4 Principles of Resource Allocation in Large Companies

  |  May 8, 2019

One of the most contentious issues we run into in organizations takes place around resource allocation. In a large company, resources are sometimes placed directly in an operating unit—a part of the business that generates value. At other times, resources may be placed in a supporting function where they can be shared across the whole organization. There are many good reasons why we may allocate work and resources one way or the other. It’s not always easy to determine whether placing resources in the operating unit or in a supporting function will be the best organizing option for the business.

Recently, this issue came to a head in a large multinational company we had been working with. A very senior executive in this $30B company decided to place certain resources in a global function. As soon as this decision was announced, complaints began to fly from business unit leaders claiming that the decision would negatively impact their businesses.  Both sides turned to us to back them up with justifications for their points of view.

4 Principles of Resource Allocation

In the process of working to help them through this dilemma, we outlined the following four principles to assist them in allocating their resources in ways that would most benefit their organizations:

  1. If the work needing to be done differentiates the business, it’s usually best to place it in an operating unit. That way, it can be tailored more specifically to customer needs to optimize revenue generation potential.
  2. If the work is something that is just supportive in nature, we want to put it in a place in the organization where it can be performed in the most efficient ways possible. That usually would be in a global function where it can be shared for reduced expense and deliver consistency across the company.
  3. When we are looking for the best capability, usually any one operating unit can’t justify creating or investing in it, but the corporation could. In this case, putting it in a global function may make the most sense.
  4. The faster an organization needs to move and respond, the greater the likelihood that resources should be placed in an operating unit where proximity to end users facilitates speed.

While not ironclad rules, these principles can help leaders strike the right balance between efficiency and performance when faced with tough decisions around resource allocation.

Impartiality is Essential

Even with these principles in hand, it can be difficult to maintain objectivity when resources are at stake. When contemplating where to allocate resources, we encourage leaders as they consider these principles to do their best to avoid letting personal or political motivations sway their decisions. Ideally, the best interest of the company should be paramount; resources should be allocated according to how best to accomplish business goals. If the goals at stake are strategic ones, then focus on placing resources close to where the work is happening—typically in an operating unit. If they are about consistency or about creating company-wide best practices, then a supporting function may make more sense.

Sometimes those decisions are not best made by the two parties at play. Asking the heads of the operating unit and the functional unit heads to come to an agreement on their own can easily result in an unproductive discussion, because they both have too much at stake regarding the outcome.  If this is the case, it can help to bring in someone from above or a third party facilitator who can help ensure decisions are based on what’s best for the business. For example, “Our strategy demands that we be faster and more responsive. Therefore, even though it may cost a bit more we’re going to put these resources in our operating units. We know that’s not a perfect answer but it’s the one we’re going to go with because it’s the best solution to help us meet our goals.”

Keys to Prioritizing Wisely

Wise allocation of resources is very important in any company. No company has unlimited resources, and every part and function of a company can come up with good reasons why they need resources. Considering the above principles when making resource allocation decisions, along with taking steps to ensure impartiality, will help leaders reduce internal strife and come up with solutions that truly serve the best interests of the organization.

 

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