06 Nov 2013  What Do YOU Think?

Is Top-Down Resource Allocation on the Rise?

Summing Up Respondents to this month's column provided Jim Heskett possible explanations for greater reliance on top-down resource allocation processes while arguing that a blend of influences from the top and bottom of an organization are still important for best results.

 

Summing Up


Is Business Agility a Product of Top-Down or Bottom-Up Resource Allocation?

Respondents to this month's column provided possible explanations for greater reliance on top-down resource allocation processes (RAPs) while reminding us that a blend of influences from the top and bottom of an organization is still important for the best results.

A number of factors were cited in determining the mix of inputs, responsibilities, and decisions associated with an RAP designed to maintain organizational agility over its life cycle. As Laura Carn put it, "I wonder if it's an either/or situation here, but rather a more subtle process change by some companies, especially those in volatile or fast-moving industries. What I see happening among partners I deal with is that they allocate strategically from the top (setting overall budgets for business units), but allocate tactically at the unit level."

Saravanan introduced the old/new, product-market 2X2 matrix to argue that top-down resource allocation is most appropriate when both products and markets are new. But he reminded us that "The decision on the total spend available and the relative proportion of investment or spend between these 4 boxes - is a Corporate/Board function … if only because their primary role is to mediate between the needs of the different Biz/Op units within the corporate structure." If top-down approaches to the resource allocation process (RAP) are on the ascendancy, he thinks it may be due to an increasing emphasis on innovation.

Making a similar argument, Gerald Nanninga said, "Much of the new growth will come from new ventures which reapply core skills in new ways. These usually fall in the cracks between the status quo business units. Unless a corporate center reallocates resources to go after those 'cracks', they will be missed." At the end of the day, he wrote, "most investors are looking at total cash flow return on total investment. An agile corporate center can better focus on getting the total right."

The availability of information at various levels of management was a theme running through several comments. As Dennis Nelson put it, "When an organization knows on what investments its existence depends, and the various returns on its investments, resource allocation from the top is best… A bottom unit can know what is best for it; it cannot know what is best for the organization as a whole." Ernesto Martinez added: "top management should be responsible for allocating resources … in line with the strategic 'blue print' of the company…the business unit should be accountable for the correct use of those resources."

Business unit buy in was a concern of Asit Goel. "Sponsorship from the top is critical to make innovation part of the culture but resource commitment from the BUs (business units) is critical if an idea is to ever take off."

This leaves us with the question of whether business agility is primarily a product of top-down or bottom-up resource allocation. Perhaps it depends on the kind of business agility we're talking about. What do you think?

Original Article

Resource allocation processes appear to be receiving heightened attention—or at least attention at higher organizational levels—these days. Why? Is it because large organizations are perceived as lacking agility, unable or unwilling to generate the impetus for development and exploitation of disruptive technologies? Is it because a new generation of leaders, largely in the technology sector, appears to be reducing middle management involvement in the resource allocation process? Or is it because certain of the world's major economies like China and Brazil are perceived by some as becoming more agile in their allocation of resources than United States and European companies?

Harvard Business School Professor Joseph Bower drew attention to the resource allocation process (RAP) with his seminal study of four organizations in 1970. He concluded that a bottom-up process of idea generation begun by operational managers and shaped by middle management works best when top management (too far from the front line action to be familiar with specific opportunities) manages the context—organization, the way managerial performance is measured and rewarded, etc.—that shapes definition of opportunities and the selection of those to be supported. In this view, strategy is seen as an "iterated process of resource allocation." The detailed work was still bottom up, but true change had to be driven by the top in a sustained entrepreneurial effort.

Bower teamed with Clark Gilbert and others 37 years later to report studies suggesting that while the initial ideas were still valid in practice, the bottom-up RAP was under fire. Among the reasons were lack of demand from existing customers (not always the best ones to ask) for disruptive technologies and the kiss of death for new ideas in large organizations; the fear among business unit managers that they and their businesses would be rendered obsolete by new ideas and ventures; and the drag of middle management screening of ideas in large organizations that is absent in startups. They concluded, among other things, that the bottom-up RAP process still held the most promise if top management would give more attention to managing the context for it. But they reported that "Without exception, these (resource management) activities are distributed more widely across the organization than is usually imagined… posing huge problems where coherence is a central requisite for efficiency and effectiveness."

