When subsidiary managers at global organizations are ignored or constrained by a parochial mindset at headquarters, the whole company can suffer. Here’s how one company set out to change that dynamic.
In 2007, Irdeto B.V., a Netherlands-based developer of security software for digital media providers, was eager to increase its market share in the Asian market. The company had been in China for nearly a decade and boasted a substantial regional office in Beijing. But its market share in China was under attack from Chinese competitors, including China Digital TV, which held a 40% market share compared to Irdeto’s 22%. Despite frequent visits by then-CEO Graham Kill and the sales director, the company worried that it would miss out on the anticipated market growth in China and other parts of Asia.
In Kill’s view, one of Irdeto’s problems was that too much power was concentrated in the head office in the Netherlands. Managers there conducted themselves as if they knew best, and branch offices and subsidiaries tended to defer to Amsterdam. Such dynamics undermined the company’s ability to understand remote markets, learn from them, and adapt to them. We call this malady the “headquarters knows best” syndrome.
In our experience, similar narrow-mindedness holds back many organizations in their efforts to turn global presence into a real source of competitive advantage. In this article, we explore the manifestations and costs associated with this way of thinking — and ways companies have addressed the problem. Many of the things companies have done are fairly predictable, such as decentralizing global responsibilities, changing the reporting relationships, internationalizing senior management, and creating cross-national teams. In Irdeto’s case, the company tried a more extreme remedy: It created two headquarters, one in the Netherlands and the other in China. While this was expensive — and something Kill’s successor ultimately did away with in 2015 — our study of the company indicated that the decision to operate out of dual headquarters provided an effective way to realign the focus of the company, and it had significant positive effects on Irdeto’s performance. (See “About the Research.”) We offer a broad set of recommendations to help executives overcome the “headquarters knows best” syndrome and position themselves more effectively for global growth.
Identifying the Problem
Whenever we discuss the problem of the domineering corporate headquarters with executives of multinationals, we find that it resonates. Many managers have no trouble ticking off the symptoms, including unrealistic demands from headquarters, misguided advice or directives, micromanagement, and a lack of receptiveness to subsidiary contributions and ideas. At subsidiaries, these behaviors lead to a loss of confidence or initiative, defensiveness, reluctance to share information, rivalry for headquarters attention, and careful impression management during visits from headquarters executives.1 As the Mexico country manager of a German diversified machinery group put it, “Local entities are trained to be dependent,” adding, “They slip into compliance mode. Sometimes they are even intimidated, [and this] leads to suboptimal use of their potential.”
Through classroom discussions and executive interviews, we developed a detailed understanding of the “headquarters knows best” condition’s characteristics and consequences. First, there are often problems in the vertical dynamics:
- Inadequate Headquarters Attention to Emerging Regions The top team suffers from tunnel vision, focusing disproportionately on opportunities, talent, and best practices in established markets. They have a limited understanding of emerging markets and difficulty providing the right quantity or quality of support. Too many visits and over-monitoring can prove as damaging as neglect.2
- Limited Upward Influence for Distant Subsidiaries Even when decisions concern them, executives in less-established markets complain that they “feel at the end of a long rope.” Their requests and ideas are unheeded and their ways of operating aren’t considered. Feeling neither involved nor trusted, many subsidiary executives lack the motivation and self-confidence needed to pursue independent initiatives.
Horizontal dynamics also can be problematic:
- Insufficient Exchange Among Subsidiaries Headquarters and subsidiaries often maintain a hub-and-spoke pattern of interaction. While the satellites compete for attention from headquarters, they maintain little contact with each other unless it’s orchestrated by the center. There isn’t much discussion of, or support for, efforts in other parts of the world, particularly between core subsidiaries and those on the periphery.
- Weak Links With Key Stakeholders Outside its home region, the company is perceived as “alien” by the local business partners and stakeholders.3 Its seat of power is remote. Also, executives at local operations lack the autonomy or status to engage meaningfully with senior local decision makers.
