Decentralisation: Concept, Types, Advantages and Disadvantages

By | May 6, 2020

Decentralisation is an extension of the concept of delegation. It actually refers to the degree to which authority is delegated to lower levels. It gives added responsibility to managers at all level below the top. Only those responsibilities are left which can be exercised centrally only or by top management. The centres of decision-making are dispersed throughout the organisation. It is considered as ‘Golden Calf’ of the management philosophy of the new era.

Concept of Decentralisation:

Decentralisation can be comprehended as the logical and systematised assignment of power and authority, all over managerial levels in the institution. It represents how the power is distributed at various managerial levels. It is opposite to centralisation where the power is concentrated at the centre. Hence, it includes disseminating the authority and function from the centre of the organisation to various levels. This diffusion can occur at horizontal or vertical. Hence, under decentralisation, there is diffusion or dispersion of authority.

According to Louis A Allen, “Decentralisation refers to tire systematic effort delegate to the lowest levels all authority except that which can only be exercised at central points”.

Factors affecting Degree of Decentralisation:

  • The cost involved in decision-making and decentralisation. It also depends on the background and history of the enterprise, its size, change in environment.
  • Does it check if the organisation have many managers?
  • It checks whether the subunits desire independence and whether the subordinates are able to cope up with the change?

Difference between Decentralisation and Delegation:

  • When a subordinated is entrusted with responsibility or the authority by his superior then it is delegation, while decentralisation is when the authority is dispersed and disseminated to the lowest managerial level consistently.
  • A delegation is a tool of managing, while decentralisation is merely an idea of management.
  • Delegation leads to transfer of only responsibility and authority. It does not include the transfer of accountability. In decentralisation along with authority and responsibility, accountability is also transferred. The subordinate is held responsible for the work and not the superior.
  • Decentralisation gives more freedom to work, whereas delegation gives lesser independence.
  • There is a superior-subordinate relationship in the institution which is created by delegation. However, decentralisation creates a sub independent units within the organisation.
  • Authority’s delegation is the essence and needs of every institution because of a single manager cannot handle the entire task. Decentralisation, however, is not a necessity and is as per the will of the top management.

Types of Decentralisation:

Responsibility Centre: It is a competent or a subdivision of a firm where the superior has responsibility, accountability and authority. They also comprise of the departments. These centres of sub-units have their own goals and procedures to be followed. It is a functional entity and the sub-units are entrusted with a specific task. They are categorised into profit, cost, revenue, investment and contribution centre.

Profit Centre: This the division of the company which aim at the calculation of profits. Such division is accountable for its own earnings and results. They deal with decisions of allocation of resources to profitable units and determine whether the activities should be discontinued or not. Hence, it is the sub-unit that generates its own profits and is accountable for it.

Cost Centre: It is a sub-unit which does not lead to the addition of profit but contribute to an organisation by performing its functions efficiently. They are not profit-generating centres such as R&D department and Human Resource Department. They indirectly help in revenue generation by assisting in business research and hiring competent personnel but do not generate actual revenue. Cost centres are responsible and accountable for working within the budgets. The key focus is to keep the expenditure to the minimum and curtail and control costs.

Revenue Centre: This department is formed for increasing the revenue of the organisation. It has no accountability for production. the managers of revenue centre do not focus on the cost of the product, but controlling the marketing/sales related expenses. this department works on increasing sales with efficient marketing strategies. The manager is responsible for generating revenue only and not the cost of production. All the incomes for various products and services are gathered and analysed.

Contribution Centre: This department is associated with generating contribution which is the difference between sales and variable cost. The manager’s accountability lies in increasing the contribution. The more contribution, the more will be the profit. he has authority, responsibility and accountability with regard to generating contribution only and not the production. the manager has no control and responsibility for fixed costs. However, he is entitled to see that contribution centre works at optimum level and generates maximum level.

Investment Centre: It is the uttermost comprehensive department as it collects and analysis the information about costs, revenues, profits along with various assets. It focuses on generating returns on the investment made by the company. The authority, responsibility and accountability lie with not only sales, cost and revenue but also, where the money is invested. The responsibility is to generate returns by efficiently allocating resources.

Advantages of Decentralisation:

  • It reduces the workload of overburdened senior executives.
  • It brings the decision-making process closer to the action without any delays.
  • It facilitates product diversification. Each product division has separate management.
  • It gives individuals an opportunity to learn by doing through the freedom of decision-making and better control.
  • It often results in effective controls and performance measurements at lower levels.
  • The most advantage is of profit centre principle for large multiproduct firms.
  • It facilitates quick decision-making and better control.
  • It develops the managerial skill of the subordinate.

Disadvantages of Decentralisation:

  • Conflicts between divisional heads.
  • Costs increases due to the large group of managerial staff for each division.
  • Decentralisation demands training programmes that may be time-consuming and highly expensive.
  • Increases risk as tasks are delegated.
  • It is not suitable for services that require specialist knowledge.