A recent McKinsey report suggests that far too many organizations do not practice the thinking described above. Instead they fall into a pattern of only incrementally changing resource allocations from year to year. (The report doesn't, however, associate the practice with either top-down or bottom-up RAPs.) Its recommendations essentially represent ways that bottom-up RAPs can be made to produce more agile results.

Rita McGrath's prescription for greater agility in large organizations includes a recentralization of control over the RAP, even moving it out of the strategic business units (even though ideas presumably would continue to be generated and tested in the business units to provide input for top management consideration when allocating investments). Does the need for organizational agility argue for top-down resource allocation? Is top-down resource allocation on the ascendancy? Bower and Gilbert would argue that there is a limit to the scope of top management intervention. What do you think?

To Read More:

Michael Birshan, Marja Engel, and Olivier Siboney, Avoiding the quicksand: Ten techniques for more agile corporate resource allocation, McKinsey Quarterly, October 2013, accessed as publishing@email.mckinsey.com

Joseph L. Bower, Managing the Resource Allocation Process: A Study of Corporate Planning and Investment Process, (Boston: Harvard Business School Press, 1970)

Joseph L. Bower and Clark G. Gilbert, From Resource Allocation to Strategy, (London: Oxford University Press, 2007)

Rita Gunther McGrath, The End of Competitive Advantage: How To Keep Your Strategy Moving As Fast As Your Business , (Boston: Harvard Business Review Press, 2013)

Comments

    • saravanan
    • consultant, ibm

    back to 2X2 boxes - really Bottom up probably works best in Existing X Existing / Old Product(Tech) X Existing Customer(Market) - while Corporates have a better likelihood of being open to New X New (Pdt-Mkt) initiatives. Where SBUs play a role is perhaps New Pdt X Old Mkt and Old Pdt X New Mkt combis - depending on how SBUs are structured in the first place within the organisation. I do not think it is a all or nothing approach to deciding who takes lead on RAP ideation vs. decisioning.

    The decision on the total spend available and the relative proportion of investment or spend between these 4 boxes - is a Corporate / Board function naturally if only because their primary role is to mediate between the needs of the different Biz / Op units within the corporate structure.

    But as to how much / what % age exactly in each box - and therefore who gets max say in the overall RAP - depends on the biz and the times - relatively more stable times - will lead to more spend in Old X categories - being driven by Op units / SBUs. while industries / markets and economies facing major disruptions require more of a New X type investments - which is more of a Corporate and then SBU driven RAP framework.

    To my mind - there is no one correct answer for all times and all businesses as to who should drive RAP within an enterprise. Right now - with greater uncertainity and greater tech and market disruptions expectations, it is not surprising if larger %age of RAP is being driven by Corporate / HO, while back in the 1970s / 1980s - it was much more of a Ops Units and SBU driven process... - Depending on whether the rate of disruption comes down or goes up in the next two decades - you may well find 2030s to be a very different situation all over again.

    I believe the fault lies in thinking / assuming that there is 1 right answer to the question of who drives RAP (or even in what proportions / areas).

    Enterprises and their management need to decide what is the level of disruption expectation over the typical timelines in terms of products (tech/supply chain/ production / etc..) and markets (geography / logistic / brand mgmt / sales channels / etc..) of their "Invest to Harvest" cycle(s) of their RAP - and then decide what is the best allocation mix among the 4 boxes. (you can always go more granular if you need to - but a good 2X2 is a pretty good way to communicate the big picture). Once you make the decision about which box gets what proportion of the total investment pool, the alignment of who needs to drive them is pretty much automatic in my opinion - driven by who (or what part of the org) is more knowledgeable and closer to the opportunity.

    As an aside - from a quasi-religio-philosophical context of managing businesses - what I am trying to say is that- rather than adopting a semetic (christian) view of business mgmt approach (1 god - 1 heaven - 1 set of laws - 1 right path - all black or white); it would be better to adopt what i wd call a hindu / greco-roman view of business mgmt (multiple gods - constant change - every man his own path to heaven - not just shades of grey but entire rainbow of colours)

     
     
     
    • Rob Houck
    • Partner, Eaton & Van Winkle

    I wonder how this topic can be addressed without citing Harry Coase (Nobel Prize winner, only recently deceased at 100+) on The Nature of the Firm. Perhaps I missed that.