The net result is that the belief that headquarters knows best can be damaging to the long-term success of a company operating in global markets. Among other things, it results in missed sales leads, the loss of talented employees working in subsidiaries due to a lack of career advancement opportunities, an overinvestment in initiatives that are close to the headquarters, and an underinvestment in innovation and entrepreneurship in far-off markets.
Although headquarters executives may have the best of intentions, their actions produce stunted offspring in the form of subsidiary executives who lack confidence, motivation, and autonomy. This places companies at a serious disadvantage, especially when they are competing against rivals with truly global mindsets.
A Common Condition
Our surveys of more than 500 executives working in the subsidiaries of multinational corporations reveal that most endure a domineering headquarters. When we asked executives to take a diagnostic quiz assessing the degree to which their companies experience “headquarters know best” syndrome, barely 10% of executives gave their companies a score that indicates the company isn’t at risk of “headquarters knows best” syndrome. The vast majority of executives gave their organizations scores suggesting that their companies are either prone to the syndrome or have an acute case of it. (See “Diagnosing the ‘Headquarters Knows Best’ Syndrome.”)
If the problem is so widespread and debilitating, why don’t more companies address it? One reason is that many corporate decision makers at headquarters aren’t aware the problem exists. Typically, they interact with executives from subsidiaries that are closest to headquarters (in terms of geography, economic development, and culture); their frame of reference is based on subsidiary managers who benefit from ample attention, autonomy, or influence. Indeed, executives from far-off subsidiaries are the ones who are most likely to be affected and least likely to be heard.4
In addition, the value of missed opportunities and lost talent is hard to assess, and headquarters executives can easily invoke contextual factors (such as competition for labor) to explain problems. They can also try to pin blame on the local entities.
Developing a More Global View
To counteract the centralizing force of strong home-country headquarters and develop more global mindsets, a number of multinationals have tested solutions that attempt to change one or more of the following:
- The Anatomy of the Organization Structural approaches to creating a global mindset often involve setting up hubs with global mandates. For example, in addition to having research and development centers in France, French energy management giant Schneider Electric has R&D centers in the United States, India, China, and Mexico. Similarly, German-based SAP, the enterprise software company, has built up large R&D centers in India, China, Israel, and the United States to support its effort to reduce costs and leverage dispersed know-how in software engineering.
- The Physiology of the Organization Various systems or processes are designed to encourage multinationals to create global linkages and boost knowledge sharing. For example, IBM uses its technology to initiate online brainstorming sessions (involving thousands of employees worldwide) around a core issue, such as innovation or client experience. Sodexo Group, the France-based facilities management company, holds a biennial innovation forum to showcase internal ideas that increase value for customers.
- The Psychology of the Organization Some solutions are designed to reshape the outlook and behavior of individuals. In a bid to create a more global perspective, Japanese drug maker Takeda Pharmaceutical set up a global advisory board, bringing in foreign advisers who had had experience at industry rivals Pfizer, Eli Lilly, and AstraZeneca, and named several non-Japanese executives to its leadership committee. Before its power-generation business was acquired late last year by GE, France-based Alstom once moved its entire 18-person management team to Asia for three weeks, not just for a visit but to run the day-to-day business from there.
Such strategies may be effective in some settings, but Kill and other Irdeto executives felt they were not adequate for addressing their company’s problem. They had already attempted to advance global thinking and communications by promoting executive travel, training, transfers, and investments in collaborative technologies. However, such efforts had limited impact. Irdeto’s CEO concluded that breaking the company’s Eurocentric mindset required a radical move. His decision was to split the top management team between Amsterdam and Beijing.
The idea of relocating the corporate headquarters so it’s no longer anchored in a single locality has been around at least since the 1990s.5 C.K. Prahalad, the late University of Michigan corporate strategy professor, proposed that “true global companies” organize themselves into hubs rather than headquarters to allow the company to have a better perspective on global markets and tap into ideas, knowledge, and opportunities wherever they arise.6 At least that was the theory. In practice, head offices are often bastions of conservatism, advocating innovation everywhere but at the corporate headquarters. Hence, we still know little about the workability of such arrangements.
