Managing the forces of

fragmentation: How IT can

balance local needs and global
efficiency in a multipolar world
The forces of fragmentation require a new global IT architecture and operating model that
is modular, standardized, and configurable to support local differentiation.

byOliver Bossert, Mathis Friesdorf, Andreas Kopper, and Wolf Richter

© Getty Images

June 2023
 Not so long ago, tech leaders were looking forward
to a future where a global IT architecture on scalable
cloud infrastructures would provide their companies
with a full array of technology services efficiently, at
scale, and at low cost.
What a difference a few years make, with a set of
fragmentation forces rendering the prospect of a
single, hyperproductive IT system unworkable. Local
regulations (China alone has passed 21 data and
tech laws), disruptions to supply chains driven by
geopolitical and trade issues as well as the COVID-
19 pandemic, and marked regional differences
in customer behaviors, such as the contrasting
preferences for WeChat in Asia and texting in Africa,
have combined to undermine the prospect of a
globally harmonized IT architecture.
Most tech leaders are all too aware of issues like
these, yet the solutions they turn to can sometimes
end up making things worse. One large pharma
company, for example, developed—and supported—
three different full-scale financial systems to
meet local needs. In another case, an electronics
manufacturer operates two parallel production
processes with dedicated factories equipped
Exhibit 1
Over time, global organizations have adapted their IT operating models to
respond to global
Over time, changing realities. have adapted their IT operating models to
organizations
respond to changing realities.
Prevailing IT operating models, by time period
1990s
Governance Local
Infrastructure Mainframe
Architecture Monolithic
Decision making Within business units
McKinsey & Company
2 Managing the forces of fragmentation: How IT can balance local needs and global efficiency in a multipolar world
with different 5G technologies to comply with
the security laws of the products’ final markets.
Compromise solutions may not work either;
some businesses have found that using a single
centralized system while making local adjustments
leads to undue complexity and maintenance costs.
Technical architecture solutions, such as
microservices, can help companies balance the
level of local solution tailoring with the need to
harness scale efficiencies. While not new, these
solutions are more widely accepted and can be
more easily realized in modern cloud platforms.
These developments are enabling leading
companies to evolve their operating models by
building standardized, modular, and configurable
solutions that maximize business flexibility and
efficiency while making data management more
transparent (Exhibit 1).
Ensuring that these new architectures and
solutions work effectively, however, requires
companies to embrace new forms of IT governance
that include stakeholders from the business side
and delegate decision authority to teams that are
closer to the customer.
2005 2020s
Centralized Federated
Single data center Distributed cloud
Enterprise service bus Microservices
Central Within agile teams
Identify strategic trade-offs, and build
on the capabilities that serve them
The most successful governance model balancing
global efficiency with local needs is often a
federated model, with a central core of standard IT
components and local layers that allow for selective
deployment of capabilities in individual markets
or business units (Exhibit 2). To build the model,
businesses work through an iterative process that
involves identifying strategic trade-offs between
global standardization and local differentiation,
reorganizing IT architecture around capabilities,
and building a global IT architecture and operating
model around modules that can be flexibly adapted
to local requirements.
What makes such a model distinctive is that it isn’t a
force-fit compromise between standardization and
differentiation. Instead, it makes choices conscious
and transparent and puts in place a repeatable
process to continuously adjust the balance as
external conditions or business needs change.
Exhibit 2
Web <year>
AExhibit
<Title>
federated
<x> of <x> model allows careful differentiation rather than complete
centralization
A federated model or decentralization.
allows careful differentiation rather than complete
centralization or decentralization.
Comparison of IT governance models
Centralized
Completely centralized
All IT resources and activities
are centralized
Advantages High synergies through
standardization
Disadvantages Loss of business proximity
and acceptance
Central governance unit
requires detailed understanding
of multiple local as well as
global requirements
McKinsey & Company
1. Identify global and local trade-offs for
business and IT
Before sketching out the new model, IT
and business need to develop a shared
understanding of their company’s strategic
business priorities and constraints and identify
likely trade-offs between standardization
and differentiation. The drivers for global
standardization include:
— Scale effects and cost efficiencies. Digital
natives have shown how businesses based