     
     
     
    • Gerald Nanninga
    • Principal Consultant, Planninga From Nanninga

    The real issue here is role of the corporate center. If EVERYTHING can be done better at the individual business units (including resource allocation), then there is no role for the corporate center and all business units should be divested into individual companies.

    In the past, corporate centers could be justified as a more efficient way to do back-office functions, like payroll, human resources or accounting. But now, there are many large outsourcing firms like ADP which can often do many of these back-office functions better than the corporation.

    Start-ups are finding it ever easier to forgo the old corporate center through outsourcing and only work on their small business unit-like venture. For capital, they have lots of options, like VC funds, private equity, Angel Investors, crowd-sourcing finance, banks, etc. Why can't all the corporate business units be divested to operate more like these start-ups?

    In many cases, they can, but I still see a large role for the corporate center as a more efficient RAP. Here's why:

    1) Much of the new growth will come from new ventures which reapply core skills in new ways. These usually fall in the cracks between the status quo business units. Unless a corporate center reallocates resources to go after those "cracks", they will be missed. Instead, the resources will be used in a futile attempt to keep the old businesses alive a little longer, when their death is inevitable due to others exploiting the new cracks and making your status quo obsolete.

    2) At the end of the day, most investors are looking at total cash flow return on total investment. An agile corporate center can better focus on getting the total right. If left alone, individual business units will sub-optimize the total as they selfishly work on their piece of the total.

    Of course, if your company has no competitive advantage in resource allocation expertise, then they cannot apply this advantage to their parts. So unless they invest in this expertise, perhaps they should dissolve the corporate center entirely.

    I've spoken more about the role of the corporate center in a three part blog at:

    http://planninga-from-nanninga.blogspot.com/2007/10/corporate-planners-plan-thyself-part-1.html

    http://planninga-from-nanninga.blogspot.com/2007/10/corporate-strategist-plan-thyself-part.html

    http://planninga-from-nanninga.blogspot.com/2007/10/corporate-strategist-plan-thyself-part_20.html

     
     
     
    • Edward Hare
    • Retired Director, Strategy and Planning, Fortune 250 Manufacturer

    I think we ought to recognize that "resource allocation" involves varying levels of importance and impact. Few might argue that micro-managing from the top is a good thing or that it's not appropriate for CEO's to delegate some level of authority for how resources are utilized.

    But CEO's are centrally responsible for guiding the investment of resourses that get the enterprises's portfolio of busnesses right. The bigger picture....that's their job. Which may be growth platforms worth betting on....and which are cash generators.

    What seems important is that decisions about committing resources, capital or human, resides with the appropriate level of management and that each is held responsible for the results of those choices.

     
     
     
    • Dennis Nelson
    • Internal Control Officer, SFS

    When an organization knows on what investments its existence depends, and the various returns on its investments, resource allocation from the top is best. From the bottom up is to be provided the information needed to keep the at the top organizational knowledge current and strategically appropriate. A bottom unit can know what is best for it, it cannot know what is best for the organization as a whole. Too few units are trained how to analyze and articulate their value much less their projected or potential value to be in a viable competition with other units.

     
     
     
    • Martin Carroll
    • Co-Founder, Information IQ Ltd

    If we're focussed on practices to manage strategy, new products development & innovation then the work of Geoffrey Moore is very useful here, particularly his latest book 'Escape Velocity'. There is clearly tension between managing 'performance' (short-term targets) and achieving 'power' (sustainable advantage) to use his terms. Based on this concept, he argues for resource allocation to power activities to happen before the allocation for performance, in terms of the timing of decision in the annual budgeting calendar. Hence so-called power activities should be generated bottom-up, but performance activities dealt with top-down.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    Resource allocation processes cannot be generalized across all businesses as strategic dimensions vary. Some need to give more importance to the divisions when bottom up approach would be more the need. Top down when corporate level decision making and importance is more relevant. On the whole, there would be a fair mix of both in most of the companies. We need to plan in time and innovate not relying and basing on approaches adopted in the past. Each business carried out needs to be analyzed from the angle of the profitability it contributes and resources - financial and others - allotted in relation thereto. Some loss making units may have to be weeded out after keeping under close watch for sometime. Needless to say that resource allocation is a high importance area and cannot be taken as a routine exercise. The top management as well as the individual business heads have to be fully involved to frame resource allocation budgets.