What Irdeto Did
Over a five-year period, Irdeto took several steps to implement the dual headquarters arrangement. Significantly, Kill announced in September 2007 that he and his family would soon relocate from Amsterdam to Beijing. Two other top executives would also move there, redistributing the senior leadership team across two locations within 12 months. Aside from the relocation costs, the other expenses were relatively minor. From a management perspective, the company didn’t have to revamp the formal reporting lines or management systems, although it did institute important changes in work practices to create a better balance between Europe and Asia. The changes involved three things:
- Sharing the Pain Middle management conference calls were rescheduled so that half of them occurred during Beijing working hours while the other half accommodated a European schedule, splitting what had previously been a one-way burden. In addition, the location of top-team meetings was divided between Amsterdam and Beijing, requiring all team members to travel equally.
- Sharing Knowledge The agenda for regional meetings always included a standing item related to developments and issues elsewhere in the world. Irdeto also created cross-regional working teams in areas such as shared services, software development, and best practices, to multiply the number of connections between managers from the Eastern and Western hemispheres.
- Sharing Opportunities Transfers of executives from Europe to Asia were matched by transfers to Europe from Asia. At the monthly country-manager meetings, the chair rotated so that managers from different areas got an opportunity to lead. In addition, Irdeto created a “center of excellence” for software development in Beijing to provide local engineers with explicit responsibility for developing high-value-added parts of Irdeto’s overall offering rather than operating under the Amsterdam development center. As CEO Kill saw it, there was some risk in doing this. But the only way to break a norm, he said, was “to cut through it, and then to manage the consequences.”
Monitoring the Response
We tracked the changes in Irdeto’s activities closely. After the company established its dual headquarters in 2007, our surveys and interviews revealed measurable improvements on four fronts: increased top management attention, greater subsidiary contributions, rich lateral exchanges, and tighter local connections.
Increased Top Management Attention
Headquarters’ new focus on Asia was evidenced by a shift of R&D expenditures to the region (increases of 190% and 69% in 2008 and 2009 respectively, compared to increases of 60% and 40% in Europe). This culminated in the announcement in 2010 that the company would locate its formal “center of excellence” for software development in Beijing. Beyond these high-profile decisions, people inside the company noticed more responsiveness to developments in Asia. As one Asian middle manager commented, “Now [with the CEO in Beijing] we can get prompt decisions and feedback from the senior management team.”
Because the structural change improved communication channels, the senior leadership team interacted more often with Asian managers. As a result, it became more alert and receptive to opportunities in the Asian market. Indeed, senior managers became significantly more aware of developments in every region, not just China. Executives in surrounding countries — notably Korea, Singapore, and Thailand — reported significant gains in senior management attention.
Greater Subsidiary Contributions
The physical presence of senior executives in Asia made it easier for local executives to establish credibility with them. As top managers interacted more with Asian executives, the top managers were more likely to appreciate the efforts made, obstacles overcome, and deals won. In short, senior executives got firsthand exposure to local executives’ competence and reliability. Increased credibility generated greater trust, which, in turn, expanded the unit’s influence and ability to make important contributions to strategic decisions.
As Asian subsidiaries became more central to discussions, they gained self-confidence. Said one European IT manager, “We have started to see a real shift in how the team in Beijing works. They are pushing back more in development projects … ‘This won’t work in the Asian market. Have you tried that?’”
Richer Lateral Exchanges
Within three years, the Amsterdam and Beijing offices were operating more or less as equals. For example, the group human resources director noted, “The increased presence in Beijing — especially the center of excellence — has given employees the feeling that they are part of one global organization, rather than one managed out of a single place.”
Horizontal ties among peers across subsidiaries improved markedly. Suddenly, Asian executives gained easy access to “boundary spanners” — people who could connect them to networks in subsidiaries around the world.7 And as network connections increased, Asia (particularly China) became more central to communication flows. In the words of an Asia-based business development manager, “The dual-core [headquarters] simply recognizes the way we work in a multicultural, multi-time-zone world.” It created a more integrated and efficient organization — one with more connections and tighter links.
