When should you consolidate resources?

Not all resources need to be dedicated to one unit: Some may be shared among units.

Hence, typical questions that may arise are…:

• Should each department have an IT support role, or should IT be consolidated in a shared services unit?
• Should each business unit have a legal team, or should there be a Center of Excellence, with lawyers that serve all units?
• Should all the engineering teams be self-contained, or should certain roles, such as those performing analyses of structural loads and stresses, be placed in a separate unit and serve all the teams?

The basic issue is visualized in the illustration below.

This is not a new topic, of course. 

The basic dilemma was first described in 1937 by Lyndall Urwick, one of the early pioneers in organizational theory. Today, the key benefit of consolidation is called “economies of scope”, and is described in textbooks used in business schools.

During the 1990’s, consolidation of back-office functions became a key trend. Most large firms established shared services centers. Some of them later went on to outsource parts, or all of the units, to external services providers.

So if it is a well known issue, why revisit it?

There are a couple of reasons.

One has to do with the trend toward agile organizations, with more extensive use of cross-functional and self-managing teams. When establishing such teams, managers often wonder whether it is sensible for each team to represent all relevant functions or whether some functions should be consolidated.

However, there doesn’t seem to be a solid framework that one can follow here. Since the problem was recognized more than 80 years ago, you would think that now we have a solid method for solving it. A standard, quantitative way of calculating the potential value of consolidating resources.

That’s not what I have found, unfortunately.

When I started looking into it, I could not find an analytical methodology to support such decisions.

Yes, many consulting firms will cite statistics like “Prior clients have reduced costs by 15% by consolidating”, but they rarely tell you where the data come from, so it is hard to verify. And yes, consultants and managers develop “business cases” to justify their decisions.

But I have not seen a solid methodology that tells you which factors should be considered, how data should be collected, or how the different factors should be weighted to arrive at a conclusion. 

I think this is needed, because managers sometimes get it wrong. For example, when firms introduced shared services during the 1990, some of the firms over-did it, and consolidated roles that should have been left intact. Some studies suggest that consolidation projects frequently fail to achieve the targets that are set (e.g., see this article).

So with two colleagues, Professor Ali Yassine and Tore Christiansen, I hope to do something about this. We recently launched a research project to find out: 1) how people actually make consolidation decisions, and 2) how they should be doing it.

If we succeed with this, my long term plan is to incorporate what we find in our software tool, Reconfig. Even as it is now, the tool should be of help, as it collects and displays some of the relevant information. But the eventual goal will be to extend the algorithm that we have, so that it supports consolidation decisions more directly.

There are at least two challenges that we have identified and that we will need to resolve along the way.

The first challenge is that there is not one criterion, but multiple criteria that are relevant to such decisions. Some of these are quantitative, while others are qualitative; so the question is how you collect data related to each criterion and combine qualitative assessment with quantitative analysis.

The table below lists four key factors that I have identifed so far.

The second challenge is that one not only needs to consider the potential benefits (such as those listed in the table), but also the costs. Research generally suggests that managers tend to be too optimistic and to underestimate the costs.

So in a paper we are writing, we propose the following equation:

Consolidation value = Expected benefits – (expected downsides + expected costs)

The expected benefits in the equation are related to the factors in the table above. Costs are related to the establishment of the new unit, transferring people to it, defining new work processes, and so on.

By “expected downside”, we are mainly thinking of the increase in coordination cost that is likely to occur. When one consolidates resources, managers will need to spend more time and energy on negotiating how to prioritize the needs of different units. 

I will return to this topic when we have made progress in our research project. So stay tuned.

Meanwhile, feel free to add a comment below if you have a question or comment regarding this topic!