THE VIABLE EVA CENTER (OR, HOW TO SLICE A COMPANY SO IT DOESN'T BLEED)

How a company is sliced, or broken up into divisions of various sorts, has a huge effect on the accountability and hence the behavior of its managers. Senior management faces a tradeoff between delegating authority to subordinates who have the best information for specific decisions, and maintaining authority to avoid parochial behavior that might hurt the organization as a whole. Divisions exist within companies to provide a framework for such delegation. A divisional structure allows decision-making authority to be pushed down along with accountability for results. Thus, how divisions are established is critical to decision-making, motivation, and accountability.
The ultimate test of a well-formed division is a high degree of correspondence between division financial results and financial results for the company as a whole. When an increase in divisional EVA can contribute to a decline in company-wide EVA, this is evidence of a poorly formed division, or what the author calls a "non-viable" EVA center. This article provides a framework for defining a "viable EVA center" as well as three ways of making existing divisions more viable: (1) use of transfer pricing and intrafirm charges; (2) reorganization; and (3) aggregation of divisional results.