Phillip Nell and Alexandra Gillung

What value does our corporate headquarters create? What parenting activities is it focused on and is this focus the right one? These, and similar ones, are very typical questions that the management of companies in various industries deal with. Ideally, the headquarters creates a positive net value, i.e., it generates more value than costs for the company. However, this is easier said than done and is accompanied by some complexities. In the following, we describe the main complexity drivers.

Value creation and value destruction are multidimensional constructs and difficult to measure

Corporate headquarters can create value in several ways, e.g., by setting up an efficient internal capital market, creating synergies or efficient monitoring. Similarly, value destruction is multidimensional. For example, the headquarters itself generates direct costs, such as personnel costs for headquarters staff. But the headquarters also generates indirect costs, such as personnel costs incurred in subsidiaries to meet the headquarters’ reporting requirements or motivation costs incurred at the subsidiary level because managers there feel they do not have much control. This makes it difficult to capture value creation and destruction holistically, especially since even the individual dimensions such as synergies, motivation costs, etc. are not easily measurable.

Positive net value creation can be brought about by many different configurations of parenting activities

Due to the multidimensionality of value creation and value destruction, complexity also results from the fact that the same net value creation can be achieved by different configurations. The scientific term here is "equifinality". In concrete terms, the headquarters of a company may focus on very few parenting activities (e.g., no strategic control of the subsidiaries at all, but control exclusively via financial KPIs), and thus also generate low costs. Another company may achieve the same net value added through a large, highly staffed headquarters, which takes on many parenting activities accordingly.

The digital transformation will strongly influence how corporate headquarters are designed in the coming years

Value creation and value destruction through parenting activities of the headquarters will be influenced by digitalization just like other company activities. For example, modern big data tools already form the basis for analyzing and processing the information available in and about each subsidiary or business unit in such a way that top managers at headquarters have both faster and more precise data for their decisions. For example, SAP offers management dashboard functions, AI-supported, among others, that provide managers with clear data on multiple screens.

Despite these various complexities, it is possible to evaluate the value creation of the corporate headquarters. The HiA team helps to do this objectively and comprehensively and identifies perception gaps as well as improvement potentials to focus the headquarters on the "right" parenting activities and increase its net value creation. At the same time, the team generates important data that feeds into HiA research.

In this context, we also deal with the question of how digitalization affects the value added by corporate headquarters. In 2019, together with Headquarters Austria and Roland Berger, we conducted a practice-relevant study on this topic (Headquarters of the future: The impact of digitalization on headquarters structures and value added) and published a scientific paper (How corporate headquarters add value in the digital age).

Of course, this topic remains highly relevant and therefore an important area of research for HiA. If you would like to participate in our current study, please contact us! Study participants will also have the opportunity to attend our Headquarters in Austria event with guests from business and academia in May.

If you want to learn more about parenting strategies and opportunities for headquarters to add value, follow us on LinkedIn!

References:

Nell, P.C., Schmitt, J., Preveden, V., & Hauska, L. (2019). Headquarters of the future: The impact of digitalization on headquarters structures and value added. University of Economics and Business, Vienna. epub.wu.ac.at/6787/1/Study_HQ_Digitalization_FINAL.pdf

Schmitt, J., Decreton, B., & Nell, P. C. (2019). How corporate headquarters add value in the digital age. Journal of Organization Design, 8(1), 1-10.