What is Decentralization?
In brief, Decentralization can be defined as the organizational structure. In such a structure, the top management of a firm entrusts the middle and lower-level management with the responsibility to take decisions pertaining to the firm’s daily operations.
To elaborate, they are responsible for planning, crafting suitable strategies and taking necessary decisions to boost the proficiency at each level and in turn, optimizing the overall productivity of the company.
Owing to its numerous benefits and positive influence on the company’s performance, business owners tend to prioritize the structure of power delegation. Resultantly, they can make the most of the time and opportunity to focus on the major concerns of their business and also to plan its expansion.
In the era of globalisation, where the entire world is connected and turned into a small village, decentralisation is a development process facilitating development ideas that are pro-poor, pro-nature and protects the regional characteristics in the development process. This process will help in bringing out the voice of the depressed, poorest of the poor and make decisions that are democratic and also help in the representation of the local communities in the decision making process.
Types of Decentralization
1. Democratic Decentralization
It is the transfer of political authority and devolution of powers to the low levels of administration that are below the center. For example, the transfer of power to the states and district authorities from the center is a form of political decentralization.
2. Administrative Decentralization
It is the transfer of power to make decisions that involve utilization of natural resources, mobilization of other resources, administrative authority. It is again divided into divestment, devolution and deconcentration. Divestment is when the powers are transferred to some voluntary organizations from the government. A delegation is an exclusive form in which the powers and authority are delegated to the subordinate officials.
3. Fiscal Decentralization
It is the devolution of economic powers to the lower rungs. This is again divided into two elements. One is devolution of power to spend the money and allotting them with some funds. Another element is to allow the lower levels to collect revenue in the form of taxes and cess charges.
Features of Decentralization in India
Reservation provision exists for the SC, ST, women and OBC at times. This reservation is extended to panchayat level administration also
Article 243E of the Indian constitution clearly mentions forming local level panchayats and also makes a provision to constitute the next panchayat before the completion of its term.
The constitution also recognizes that the panchayats need some powers to function and made a provision making the state government devolution some powers to the panchayats.
Importance of Decentralization
Now that we have gained a basic idea about decentralization let’s glance through its vital role in a commercial set-up mentioned below –
1. Accelerates Decision Making
Since middle and lower-level management is in charge of everyday operations, it accelerates the process of decision making. The freedom to take prompt decisions further enables them to execute their decisions quickly and effectively.
2. Improves Leadership Skills
As employees have the freedom to perform tasks individually, it offers them substantial exposure. In turn, it helps to create a work environment; wherein, employees can hone their executive skills significantly. As they learn to improve their skills and take responsibility for various tasks, it enhances the overall productivity of the firm.
3. Improves Administration
As the manager at each level is allowed to make decisions pertaining to their department, it offers them more room to bring necessary adjustments through the course of operation. In turn, it not only helps to improve the quality of the department’s performance as and when required but also allows them to come up with suitable solutions to tackle departmental challenges. All of this helps to improve the quality of administration at each level significantly.
4. Facilitates Greater Control
With the help of decentralization, top management can evaluate the performance of different departments more effectively. Further, it helps them to review and identify the prevailing shortcomings and helps to bring necessary changes to the same. This not just helps to lower the occurrence of operational shortcomings but also offers greater control over each area of operation.
Test your Knowledge: In what other ways do you think decentralization is essential for a firm?
Advantages of Decentralization
Moving on, let’s quickly check out how a firm benefits through decentralization –
1. Facilitates Smooth Communication
With the presence of fewer hierarchical levels, there is a smooth flow of communication between the superiors and subordinates in each department. In turn, such a set-up comes in handy for the top management and keeps them informed about the grievances and functioning of each department.
Additionally, it allows them to reach out to their subordinates as and when required and implement decisions more effectively.
2. Promotes Expansion
With the middle and lower-level management being more involved with the everyday operation, the top management seeks the opportunity to focus on expansion and sustenance of profitability.
Further, with decentralization management is more adept at identifying areas that require more attention or reforms to emerge as more productive. This helps management to make necessary changes quickly and with more effect, thus facilitating expansion and profitability in a real sense.
3. Motivates Subordinates
Decentralization is an effective way to boost the morale and feeling of job satisfaction among employees. Being entrusted with responsibilities around the department offers them a sense of belonging and further inculcates a team spirit in them.
Although decentralization lays a positive impact on the productivity of a firm, it brings forth specific challenges as well.
Disadvantages of Decentralization
Take note of these common challenges of a decentralized firm –
1. External factors
Factors like market fluctuations, government policies and intervention and trade union movement often present a challenge to optimize the productivity of a company through decentralization.
2. Lack of coordination
Each department is given due powers to delegate their operations adequately. However, different departments may not be eager to cooperate, which defeats the purpose of a decentralized structure altogether.
Give your opinion: Imagine yourself as an owner of a company. How would you overcome the shortcomings of a decentralized firm?
Difference Between Centralisation and Decentralization
Check out the table below to find out the difference between centralisation and decentralization –
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FAQs on Decentralisation
1. What do you mean by Decentralisation? Explain Decentralisation Meaning in detail.
Decentralization is a structural set-up, wherein, the power to make a decision is delegated across all levels in an organization. It is mostly suitable for large scale companies and follows a free and open flow of communication pattern.
2. What are the Advantages and Disadvantages of Decentralisation?
Advantages – Facilitates diversification promotes growth and motivation and helps expansion.
Disadvantages – Lack of coordination and exposure to internal and external conflict.
3. What is the best process of administration? Choose between centralisation and decentralization?
Administration is looking after the functioning of certain people or an organization. It can be done majorly by centralisation or decentralization. In the centralisation of administration, all the powers rest with one authority at the top. In the case of decentralization, important powers are kept with the center and some powers and authorities are devoted to the lower levels of administration. In the case of decentralization, voices of the marginalized, poorest of the poor and locals are heard. They are also involved in decision making. In the case of centralized authority, as the decision is taken by a single person or group of persons, they might miss out on some local issues. But, this form of administration helps in maintaining greater control over the people. It avoids any form of deviance from the rules and plans. It also helps in a faster decision-making process as the people involved in decision making are fewer. It also avoids privacy issues as the people involved are minimized. To pick between the both is a difficult choice. It should depend on the objectives of the plan or administration. If one wants greater control over the organization, one can go for centralisation. If they prefer considering everyone’s decision, they can go for decentralization.
4. Explain the difference between centralisation and decentralization?
Both are two forms of administration of people or an organization. In centralisation, only the top officials or people involved take the decision. In a decentralized organization, decisions are taken at multiple levels of the organization. Centralisation is suitable for small firms as they do not involve many people. Information in the firm flows vertically. As the people involved are fewer, decisions are taken at a faster pace. Only selected people make decisions. On the other hand, is a decentralized firm, which is generally a large scale firm, the information flows at a slower pace as it has to go through many people and hence, the decision-making process is also slow. Conflicts in decentralized firms are frequent and common. It tries to consider all the individuals in the decision-making process
5. What are the provisions in India facilitating decentralization?
India is a country with cooperative federalism which means that the entire structure is such that it is decentralized with a twist of centralisation in certain spheres. There are many provisions facilitating this arrangement. Reservations for the SC, ST, OBC and women are extended to the panchayats at the local level also. This was brought through the 73rd and 74th constitutional amendments. Another constitutional provision like article 243E facilitates the constitution of local panchayats before the end of the term. It also facilitates the devolution of finances and powers from the state government to the local government. The panchayats are allowed to collect certain types of taxes and cess charges. They are also given some funds to take up development activities.
