There’s been a lot in the press lately about how financial companies are having regulatory issues.  One observation: the  organizational structure of the firm could be a major contributor. How?

Heavily decentralized organizations tend to put everything into self-contained smaller organizations.  The business controls every function directly: ops, tech, sales, product…all in one reporting structure.  Companies which lean towards decentralization look like fiefdoms, run by princes/princesses. The focus is often revenue.  But unfortunately, heavily decentralized companies can struggle with risk and compliance issues because the centralized functions are too weak….the final arbiter is often the business.   They struggle with data issues because everyone does it their way and they can’t develop consistent reporting… which is crucial to exhibit control.

Centralized organizations can be heavy top-down bureaucracies…when they define the what and the how. There is only one way of doing things…no matter what the extenuating circumstances might be. It relies heavily on senior management mandates:  no matter what, the organization has to follow that lead….which can be dangerous.  But certain functions lend themselves well to centralization: for instance Operations and Technology.  These functions can benefit from like-function synergy, standard setting for key activities such as testing and datamasters, and coordination of resources.  At the same time, there are areas which benefit from working closely with the business such as app dev and UAT in a more decentralized manner.

Clearly, the best option is a judicious mix of the two. I worked for a great leader when I was at Amex and he put it this way: “there is a natural tension between functions like sales and risk, ops and product development. You want that tension. It’s up to leaders to manage it.”