Purchasing power: who gets to make the final decision?
All too often, the responsibility for approving a purchase travels upwards through an organisation and doesn’t stop until it reaches a CXO. But, if a company is to be run at optimum efficiency, not all such decisions need to go that far to get the green light.
Determining which decisions require C-suite sign-off and which can be made further down the chain of command isn’t always clear. Companies seem divided on who should be making the final call.
For instance, Raconteur’s new survey of 1,100 business leaders has found that chief information officers signed off purchasing decisions concerning enterprise resource planning systems in 40% of cases. In the remaining companies, that responsibility was evenly split between IT managers and IT directors.
Deciding who makes the final call
One of the first tasks in any decision-making process is to determine the person who will make the final call. Randall Peterson, professor of organisational behaviour at London Business School says: “You have to declare who that is. Otherwise, people don’t know who to try to influence and persuade, making the process totally inefficient.”
In many businesses, this responsibility falls to the most senior person in the room. Raconteur’s research shows that CXOs make the ultimate buying decision on eight out of the 14 products and services covered by the survey, while directors do so in six of the categories.
Although this seems a natural and logical way of determining who gets the final say, it’s not always necessary. Peterson suggests that, rather than looking at seniority alone, organisations should pick the person with the most appropriate attributes. That’s likely to be someone with the best interests of the business at heart, who’s considered fair by all involved and who’s happy to consider different ideas and listen to the arguments for and against them.
It stands to reason that any good CEO should have these qualities, but that’s not to say that others further down the hierarchy can’t also possess them.
“Someone junior can absolutely be making some very senior decisions,” says Erika Eliasson-Norris, a leadership adviser and founder-CEO of the Beyond Governance consultancy. “But it depends on the organisation and the personalities of the people involved.”
When to give more junior people responsibility
There are obvious contexts in which giving someone more junior such responsibility would be inappropriate. Take construction and pharmaceuticals, for example. These are two industries in which the ramifications of a poor decision can be particularly severe.
“Making the wrong call in areas concerning health and safety could land someone in prison, so you probably wouldn’t want to be delegating that responsibility,” Eliasson-Norris notes.
Understanding the possible consequences of making a poor choice can therefore be the easiest way of determining who should be signing off a given purchase. But, equally, expecting a senior manager to approve every such transaction is unrealistic, especially in larger organisations.
“You cannot be the sole budget-holder for procurement when you have a team of 250 and a £10m budget,” Eliasson-Norris says. “Even if you’re the founder and don’t trust other people, it would be impossible for you to sign off everything. You have to learn to delegate. Otherwise, your business will grind to a halt.”
If an organisation is incapable of effective delegation, it risks bestowing too much power to one person. Without proper governance, this can reduce accountability. Eliasson-Norris believes that there should be some form of documentation giving senior members of the organisation powers of veto over certain decisions and, in certain scenarios, the ability to dismiss the person responsible for a particularly bad decision.
This aspect of governance is “the key to ensuring that money is not misused”, she says. “We often hear from MDs who say a hiring manager has brought someone in on a six-figure salary but when they try to hold the individual accountable, there is no documentation saying they shouldn’t have done it. Without those rules in place, no one knows what they should or shouldn’t be doing and, no matter how misguided the decision might seem, they will have thought they were acting in the best interests of the business.”
Strategies to democratise decision-making
One company that has found a novel way around this challenge is office management platform Kitt. As the business grew, co-founder Steve Coulson decided to adopt a mini-CEO structure, which gave people decision-making powers further down the hierarchy.
He recalls a “painful transition moment” when the startup grew from 10 to 50 people and the old ways of working were no longer effective.
“As a co-founder, it’s possible to run your business in the early stages as a benevolent dictatorship, making decisions and executing against a single clear vision,” Coulson says. “But, once you hit a certain size, you can’t work that way because you no longer have all the answers and there will be many people in the business who are much better than you at certain tasks.”
Coulson created a system that allowed people to take ownership of their own decisions and their outcomes. Under the mini-CEO structure, high performers are given the chance to run their area of the company as if it were a separate business.
Although this shifts all decision-making powers on to the mini-CEOs, each one has to reconvene with the co-founders once a quarter to bring forward a document of all the changes they want to make in the short term. This enables Coulson to assess the impact it would have on the bottom line and the necessary budgets.
One of the difficult elements of this format is allowing people to make their own mistakes. Coulson says. “The hardest thing is standing back and watching the car crash happen. But that’s the only way a mini-CEO develops. The more bad decisions you make and learn from, the better you eventually become.”
It may be easier to look at a bad decision as a learning opportunity when the financials involved are smaller. But there is still something for leaders to learn from Coulson’s willingness to delegate. Balancing the distribution of power and accountability is the key to ensuring that decisions cross the finishing line.
This article is part of a series analysing the state of business decision-making. Based on exclusive research of more than 1,000 senior leaders by Raconteur, you can explore the rest of the series, here.