Tighter Local Connections
Irdeto’s strategy also led to improved communications with the outside world and improved perceptions about the company. Our findings show that it generated more interactions with Chinese customers and, thanks largely to the presence of senior leadership team members, closer relationships with Chinese business partners. The fact that Irdeto had two headquarters, combined with the CEO’s move to Beijing, made a strong statement about Irdeto’s priorities to employees, customers, prospects, suppliers, investors, and other external stakeholders. Several China-based interviewees remarked that the company had started to become part of the local fabric. As one executive noted, “We are a bit less foreign now. In competitive bids, our win rate has gone up, and local patenting has gone up as well.” A key area that improved was Irdeto’s relationship with local officials. As Kill noted, “Being able to drop everything and show up immediately has been very helpful in managing our relationship with the government.” Irdeto’s commitment to the Asian market also improved its relations with local universities, resulting in new internships and joint research programs.
Significantly, Irdeto’s gains in Asia did not come at the expense of its business in Europe. In fact, European executives benefited in two ways: The move enhanced the company’s reputation for innovation among its European stakeholders, and Kill’s move to China pushed managers in Amsterdam to take increased responsibility for decisions, especially those that didn’t really warrant the CEO’s attention.
A Changing Perspective
As a private company, Irdeto doesn’t typically disclose financial information. However, we can report that the company’s revenues tripled during the four years we actively studied it, increasing from $70 million in 2007 to $215 million in 2011. Not all of the growth was internally generated: Irdeto made two small acquisitions in North America in 2010. But our research indicates that two-thirds of the growth was organic, driven mainly by positive perceptions about the company and by its pursuit of new opportunities worldwide; Asia sales grew by 94% in 2008, 36% in 2009, and 70% in 2010. The following year the company, in an effort to integrate the North American acquisitions (which represented more than a third of its sales and employees), decided to add a third headquarters in San Francisco and to add three executives based there to the senior leadership team.
In a 2012 survey, we asked executives how they viewed corporate headquarters. We were surprised by the response. Most said they didn’t regard it as either two-headed or three-headed but rather as a “virtual” headquarters led by senior managers who worked from different locations. Regardless of whether the headquarters was truly virtual, this view signaled how far mindsets had evolved. No longer a prisoner of its home base, the top team was viewed as mobile, agile, and geographically dispersed. As a result, people said the company was able to make more effective resource-allocation decisions informed by diverse thinking and divergent points of view.
Lately, Irdeto’s concept of headquarters has continued to evolve. In 2014, after eight years in Beijing, Kill left the company in order to move back to Great Britain. His successor, former sales director Doug Lowther, chose to base himself in the Netherlands. He was confident that the changes were sufficiently anchored that they would not be threatened by this move. Lowther is a Canadian, with extensive experience of working in North America, Asia, and several parts of Europe. In many ways, he embodies the new global perspective of the company.
Our discussions with both the previous and current management teams at Irdeto suggest that adding another headquarters served as a catalyst for breaking the domineering mindset within Irdeto and enabled it to grow in Asia. In the wake of that success, the company has shifted to a distributed headquarters with Amsterdam as the primary center, while maintaining a de facto virtual model with top team members spread across three continents.
The recent changes are a reminder that there is no perfect structure. There are pros and cons to any arrangement. Although the major benefits of the dual-core headquarters had been realized by 2014 in the form of changing mindsets and new ways of working, the coordination costs were still present. So shifting to a slightly simpler model reduces the costs without eliminating the benefits. It is a reminder that there often is a natural cycle to these types of structural changes, and we should not expect any model to last forever.8
Lessons for Other Companies
Irdeto is a medium-sized, privately owned multinational corporation — and what works for one company may not be right for another. Nevertheless, Irdeto’s experience offers some broad lessons for companies seeking to eliminate their local biases and become more global. They involve openness to changing the existing structure, a commitment to promoting fairness, and the willingness to learn what it takes to operate virtually.
Openness to a Different Structure
Redistributing headquarters’ activities and reassigning top executives to other locations is the fastest, most effective organizational lever management has. In less than a year, Irdeto saw a significant increase in the stature, influence, and centrality of the Asia market, which had previously been marginalized. The results were relatively easy to achieve.
