Diseconomies of scale

An interesting chat with Rico at breakfast this morning when we touched on the challenges of rationalisation and centralisation in organisations.

Some of our clients are reacting to the current economy (or maybe using it as an excuse) to centralise services so that they can achieve “economies of scale“. The two things that we reflected on were that:
– centralising things can lead to some unpalatably big numbers that, even when substantially cut back, can still be seen as too much.

A decentralised spend of x that is invisible because it is dispersed across a number of cost centres globally can be reduced to x minus lots though consolidating. However, x minus lots is still considerably more than nothing, which is what the organisation centrally used to believe that it was spending.

– economies of scale only scale so far…

Something that is all too familiar from the world of ERP is that to do so you need to have consolidation of working practices. If you homogenize your ways of working too much, you end up with processes or services that, rather than just addressing the needs of the common denominator, actually end up meeting the needs of no-one. Guerilla systems and processes then start to spring up and the costs are effectively raised again (without transparency).

Alternatively, a centralised service attempts to cope with everyone’s specific needs, and as a result ends up so complicated that it costs more that what you were doing on a decentralised basis in the first place.

There are sweet spots where you can find the right mix of quality of service against cost effective management of that service, but I am increasingly of the view that that comes from being able to slipstream in the shadow of a third party who is providing a service on such a large scale that your incremental usage is a triviality. This, of course, is the model that underpins much of the Software as a Service world…

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