Decentralization, in a very generic sense, is the act of distributing resources away from a central controller or authority. There are many definitions available for decentralization that can be interpreted in different ways. These definitions apply to different domains. However, the central meaning or the essence of the term is retained in each of those definitions. The question that naturally follows is -what does it mean to say “decentralization is about the distribution of resources”?
Let us take an example of countries that have adapted to federalism. A federal state is a union of several smaller self-governing territories that form a coalition under the umbrella of a central governing body. The component states of such a federal alliance, to some extent, have the authority to administer their policies, take decisions and control their affairs. Such federal entities are perfect examples of decentralization where resources – in this case, power, decision making, governance, and autonomy – are decentralized from a central governing authority to the regional components.
If we take a look at the structure of most global corporations, we can also see decentralization in operation. Most of such organizations align their business units in such a way that each of them can function independently to some extent and can have its decision-making capabilities. From politics to engineering, from technology to economics, we can see the application of the concept of decentralization. But why do we see such wide application of the concept? What is so special about decentralization?
Decentralization offers several advantages, especially for entities that are large in size. Ability to make quick (and effective) decisions is a great advantage, and it can be a make or break factor when it comes to the real world. Decentralization, by distributing authority, expedites the process of decision making increasing the efficient and throughput of the entity. Decentralization also offers another great advantage – mitigation of the risk of a single point of failure. A system or structure that is highly dependent on a central controlling body or authority can fail and stop functioning entirely in case the central structure fails thus making the centre a single point of failure. Decentralization mitigates this risk as the resources are distributed minimizing the potential risk of a complete failure.
Decentralization, however, comes with its share of trade-offs and before implementing such an approach, one needs to be very careful about formulating a strategy for achieving it. First of all, decentralization fails completely in case the components of the entity are not capable or competent enough to make effective decisions and take care of the functions that are expected of them. Secondly, in a decentralized system, each of the constituent components might have or create its set of rules that are quite different from its other counterparts thus making effective co-ordination difficult to achieve. Duplication of activities is another problem that needs to be addressed in a decentralized body. Decentralization, when implemented correctly, can hugely benefit an entity by increasing throughput and efficiency and larger organizations can greatly benefit from this approach. However, the transformation towards decentralization requires thorough self-assessment and careful planning in the absence of which things can turn out very differently from what was conceived, for worse.