on a single global platform can be scaled at
minimal marginal cost.
— Simplification. Standardization helps
organizations simplify and integrate
processes, products, and operations across
regions. This, in turn, allows operational staff
to be shared—via call centers and centers of
excellence, for example—and reduces hiring
and training costs.
Organizational unit IT resource
Decentralized
Federated Completely decentralized
Centrally led, with decentralized
units for selected tasks
Standardized IT is centralized; Local IT units operate
selected IT activities are localized independently without coordination
or exchanges
Standardization of similar IT High level of flexibility to meet
infrastructure and applications, local requirements in an agile way,
coupled with individualization at speed
in relevant areas
Strong governance mechanism Architectural complexity
required to continuously balance increases as more requirements
standardization and are accommodated, more
individualization for each domain services are added, and synergies
or capability between units are lost
3
 — Consistency. Providing a consistent experience
across countries can add value for customers.
Online shopping is much easier when a
consumer who moves abroad, for example,
doesn’t have to create a new account or adjust
to a different user interface. Multinational
corporations also welcome a consistent
customer experience offering a consolidated
view of their business across regions.
On the other hand, the drivers for local differentia-
tion include:
— Regulation. Businesses in highly regulated
industries such as insurance and banking must
adhere to national or regional regulations and
ensure that regulators’ systems can connect
with their own. Data privacy and security laws,
such as the European Union’s General Data
Protection Regulation (GDPR) and China’s
Data Security Law, apply to all industries and
may include requirements affecting local
infrastructure, such as cloud providers, and
mechanisms to control data flows, such as
isolated access controls.¹
— Customer expectations and behaviors. The user
experience may need to be tailored to reflect
local payment or communication preferences
(such as AliPay or WeChat), or the need for
integration with local ecosystems (such as
Singapore’s Grab or Indonesia’s Gojek) or the
systems of third-party service providers and
suppliers.
— Risk. Global operating models can be vulnerable
to large-scale disruption through single points of
failure. Measures that expand the supplier base,
increase local and regional sourcing, redesign
networks, review inventory targets, and increase
safety stocks can all help increase resilience and
mitigate risk.² At times of geopolitical instability,
keeping systems and processes separate in
vulnerable countries can allow business units to
be carved out without too much difficulty, should
the need arise.
1
“Localization of data privacy regulations creates competitive opportunities,” McKinsey, June 30, 2022.
2
“Supply chains: To build resilience, manage proactively,” McKinsey, May 23, 2022.
4 Managing the forces of fragmentation: How IT can balance local needs and global efficiency in a multipolar world
— Differences in market size and maturity. Global
systems and processes may not be the most
economic choice for companies operating in a
highly disparate set of markets. Smaller and less
mature markets may be better served through
local alternatives. For instance, an insurer with
a sales force several hundred strong in its main
market may need a sophisticated performance-
management system to steer it, but deploying the
same system to manage a local sales force with
just half a dozen people wouldn’t make sense.
Weighing the pros and cons of standardization and
differentiation is challenging, not least because
people’s views are often shaped by their function.
Risk managers often favor centralized controls,
for example, while country leaders push for local
autonomy. Managing these conflicts requires hard
facts, such as the cost implications of a specific
decision, and sometimes the willingness of a senior
leader, even the CEO, to step in and settle the matter.
The goal will be to enable most products,
components, and processes to be shared across
countries. The advantages claimed for market-
specific products and processes must always be
carefully weighed against the disadvantages of
increased complexity and limitations on scaling (see
sidebar, “Balancing customization and efficiency at a
manufacturing company”).
2. Reorganize the IT model around capabilities to
reflect agreed strategic trade-offs
Discussions on how far to standardize and how
far to differentiate can easily get lost in the weeds
or become oversimplified. To avoid these traps,
companies can draw up a capability map such as the
one illustrated in Exhibit 3 for a European P&C insurer.
Its purpose is to provide an abstract overview of
individual business domains that use similar business
capabilities. Properly done, such a map helps leaders
visualize the business dimensions and related IT
services of a given capability and determine what
level of customization or harmonization is needed for
their target system architecture and operating model.
 Balancing customization and efficiency at a manufacturing company

