There are different ways to approach management and decision-making in an organisation. Two common approaches are implementing either a centralised or decentralised organisational structure.
Decentralised organisations generally form when people with similar goals connect to align around a shared purpose while distributing decision-making and enabling self-organisation. Meanwhile, a centralised structure follows the more traditional management hierarchy.
Keep reading for a detailed explanation of centralised and decentralised organisational structures, the difference between the two, and why it’s so helpful for decentralised organisations to utilise shared tooling.
What is a centralised organisation?
A traditional centralised organisational structure is hierarchical, meaning power flows downwards.
Skills are usually departmentalised, and each department has a leader. Team members have specific job titles, descriptions and accountabilities, along with a manager who holds authority.
Decisions are made via a top-down chain of command, where the further down the chain you are, the fewer decisions you can make on your own. This approach often leads to delays in decision-making as delays occur along the command chain. There also tends to be more bureaucracy involved in decision-making.
Centralised organisations generally follow a Predict and Control structure where goals and plans are set ahead of time and are difficult for those further down the chain to change or influence.
Pros of centralised organisations
A few advantages of centralised organisations include:
- Centralised authority makes it easy for all members to know who is responsible for decision-making. This can be a bonus for people who don’t enjoy the responsibility that comes with making decisions.
- It’s easier to achieve uniformity across the organisation.
Challenges of centralised organisations
A few challenges that come with centralised organisations include:
- It can lead to an environment where all decisions are made by a few members with little to no input from the rest of the organisation or those that have the direct experience of the area the decision is being made on.
- There can be delays in execution due to the reliance on managers to approve or oversee.
- Centralised authority can lead to a rigid system where people make decisions they believe will please those with higher authority and improve their career path.
What is a decentralised organisational structure in business?
Decentralised organisations distribute decision-making power and work across the organisation. Through this distribution, all parties affected have a say in the organisation’s governance and how work is allocated and managed.
Decentralised organisations often follow a hierarchy of purpose, not people. This means that work is distributed according to how it impacts the organisation's purpose, often through roles, with each role aligning with a sub-purpose. For this to work, all members must be aligned towards a common purpose. Interestingly, a lack of buy-in or alignment is often more visible in a decentralised organisation than in a centralised one.
Pros of decentralised organisations
Traditional management hierarchies were built for a world where we believed we could predict and control our environment, but that’s not the reality. And that’s where decentralised organisations have an advantage, as they’re better set up for a Sense and Respond approach.
Here are a few more advantages of decentralised organisations:
- Decentralised organisations provide ideal conditions for responsiveness as those closest to the situation can immediately respond—instead of sending the decision up the chain. This leads to quicker, and often more effective, decision-making.
- Decentralisation is primed to improve innovation by creating containers for emergence, experimentation, and learning—much more than in a centralised organisation.
- There are more opportunities for individual growth throughout the organisation, which collectively leads to the organisation's growth.
Challenges of decentralised organisations
Here are a few challenges that come with decentralised organisations:
- Communication and collaboration can be tricky without the right tools and processes in place. At Nestr, we provide tooling that helps decentralised organisations collaborate and align around a common purpose.
- This working style doesn’t come naturally to many people—especially those who have worked in traditional organisations for a long time. It requires training, learning, and getting comfortable with this working style for people to start leading their work rather than simply executing delegated tasks.
- People can be stuck in consensus-seeking before moving forwards with a decision. To avoid this, members need to calibrate on a shared purpose and strategy.
What are the most significant differences between a traditional and decentralised business perspective?
The biggest differences between the two approaches are how the business organises and shares information and how they make decisions.
Traditional organisations generally rely on one individual or leadership team to make key decisions, while decentralised organisations distribute decision-making authority. With decentralisation, there’s a shift from delegation to distribution. When authority is distributed, all relevant parties have a say in governance. Members are also given the authority to make decisions within their roles.
Here are a few key paradigm differences between centralisation and decentralisation:
Why decentralised organisations require specific tooling
Without centralised authority, everyone in the organisation needs to know the purpose of the organisation, how it’s unpacked into strategy and action, and what is expected of their roles.
This is where tooling built specifically for decentralised organisations comes in handy. For example, Nestr allows you to capture and continuously upgrade your organisational structure, circles, roles, accountabilities, policies and domains to meet the daily challenges without resorting to centralised interventions.
Decentralised organisations thrive off visualising projects and working from roles rather than people, setting priorities for each role. This way, everyone can easily know who is accountable for what while also being able to participate in proposing governance changes. A focus on roles is essential for decentralised organisations, as members often show up in multiple parts of the organisation and hold a portfolio of roles rather than one role. The tooling used by all members must be flexible enough to allow this to happen seamlessly.
Conventional collaboration tools aren’t always effective as they have no notion of roles when doing work or communicating with peers. Nor do they offer pathways to upgrade and improve the structure and governance of the organisation on an ongoing basis, with input from the whole organisation.
See also: Moving the needle: How collaboration tools improve effectiveness
The right tooling for the type of organisation
There’s no doubt that tooling brings incredible benefits to all types of organisations. But, to truly reap those benefits, it’s essential to incorporate the right tooling. For example, effective communication and collaboration in decentralised organisations can be tricky without the proper tooling and processes in place. Tooling helps prevent hierarchies from emerging and consensus paralysis from showing up when endless debates keep the organisation from acting.
Shared agreements also play an integral role in a successful decentralised organisation. This is something that works very differently in traditional businesses where authority is delegated rather than distributed. And because of this, it isn't a central focus of many conventional tools.
At Nestr, we support decentralised organisations by helping members align around a common purpose and self-organise around their work.
For more details on how Nestr aids decentralised organisations, check out: Values matter: A digital tool for purpose-driven organisations.