     
     
     
    • Asit Goel
    • Director - Strategic Marketing, United Rentals

    Jim, The either/ or approach is, in my view, the issue here. Sponsorship from the top is critical to make innovation part of the culture but resource commitment from the BUs is critical if an idea is to ever take off. The real value is in that the corporate resources can better leverage the mega trends and the BU resources can provide the "real world" perspective to make the idea work. Additionally, having the BU engaged alleviates any concerns around "being rendered obsolete" while the corporate resources can drive "cohesion of vision".

     
     
     
    • Laura Carn

    I wonder if it's not an either/or situation here, but rather a more subtle process change by some companies, especially those in volatile or fast moving industries.

    What I see happening among partners I deal with is that they allocate strategically from the top (setting overall budgets for business units), but allocate tactically at the unit level. This allows companies to respond more quickly to on-the-ground conditions without need for a large-scale review from top management. Of course, lower managers are ultimately accountable for those decisions. They can also follow fast-track routes to upper management to get more resources as competitive forces dictate.

    All to say that resource allocation seems to be a much more blended process than in the past, involving multiple organizational layers.

     
     
     
    • Ernesto martinez
    • Marketing Professor and Business Consultant, IPADE Business School

    I think it is the wrong question if resources should be allocated top down or bottom up. In my opinion, the right question would be what is the role of top management in the innovation and renovation processes of an organization, and what is the role of the business unit. In my experience, top management should be responsible for allocating resources, the sponsor, there is no doubt about it, since those resources need to be in line with the strategic "blue print" of the company. In the other hand, the business unit should be accountable for the correct use of those resources. I don't want to be simplistic or naive with my response, I understand there are so many factors affecting this decision, but it will all depend on the "entrepreneurial spirit" of the top management, the size and structure complexity of the organization, the dynamics of the category and the ability of the company to roll out successful ideas to the markets where they compete.

     
     
     
    • Tink

    Resources come in many sizes and shapes--people, technology, processes, tools, fuel, are all resources that must be planned strategically. But the CEO isn't the person to decide on fuel acquisition locations or machine-tool dye design. The point being that the real secret of a successful RAP is not so much who makes a decision but rather how it is made.

     
     
     
    • Nada S. Almutawa
    • head of strategic studies devision, kuwait university

    In educational organizations Theorists have explored leadership traits in many ways such as the great man theory , in which leaders were born with styles outcomes .. Other factors have the impact on educational leaders such as gender , very few scholars linked authenticity with leadership ,Philosophers focus on authenticity and regard it as terms of meaningful life and ethics and consider it as being true to ones self . A main component of it that blends in with the educational organization and profession is behavioral integrity .therefore examining leaders in education organizations is important to define resources and integration through educational networks uncovers idea generation . Nada S. Almutawa Head of strategic studies division Kuwait university Harvard Kennedy school executive education alumni

     
     
     
    • josh
    • student

    a crucial factor of consideration could probably be whether the resource allocation process (RAP), is meant to enhance the quality management policies of the organization. This might necessitate customer involvement in directing which viable and operationally efficient areas and projects that such resources need to move.

     
     
     
    • Andew Campbell
    • Director, Ashridge Business School

    If the organisation is structured into business units, the managers in charge of the business units should develop strategies for those units. Once the strategy is approved the group level should fund it.

    As the strategy is being implemented, the managers in the unit are likely to be most wise about whether the strategy needs more or less funds.

    So the default RAP should be bottom up.

    The question then becomes, when should corporate level managers intervene or overrule or guide the bottom up processes. The answer is whenever they can predict that the judgements of the managers in the business unit will be less good than their own.

    This can occur because the business unit managers have a "self-interest" (they may want a bigger empire), because they are "attached" (they have fallen in love with their brands or location or people), because they are "anchored" (by a previous decision or by previous experiences) or because they are "less knowledgeable" (e.g. only just taken on the role).

    Unless one of these conditions exist, the top should let the bottom guide them.