very clearly.' What this means is that the board members 'have defined their role as less than hands-on'. Together with the chief executives of the pharmaceutical and US businesses, and the three general managers, they constitute a 10-strong executive council that meets weekly to consult and co-ordinate. Two of the general managers are responsible for finance and legal affairs (inescapable head office functions), while the third, Donaldson, looks after 'corporate resources': engineering, personnel, health and safety, public affairs, planning, head office administration and security - 'and, if required, I act as the ship's cat'.

Numbers employed under these headings are quite small. 'We didn't do any bizarre calculations of value added,' says Donaldson. 'We asked: What is the raison d'etre? Then: What is the minimum?' 'Safety, health and the environment', where ICI had 20 people, engages two-and-half including a shared secretary. 'Personnel' is largely a matter of agreeing policy in some areas ('we will use job evaluation worldwide') and guidelines in others. Pensions administration is contracted out. The pay centre, covering all UK employees, is run by one of the business units because the facility was already there.

The odd-one-out among the central functions is 'engineering', which is 230-strong. It reports to Donaldson although its members are distributed among the manufacturing sites, and is paid for by a corporate levy agreed by the managerial group. This may fall short of 'best practice' these days, which decrees that, where possible, business units should be charged directly for services they use. The fact that so few British companies yet attempt to recover costs in this way suggests to Goold that 'there's quite a lot of room for improvement'.

Engineering aside, Zeneca's l00-strong head office (its new building in Mayfair was designed so as to be incapable of accommodating more) falls within the smaller quartile for a company of its size, according to the Goold-Young ready reckoner. But size isn't everything. Goold argues that it's wrong for every company to strive for a place at the thin end of the range. 'Some have gone too far,' he believes, mainly because they've been driven 'by the current fashion for downsizing'.

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