Relocating headquarters’ activities forces people not only to think differently but to act differently. Efforts to modify executive attitudes often fail because they mistakenly assume that changing how people think is the secret to changing how they behave. Evidence from the Irdeto case and other settings strongly suggests otherwise.9
This shouldn’t come as a surprise. Social psychology has shown that behavior change is often a precondition for changes in attitudes and feelings.10 Overcoming ethnocentric thinking presents a similar challenge. After moving key top executives to a new location (making it almost impossible for them to ignore peripheral markets), Irdeto executives began acting more globally, and their beliefs progressively fell into line with their experiences. People tend to act their way into new attitudes more than they think their way into new behaviors. To change attitudes, therefore, companies must create new patterns of interaction rather than just relying on training and development.
Commitment to Fairness
The perception of fairness is critical to reducing resistance to painful change. One reason many restructuring efforts flounder is that they demand sacrifice from everyone except those at the top. To succeed, the senior management must accept its share of the pain. The CEO’s move to Beijing was a manifestation of this. “It wouldn’t have been right for me to say to my colleagues, ‘Look, I want you to go over to China to start this initiative,’” Kill said. “It had to start with me.”
Another aspect of fairness is managing the trepidation associated with change. At Irdeto, it was clear from the outset that some executives didn’t want to participate in the program because of the intensive travel and mobility demands. Therefore, relocation of top managers to China was voluntary and, in contrast to the CEO, the volunteers were not expected to move immediately. For those unwilling to change, it was important to manage the necessary transitions in a fair way; there was total clarity on the impending changes and time horizon, but also a chance to adapt, get reassigned, or exit with dignity (with outplacement assistance).11
Decisive, top-down leadership is sometimes necessary to produce lasting change. The paradox is that breaking the tyranny of the center may require autocratic decisions. Fair processes can help render these difficult outcomes more palatable by making the case for change and engaging reluctant participants in discussions about how to achieve it and mitigate the downsides.
Willingness to Learn to Operate Virtually
The big risk with distributed leadership is that it complicates communication and collaboration. In the late 1970s, MIT engineering professor Thomas J. Allen showed that interaction frequency in an R&D setting declined substantially with distance (for example, colleagues on separate floors seldom interacted informally). Advances in communication technologies have done little to change this. Ironically, virtual communication occurs most often between colleagues who frequently meet face to face.12
Combating this phenomenon requires discipline. With less spontaneous interaction, leadership teams located in different places must change how they operate. Executives must make a conscious effort to connect with others regularly, often by scheduling appointments that span multiple time zones. It’s all too easy for the top team to neglect interactions and get swamped by the operational side of managing the business. If meeting times aren’t set in advance and respected, the demands of the moment invariably win out.
This extra commitment to communication was noted by Irdeto’s Asia-based head of sales and marketing: “I will have weekly [calls] with my sales team, and a lot of that is about joining the dots, making sure they know who is talking to whom, suggesting they reach out to someone in another location. Because we are so dispersed, we need to work hard on alignment and priorities.”
Virtual discipline also applies to the discussions that remain “off limits.” Organizational theorist Karl Weick first noted the challenges of achieving a common understanding and reading other people’s concerns using technology-enabled communication.13 According to Weick, people communicating remotely lack many of the sensory, emotional, and contextual cues vital to what he calls “sensemaking.” As a result, it’s harder for everyone to fully understand the topics under discussion, and participants tend to judge each other more harshly. The distributed team must address these challenges by taking full advantage of occasions when they meet face to face to iron out misunderstandings and review mistaken judgments.
Wanted: A Global Mindset
Companies today must use their global reach to learn from their partners in far-flung locations and to recycle that learning globally. Instead of emphasizing where a company operates, we are now more concerned with how it manages and structures its worldwide activities. Unfortunately, many companies that regard themselves as global are missing the boat. They mistake a global footprint for a global mindset. They are boosting their presence in growth economies, such as China and India, to leverage what they already know. They are investing heavily to meet short-term growth targets instead of developing new business models and innovations that will help them compete across their entire network.