Strategy: Complexity

Confronting complexity

Unnecessary complexity is costing the world’s businesses billions, say the authors of a recent global study on the topic—but fortunately, there are a number of ways in which you can reduce complexity and re-acquaint yourself with the benefits of simplicity.

 

Complexity is one of the most challenging issues facing modern business. The recent publication of The Global Simplicity Index by consulting firm Simplicity and Warwick Business School illustrated that, on average, complexity is costing each of the 200 biggest companies in the world 10.2 per cent of their annual profits ($1.2 billion). This adds up to a loss of $237 billion collectively.

It’s a shocking statistic and, despite complexity being widely acknowledged as one of the biggest barriers to success, it is apparent that business leaders are not doing enough about this problem. Instead of developing coherent strategies to remove complexity costs and simplify their businesses, many leaders are treating complexity as an uncontrollable and inevitable cost.

But what is business complexity? Complexity is the result of adding new products, people, processes and strategic initiatives. This can occur either as a result of normal organic growth or through M&A activity. It can also take the form of external pressures—from emerging markets, competitors, regulatory changes, red tape and the economic environment. But it can also brew internally within businesses—as a result of complex processes, bloated product portfolios, increasing management layers, over-complex decision-making chains and other organisational processes.

Initially, complexity is no bad thing. As a business grows, it will naturally develop more formal methods for managing people, or add specialist divisions, new processes and strategic initiatives. But, left unchecked, these systems can proliferate and become unwieldy, over-complicated and a drag on efficiency. This is what we call the ‘Complexity Curve’—an inverted U-shape graph that shows how complexity naturally reaches a tipping point, after which any benefits are outweighed by costs. We note two major effects on individual managers: they find it tougher to make key decisions because of the wide range of options and uncertainties they face; or they are distracted from their focus on making key decisions because of unnecessary demands on their time. Very often it is both.

So why aren’t more companies reducing complexity? Well firstly, identifying the specific sources of harmful complexity within a business is not easy. Secondly, knowing how to make necessary changes to eradicate complexity is even more difficult, particularly given that removing it and keeping it out of your business requires fundamental changes in management behaviour.

Our own survey of 500 middle and senior managers from companies across Europe with more than 10,000 employees identified the most common causes of complexity and found over 100 common sources. This complexity can come from external sources such as a turbulent operating environment, or internally in the form of expanding product portfolios or constant changes in strategy. In the worst cases, external and internal pressures converge upon an organisation to create a ‘perfect storm’ of complexity—where industry rivals are more fleet of foot and internal processes only serve to slow you down and waste resources.

Companies that try to do too much, or spread themselves too thinly across markets, also risk creating unnecessary complexity and alienating both customers and employees. Likewise, strategic moves such as mergers or acquisitions or restructuring may initially appear to add value, but often result in two complex companies further compounding each other’s processes and organisations. There are three important stages to developing a complexity reduction strategy:

1. Diagnose complexity—your hotspots. Firstly, companies should carefully diagnose the biggest complexity ‘hotspots’ inside their firm and work out how much this harmful complexity is costing them. There are 1,000s of potential sources of complexity, so it is impossible to tackle complexity without knowing which types of complexity you should focus on. To help with the diagnosis process we have divided complexity into six categories. Across these six categories we have identified the 100 most harmful sources of business complexity:

External drivers: like regulation, competition, economic turbulence and other factors outside the business

People: the everyday behaviours of employees and managers

Process: the complexity of business processes

Strategic: the goals and decisions the board makes in terms of where to focus and how to win in a particular market

Organisational: how the business is structured, talent management and decision-making

Products and services: their number, design and the structure of the portfolio

Some companies have already taken steps to reduce process complexity using techniques like lean. However, there are bigger sources of complexity within a company which are even more costly. Unfortunately, lean does not help to address these other types of complexity. Organisational complexity means that up to 40 per cent of management time is wasted on non-value added activities. The complexity of a company strategy itself and/or contestant changes to strategy also add to the company’s complexity profile.

