Corporate headquarters (CHQ) are shrinking in size and underperforming relative to expectation, concludes a report by Roland Berger. On the upside, if implemented effectively, CHQs do possess a considerable potential to add value to a company. In order to do so, the consulting firm identifies six value-added capabilities that need to complement the six fundamental capabilities performed by CHQs.
In its recently released report, “Corporate Headquarters 2014: From headquarters to ahead-quarters”, Roland Berger Consultants surveyed the current state of corporate headquarters (CHQ) across the pan-European landscape. For this 7th edition of its CHQ series, the consulting firm surveyed 130 companies, who were asked to rank and described their CHQ’s value and worth. The firm identified six fundamental capabilities and value added functions performed by CHQs and compared the importance placed on the capabilities against the headquarters’ performance. This resulted in the conclusion that many CHQs are underperforming relative to expectation.
The role of CHQ is to provide key and vital business decisions and strategy for the business, as well as, among other, manage portfolios, finance, governance and identity management. Seemingly important tasks, yet CHQs have for some time had a bad reputation and are increasingly called upon to justify their existence to the operating entities and demonstrate how their functions contribute to the company’s overall performance, while minimizing the resources they deploy. As a result, “cost cutting” exercises, such as decentralisation and outsourcing, have in the last years cut into the number of personnel, with only 3.4% of personnel working at CHQs, dropping 2% since 2012. So how might corporate headquarters change to position themselves as another value adding business structure? To answer this question, the firm identifies six capabilities* that are key in determining the value CHQs add, capabilities that complement the six ‘fundamental’ capabilities**:
Keys to performance
One of the key findings from the survey is that CHQs not only have a perception problem, but for the most part, are in fact not performing at the level of expectation. The research finds that for nearly all of the twelve defined capabilities*, CHQs fall well short of what companies claim to want to achieve. On average, there is a gap of more than 0.5 points between perceived importance and actual performance for each of the six fundamental capabilities. For the value adding capabilities, the average gap is even wider, at 0.67 points. Only in the provision of financing (funding, capital structure, risk management, etc.) do CHQ perform to a level that matches the importance companies attach to this topic. The biggest deficits – reflected in deviations of at least 0.7 points – concern the management of synergies and the ability to manage complexity.
Striving for valued performances
A second key conclusion from the study is that those companies that perform well in the fundamental capabilities, tend to perform better at the value adding performances, and that the fundamentals need to be in place first. However, once the fundamentals are in place, more importance needs to be placed by the CHQ into itself adding value to the business. The report noting that particularly the categories of innovation, managing complexity and providing talent are overlooked even by well performing businesses and that these areas are also key drivers for the future success of the business. The relationship between adding value and fundamental capabilities is partly iterative the study finds, and by neglecting investment in value added functions companies put at risk the core capabilities they will need to master the challenges of the future. In a world increasingly characterized by uncertainty and rapid change, the authors note, it is vital to master complexity, be able to innovate, and have people on board whose thinking transcends the boundaries of individual disciplines and functions. Only then will firms be able to keep pace with the constantly changing environmental conditions.
“Many companies still underestimate the importance of these key areas, though,” warns Fabian Huhle, Partner at Roland Berger Strategy Consultants. “That becomes apparent most of all in the context of managing complexity, innovation and talent. But these capabilities are particularly important in a volatile market environment – and this is exactly what corporate headquarters should be tackling as they strive to demonstrate the value they add.”
* The six ‘value adding’ capabilities are: provide strategic direction, enable global collaboration, ensure execution, manage complexity, strengthen innovation and provide talent by means of staff and executive development.
** The six ‘fundamental’ capabilities are: provide purpose and identity, manage the portfolio, ensure corporate governance, provide financing, report corporate activities, and exploit synergies.