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.
by James Heskett
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?
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?