Another area where few businesses are yet to simplify is product portfolio, where the majority of companies are constantly adding products or services, but few are taking enough of them away. This leads to ever widening product portfolios, which are difficult to manage.

It is important to analyse how complexity affects an organisation by comparing its levels of internal complexity with those of its competitors—but it is also important to look at the companies outside its industry sector. A lot can be learnt from the companies who are best at managing complexity. Additionally, it is wise to speak to middle and junior managers as they are often very aware of any complexity bottlenecks within the firm and have a high motivation to remove them. Finally, organisations need to also speak to people outside of the business. No business operates in a vacuum, and the complexity that a firm inflicts on suppliers and customers will inevitably cost money.

2. Change management behaviours. An organisation, product or process does not wake up in the morning, go to work and make itself more complicated! Complexity is created by the decisions and behaviours of people. So people are both the creators of complexity and the victims of it as well.

So why do we all tend to make things more complicated than they need to be? We create complexity because it’s in our nature. Humans are successful because of our creativity and our desire to progress and survive. This means that we just can’t resist developing and improving ourselves and our surroundings, even if this ‘progress’ is eventually harmful to ourselves and others. Add to this the collective effect of many individuals in a firm all seeking personal progress and we can see that companies quickly become highly complex, adaptive systems. This happens unconsciously, because of our inherent human programming. It seems that we just can’t help pushing things too far.

In addition, we have no way of seeing whether our decisions will increase complexity too far, pushing us up the Complexity Curve and beyond the tipping point. There’s no warning signal that tells us that we are over-engineering a process, organisation or product. This means that over time, more or less everything at work evolves to become more complex.

In the same way that we are trained to consider the financial impact of our decisions, we also need to learn to identify the ‘complexity impact’ of our decisions. This means that you can’t tackle complexity without addressing the human behaviours that cause it. A big complexity reduction programme might make a company simpler in some key areas for now, but new complexity will creep back in if people don’t change their ways of thinking and working as well.

More importantly, complexity hides everywhere, across every department and every function. So complexity can’t be solved with a small project team of people, however well-equipped and motivated they are. To win, everyone in the organisation has to first play their part in identifying and removing the harmful complexity. And at the same time they have to learn how they can prevent complexity creeping back into the business in the future.

So in large multinational organisations, you can’t attack complexity unless you change the decision making processes and behaviours of the many people that cause it in the first place. An effective way of doing this is to ensure that the values and ways of working promote simplicity. Individuals who are motivated and enabled to simplify things are less likely to reintroduce complexity into the company.

3. Reshape complex systems, processes or structures. Once the behaviours of the individuals within the organisations have been changed, companies can then tackle the other areas of complexity by changing their product or service portfolios, simplifying their strategy, streamlining their processes or by adapting and clarifying their organisational structure and roles. There are a growing number of ‘tool kits’ to help companies do this quickly, cheaply and effectively.

Complexity is one of the biggest barriers to the success of businesses today. In our study of the world’s 200 biggest companies, every single one had some form of harmful complexity holding them back. It therefore follows that companies from all sectors and of all sizes will also be losing profit and agility due to this problem. In addition, employees will be frustrated by the difficulties of doing relatively simple things well. Since things grow over time to become more complex, not less complex, the problem will not solve itself. In short, reducing complexity in companies will be the result of having a clear and aggressive strategy for dealing with complexity.

Written by Simon Collinson (professor of International Business and Innovation at Henley Business School, Simplicity research director and co-author of The Global Simplicity Index) and Melvin Jay (founder of Simplicity Partnership and co-author of The Global Simplicity Index).

To obtain your free copy of The Global Simplicity Index, please visit www.simplicitypartnership.com. To find out more information about Simplicity’s services please contact Melvin Jay (Melvin.jay@simplicitypartnership.com).