Management depth: The key to operational efficiency

CRISIL has studied the organisation structure of 835 micro, small, and medium enterprises (MSMEs) rated by it in 2013-14 (financial year April 1 to March 31). The study indicates that MSMEs with a decentralised structure (i.e., where the second line of management has decision-making powers) have an edge over MSMEs in which day-to-day administrative and operational decisions are made by the enterprise promoters themselves (centralised structure). Nearly 87 per cent of decentralised MSMEs had strong internal systems and controls, resulting in high efficiency in business operations, as against 67 per cent in centralised MSMEs.

A centralised structure is seen mainly in proprietorship and partnership firms, with about 68 per cent relying solely on the promoter for day-to-day operations, while in the sampled decentralised enterprises the majority comprise private and public limited companies (63 per cent).

Further, the practice of vesting decision-making powers with the second line of management may also have positive implications on the customer profile. Decentralised MSMEs were found to command a larger share (37 per cent) of corporate and international clientele, typically the strongest customers for the MSME segment as a whole. The study thus indicates an inverse relation between centralisation and operational efficiency in MSMEs.

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Note: CRISIL has rated over 50,000 MSMEs in India. This fortnightly tracker presents to our readers insights on MSMEs, a key element of the Indian economy.