Finding the Centralization Balance While Playing Digital Transformation Game at Multinationals

This post on Virto's blog focuses on the challenges of wisely balancing centralization and decentralization when implementing digital transformation in multinational companies. Its content is based on an article by Evgeny Grigul, cofounder & VP of Virto Commerce and Forbes Councils Member, and is explained using more popular terms.

Digital transformation is the process of using digital technologies and assets to analyze existing business processes and adapt your customer experience to the new realities of the digital age. Digital transformation is a great opportunity to rethink how you do business and improve the way customers, partners, and suppliers interact with your company.

The digital transformation strategy includes many aspects, such as building digital platforms for customer relations, developing a corporate software ecosystem for business expansion, tools and practices for making quick decisions by management, automating routine tasks, building an IT infrastructure for running applications installed during digital adaptation, and much more.

Centralization Challenge Aspects

Finding a balance between centralization and decentralization is an important aspect of digital transformation for multinationals as well as businesses with a multiregional presence. For such corporations, the digital transformation process must take into account the additional complexities associated with different cultures and economic characteristics, including the level of competition and other local specifics.

The development of IT solutions for a regional organization forces companies to develop its ecommerce presence using a variety of legacy software systems, which requires significant time and budget investments for customization and integration.

Since customers focused on online platforms as the main channel for ordering during the pandemic, time-to-market has become more important than ever. Multiregional organizations need to act as quickly as local competitors. A large role will be assigned to centralized digital assets that can be reused at the regional level.

When attempting to accelerate online market penetration in different regions, multinational corporations often run into additional digital transformation tasks by selecting the wrong level of centralization for managing and using digital assets.

Determining the optimal level of centralization and decentralization for businesses during digital transformation has to be solved by each multiregional company. This process often depends on many objective – and even subjective – factors, such as the background of top management, the age of people on the board of directors, and even things like the gender of decision-makers.

Therefore, situations are not uncommon in which teams tend to go toward one extreme or the other, which can slow down the process of digital transformation. Let's look at these problems and how to solve them.

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Digital trap № 1: too much centralization

Too much centralization occurs when you have a team that adheres to complete centralization without further debate. For example, men on the board of directors who served in the military are more likely to support the role and benefits of centralization because it is familiar to them. At its most basic level, centralization is the way the military operates – strategies affecting other countries and continents are decided from a centralized command center in Washington, D.C.

Performing tasks according to centralized templates that are standardized for all regions without any discussion of changes at the local level will negatively impact the process. As a result, local branches will be forced to act as customers of a centralized digital commerce transformation “super service.”

In this scenario, the centralized “super service” takes away the initiative of people at the regional branches, which is detrimental, because initiative is the engine in business that propels a company to the top of its market and drives customer satisfaction.

Another drawback to centralization is increased financial cost. The central office will have to do the work of customizing the ecommerce solution for regional expansion without knowing all the nuances of doing business in these disparate environments. In other words, a completely centralized solution that works for all regions would be too expensive and time consuming to develop. Numerous updates would be required to take into account the regional specifics within the centralized ecommerce solution, which equates to increased expenses and implementation time.

Digital trap № 2: decentralization up to the level of anarchy

Agile companies are often opposed to strict centralization and prefer to give regional offices total freedom to adopt a completely decentralized approach. This way works better to meet the individual needs of each regional business unit, but there are also disadvantages to this approach.

One of the shortcomings is the duplicative work on customization of the ecommerce solution, which has already been successfully completed in some other region. Regional teams need significant financial backing for recruiting IT staff or ordering customization of the ecommerce solution from local implementation partners. This is usually expensive in terms of budget and extended time to market, so a ready-made, localized solution could be deployed much faster.

It is highly likely that technological solutions will have to be duplicated and there will be a slight reuse of digital assets that already exist in the headquarters of the company. As you know, replicating a project is always cheaper than redevelopment. This is where economies of scale come in, while self-customization of the ecommerce solution in regional offices will lead to an unnecessary variety of technologies and negatively affect the corporate budget.

Optimal level system

A famous ABBA song declares "The winner takes it all, the loser standing small…, " but the best decision in business is always a compromise, i. e. , balance matters. The best way to avoid either extreme in centralizing the implementation of digital transformation is to take a two-level approach.

The main goal in this approach is to select and reuse best practices, competencies, and technologies at the company-wide level. This provides flexibility for local branches and ample opportunity to tailor the ecommerce solution to specific aspects of the regional markets.

Using a combination of local and global resources and best practices is the best choice. The headquarters of the organization can take on the functions of an information center for the collection, analysis, and implementation of best practices across the regional offices.

There are resources available to help you transition to flexibility, which the experts at McKinsey & Company believe has many different benefits. When local subject matter expert (SME) businesses operate in a regional market, they have more flexibility in choosing and implementing omnichannel trading strategies. Through agile technology, traditional companies can increase productivity and compete effectively against these local businesses with a two-level approach.

Digitization is directly linked to software on the market that provides the best level of business agility. Thanks to standardized API interfaces, companies can use different best-in-breed software solutions on the market together. IT experts at Gartner Inc. call this strategy "composable commerce. " The Virto Commerce team goes one step further by building its ecommerce platform into different layers for composable components, calling it "atomic commerce architecture. "

Questions for an ecommerce platform vendor about digital transformation

It's important to know what you can expect from an ecommerce platform vendor when implementing digital transformation. You should ask vendors certain questions to ensure cross-applicability, including:

  • How can my regions in the EU take advantage of the technologies developed by our U. S. counterparts while retaining their unique business logic?
  • How can my Australian subsidiary reuse the solution without sacrificing its regional preferences?

There are many examples on the market of how companies can use widely available resources to properly design and implement cross-regional solutions. With clear goals and strong leadership, this can be achieved quickly while, at the same time, minimizing risks. Use expert advice as a guide to develop a balanced strategy that applies technology with the right coordination, understanding, and depth.

The issues of centralization and decentralization in cross-regional digital transformation are not always simple, but the right strategy and a broad understanding of the market can help organizations succeed in an increasingly competitive global environment.

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Evgeny Grigul
Co-founder Virto Commerce