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(originally published by Booz & Company)


We’re from Corporate and We’re Here to Help

Developing and deploying human capital is corporate’s third key function. Profitable corporate centers use the full breadth of the company’s business portfolio to offer a variety of flexible and rich career paths that will attract and develop people who can make a real difference to the BUs. They nurture the corporate brand as a recruiting asset when and where it has more equity than the individual BU brands. (For example, PepsiCo’s corporate brand helps Frito-Lay, Gatorade, and its other businesses attract talent.) They actively match the company’s strongest talent to its most important priorities, whether these are specific to particular businesses, span multiple businesses, or transcend them. Deadweight corporate headquarters facilitate inbreeding, cultural silos, and hoarding of talent within units. They do worse than what the talent markets do on their own, and they often do it with an enormous and costly corporate HR function. Sooner or later they are forced to go outside the company and pay a premium for the business talent they need.

Business unit governance processes are a fourth key function of corporate headquarters. All companies require deadlines, policies, targets, plans, and more to operate well. But profitable corporate centers go beyond that. They work hard to shield the BUs from the worst of short-term behavior—be it from customers, employees, or, especially, shareholders—while also holding their feet to the fire when it comes to producing results. They challenge and help shape the strategies that underpin the BUs’ plans, rather than just sit back and wait until those plans are submitted for corporate’s review and approval. They actively work with the BUs to determine how they will meet their targets, instead of just handing them down from on high. They continually ask themselves, “How can we ensure that we are governing the BUs in ways that enable them to outperform in their markets?” This determines how they set policies, allocate resources, manage the annual planning and budgeting processes, and centralize or standardize services; it basically drives everything else they do.

Unprofitable headquarters have a completely different attitude. They tend to ask, “How can the BUs help us do our job in running the company?” Thus, they tend to think of their governance role primarily as one of control and compliance rather than as one of adding value. In fact, in our experience, they are more likely to suck the life out of the BUs.

Perhaps the most valuable—and difficult—of all functions is the fifth: incubating, nurturing, and disproportionately investing in the company’s enterprise capabilities. An enterprise capability is something a company is able to do better than any other company. Frito-Lay, for instance, handles direct-to-store delivery better than just about any other company in the United States. Apple has an uncanny user design capability (or at least it did when Steve Jobs ran the company). IBM knows how to sell technology services into the C-suite. Profitable head offices actively identify capabilities anywhere in their organizations that can benefit all their businesses. They stay on alert for acquisitions that would enhance their businesses’ most important capabilities. They organize centers of excellence to nurture certain essential capabilities. They manage costs and capital to ensure that they are investing more and more effectively in their capabilities than any other company. If done well, this can be the most valuable role a corporate center plays in delivering a positive bottom line to the company.

Finally, profitable corporate centers know that their ability to add value depends greatly on the nature and complexity of the company’s portfolio shape. Universal banks, for example, have discovered how different commercial banking and investment banking really are. The best-performing banks tend to be good at one or the other, but not both. Wells Fargo is good at commercial banking, especially retail, but it long avoided investment banking (until it bought Wachovia during the financial crisis). Goldman Sachs is the best of investment banks and does very little commercial banking. Few, if any, universal banks have a profitable corporate center, because it is very difficult to add value through the other five functions across commercial and investment banking given the very different nature of these two businesses. Companies with profitable corporate centers tend to be made up of businesses that draw on the same few essential capabilities. This coherence in the company’s portfolio makes it easier to add value through the other five functions.

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