When a manufacturing company assessed the case for standardization versus differentiation in key business domains (exhibit), it
decided to centralize some functions because of the clear benefits: procurement to increase its bargaining power, improve financial
transparency, and drive efficiency across regions; and talent management, with a focus on making remote working the norm for most
key staff. This made it an attractive employer for digital nomads and gave it access to new hires anywhere in the world.

On the other hand, innovation management was managed separately by each of the company’s two subdivisions, reflecting their very
different product portfolios and customers, which would not have been well served by a single unified system. Meanwhile, customer
management was harmonized at the regional level to allow the sales force to approach customers consistently across business units,
but not at the global level, as there were no global customers.

Finally, warehouse management was organized regionally within each subdivision. Minimum requirements were set to allow
integration with global supply chain systems and processes, but local operating models ensured the efficient management of a
heterogeneous network of small suppliers and transport companies.

Exhibit
One
One manufacturing
manufacturingcompany pursued
company synergies
pursued by domain
synergies at global,
by domain regional,
at global, and
regional,
subdivisional levels.
and subdivisional levels.

Key domains for standardization vs differentiation

Complexity Footprint Objective Chosen domains

1× Subdivision • Capture global

synergies
• Procurement
• Talent management
Regional

Regional Global

2× Subdivision • Capture synergies

within each subdivision
• Innovation management

Regional

Regional Global

5× Subdivision • Capture regional

synergies
• New customer models

Regional

Regional Global

10× Subdivision • Capture regional

synergies within each
• Warehouse management
and transportation
Regional subdivision

Regional Global

McKinsey & Company

Managing the forces of fragmentation: How IT can balance local needs and global efficiency in a multipolar world 5
 The capability map shown in Exhibit 3 includes all
the top-level capabilities required for the company
to operate, make strategic decisions, and design
the underlying IT architecture. For instance,
“output management” comprises all the processes
needed to create, store, and deliver outbound
communications and the IT services needed to
support them. For a more granular view, each
capability is broken down into sub-capabilities,
typically functionalities developed and maintained
centrally by a cross-functional team with members
from IT and the business. “Operational reporting”
can, for example, be broken down into “sales
performance” and “call center” reporting, each with
its own team.
Wanting its business to be “as global as possible
and as local as necessary,” the insurer used the
capability map to help it make trade-offs as it
shaped its system design and operating model.
For example, the “web and mobile” sales customer
journey was developed as a single global set of
microservices by a central agile team so that it could
be harmonized across countries, with parameters
customized only when necessary. Similarly,
underwriting and pricing are managed via a shared
global system, but local experts can reconfigure
elements using a low-code/no-code rule engine
and a standard software component.

Exhibit 3
A capability map is useful for deciding on strategic trade-offs between
A capability map is
standardization useful
and for deciding on strategic trade-offs between
differentiation.
standardization and differentiation.

Example: European P&C insurer capability map Harmonized Partly harmonized Differentiated
across countries across countries by country

Sales

Web and Call, chat, Agents Aggregators Digital

mobile email marketing

Pricing and underwriting

Underwriting Underwriting Pricing Address Car model

rules fraud validation search
detection

Policy management

Vehicle Policy Product

registration changes catalog
and renewal

Claims

First notice Claims fraud Claims Repair shop Repair shop Value-added
of loss detection handling network search services

Finance

Accounting Price Solvency Finance Payment

and financial modeling risk and bank
reporting integration

Input and output management Analytics and reporting Sales performance

Input Output Local printing Pricing and Operational Call center
management management service underwriting reporting
and scanning analytics
...

