Three tests to unravel value of corporate headquarters

02 March 2016 3 min. read
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Is there a way of reducing the risks of unproductive interference by head offices? In a recent McKinsey & Company article, the consulting firm explores ways of measuring when engagement by central management adds or subtracts value to projects through three tests. The evaluation of the different stakeholders provides the key to making a judgement as to whether centralised intervention will create long term value.

The value added by corporate headquarters has come under scrutiny in recent years, as many were found to be under performing in a range of capabilities. While there are various areas in which corporate headquarters can add considerable value to a company’s operations, including its role in preparing financial statements, paying taxes, or conducting internal audits, the very real risk of value destruction remains a possibility in more discretionary projects; ranging from misguided influence, bureaucracy, delays, and time wasting.

To mitigate such risks and improve the decision making process, in terms of whether a project warrants centralised management, McKinsey & Company recently released an article titled ‘Knowing when corporate headquarters adds rather than subtracts value’, which considers a litmus test for deciding whether centralised intervention is warranted. The three tests ask whether the project adds significant value (the added-value test), whether there are risks of unintended value subtraction (the subtracted-value test), and whether the initiative will encounter barriers to implementation (the barriers-to-implementation test). 

implementation barriers

Three tests
The first of the three tests asks whether the project is expected to create considerable value for the company, thereby justifying centralised oversight. Headquarters should, according to the firm, only busy themselves with significant opportunities. The consultancy places a number of 10% or up on overall performance values such as sales, profits, return on assets, or value to beneficiaries, although the consultancy suggests that this is open to the discretion of the firm. Critical to this test is knowing how much value is expected from the project and when it provides enough justification for headquarter involvement: the number should be large enough to make the risk of subtracting value worth taking. Such an evaluation may take the form of breaking a project into component parts and quantifying the various added performance values.

The second test asks operational managers to provide an assessment of the risks associated with centralised interference in the project. These managers may have better insight into the risks of such influence than the optimistic central executives. The third test involves an assessment of the barriers to implementation of the project. So long as a project being pushed by the central headquarters faces less than three barriers of nine key barriers, there is a reasonable likelihood of its success.

Value judgement
The research highlights that keen judgement is required to assess whether a discretionary project will benefit from addition centralised support, or whether it is best left to decentralised management. The research suggests that central management might be better at spotting where additional value may be gleaned due to their company-wide perspective, while decentralised management can better inform how such a strategy might subtract value from local context conditions and implementation barriers. Clarity in terms of the role of the various stakeholders in a project need to be clear, the consultancy noting that “Without clarity, power struggles and competing agendas can emerge when companies fail to communicate the different roles that headquarters, functions, and businesses should play.”