McKinsey & Company

6 Managing the forces of fragmentation: How IT can balance local needs and global efficiency in a multipolar world
Some of the insurer’s top-level capabilities
required a more differentiated approach.
Managing multiple local insurance aggregators,
each with its own integration requirements, is
done at the local level, as shown in teal in Exhibit
3. Similarly, capabilities that have a regulatory
dimension, such as vehicle registration for car
insurance, need to be deployed at the country
level, as do address registers, car model search,
local printing services, and repair shop networks.
3. Use the capability map to build an IT
architecture and operating model
A flexible global platform architecture consists of
three components:
— A client journey platform, which covers an
end-to-end customer experience, such as
opening an account or checking out with a
basket of goods. The platform is made up of
products with functionalities that can be easily
combined according to the specific customer
needs in a particular region or segment.
— A business capability platform, which
offers business functionalities that support
customer journeys, such as order or payment
management. This platform is made up of
modular components that can meet the needs
of individual countries, regions, or business
units, as identified during the discussions on
the capability map.
— A standardized, scalable cloud-based “IT for
IT” platform, which uses state-of-the-art
technology to provide IT capabilities to enable
client journeys or business capabilities “as
a service.” A central IT team manages this
platform, while architecture and engineering
teams assist client and business platforms
to support the building of consistent
solutions. This enables releases to be quickly
deployed across the business and individual
IT components to be consumed and reused
independently across lines of business and
capabilities.
Managing the forces of fragmentation: How IT can balance local needs and global efficiency in a multipolar world
Through these components, IT can allow local teams
to tailor their technology needs either through
configuration, where IT develops all the components
for a given capability that local teams can configure,
or extension, where locally developed components
are linked to the global platform through centrally
developed standard interfaces.
Configuration may be appropriate for capabilities
that require only limited local differentiation, or
those where differentiation is required by business
logic and local configuration can be readily
achieved. For instance, at the insurer described
above, an open-source process-automation
solution enables business leaders to configure
underwriting rules locally without having to rewrite
any code. Localization through extension is an
approach often adopted by consumer companies
to handle payments and last-mile logistics, with all
their country-specific challenges. Country-specific
capabilities are typically developed and maintained
by local cross-functional BizDevOps teams and
integrated with the global platform via APIs.
However useful these localization capabilities are,
they will not work as needed unless local teams
have sufficient autonomy (at some companies, local
teams in China, for example, clear decisions through
central headquarters, which is a major roadblock for
pace and innovation). The best companies provide
local teams with specific decision rights within
guidelines and support them by providing necessary
capabilities, such as IT talent embedded with local
market teams to get customer feedback early.
Balancing these localization capabilities is a central
organization, which safeguards standards and
provides clearly defined services and APIs for
local use. This balance helps reduce complicating
adjustments and overlapping or conflicting
implementations and enables the management
of an effective global services architecture. We
have mapped how this approach might work for
automotive OEMs operating in China to find the
optimal local/global balance across key functional
areas (Exhibit 4).
7
 Exhibit 4
Automotive OEMs can drive localization through sales and marketing and a
connected-vehicle
Automotive OEMs platform.
can drive localization through sales and marketing and a
connected-vehicle platform.
Example: Automotive OEM capabilities configuration
Business operations Sales and
marketing
R&D
Factory and
production
Driving product/ V2X (connected-
services vehicle platform)
Autonomous
driving (ADAS)
McKinsey & Company
Avoid key missteps in developing this
new IT model
As a company builds out a new global architecture
and operating model, it will need to avoid common
issues that doom these kinds of programs.
Following are some critical items to bear in mind:
— Provide local teams with clear decision rights.
Leaders and the board need to refer to the
capability map when making decisions, provide
local teams with a clear mandate and the
autonomy to make decisions, and establish a
two-way communication between headquarters,
countries, and business units.
— Think beyond one year for a long-term strategy.
The flexibility of modern IT architectures allows
companies to make extensive changes in a
short time frame. However, some fundamental
decisions, especially those on the data model
and the organization of domains, should stay
stable for three to five years. This reality may
pose a challenge for managers focused on the
next budget cycle.
8 Managing the forces of fragmentation: How IT can balance local needs and global efficiency in a multipolar world
Solution Instance Team
Local Local Local
Global Global Global
Global Local Local
Local Local Local
Local NA NA
— Create a capability map that breaks historic
constraints. If the capability map is to act as a
solid basis for identifying critical trade-offs and
shaping the new IT model, it shouldn’t be defined
by historic decisions or existing functional
boundaries and constraints.
— Balance strong standards with sufficient
flexibility. Standardization isn’t all or nothing; the
trick is to make each decision at an appropriate
level of granularity. In sales reporting, for
instance, a company could mandate the use
of a single IT solution across regions, limit
standardization to a shared technical definition
of what constitutes a sale, or choose a middle
path, such as creating a shared interface with
customization via local layers.
One European bank found this balance after one
unit struggled to integrate the solutions that the
main IT team was developing because of an array
of issues, including poor documentation and IT
solutions that were worse than those the local team
could create. The bank launched an initiative to
address this issue and developed a series of best
practices, including people rotations between the
local and main teams and adopting better sharing
mechanisms.
In the past few years, the drawbacks of central
globalized IT systems have become ever more
apparent, while the advantages gained by running
multiple national systems are often outweighed
by complexity and costs. For a few early adopters,
federated models like those described in this article
are providing a better solution. Other multinationals
may want to take note and follow suit.

Oliver Bossert is a partner in McKinsey’s Frankfurt office, Mathis Friesdorf and Wolf Richter are partners in the Berlin office,
and Andreas Kopper is an associate partner in the Vienna office.

Copyright © 2023 McKinsey & Company. All rights reserved.

Managing the forces of fragmentation: How IT can balance local needs and global efficiency in a multipolar world 9