Projects to manage complexity, can result in revenue growth from 5 percent to 40 percent as well as cost reduction from 10 percent to 35 percent. While the savings are significant, the largest benefits nearly always come from achieving a better understanding of customer needs–and that leads to improved customer satisfaction, faster inventory turnover and ultimately, higher revenues and margins.
Complexity is a natural consequence of a company’s success. As companies grow, they enter new markets, expand their product lines and set out to conquer new customer segments. And on the way they build up their organizational, process and IT infrastructure to support that growth. Taken individually, each decision makes rational sense, but in aggregate, they create exponential growth of the "nodes"–points where business units, functions, geographies and layers of management have to interact to make and execute critical decisions. This often becomes the root cause of sluggish growth, high costs and poor returns.
We believe that some complexity is necessary, and even advantageous. For example, customers like to have some choices–and different segments have different needs; country or regional business units can be closer to the ground than headquarters and are more likely to know what customers want in their areas. However, if not carefully managed, the new interfaces and nodes of interaction can lead to bureaucracy, conflict and wasted energy. The key is not to eliminate choices and autonomy, but to consciously manage the benefits and costs of optimizing customer offerings, decision and operational processes, business and organizational structure, and the IT systems that support it all.
While the cost savings are significant, the largest benefits nearly always come from achieving a better understanding of customer needs–and that leads to improved customer satisfaction, faster inventory turnover and, ultimately, higher revenues and margins. In fact, research from over 100 companies in industries ranging from cosmetics to aerospace and medical equipment to mutual funds shows that companies with the lowest complexity grow 30 percent to 50 percent faster than their average competitors.
In our work we encounter five forms of complexity that are highly interrelated: strategy, customer, product, organization and process, including IT. Most clients engage us to address the single most visible symptom of complexity; for example, fixing rampant SKU proliferation that is wreacking havoc in the supply chain and the sales channel, or streamlining an excessively complex process that is hampering their time to market. We have developed a methodology to address each type of complexity, but we found that addressing the root cause of the problem many times requires tackling issues outside of the scope initially anticipated.
The complexity in a big organization emanates mainly from the "nodes"–or the points where business units, functions, geographies and management layers cross. Nodal complexity of this sort hamstrings many companies–every one of these interactions adds cost and confusion, draining the focus and energy of senior executives and good managers.
Traditional approaches to reducing structural costs and increasing efficiency usually fail to address nodal complexity. But there’s a bright side to this picture as well: An attack on nodal complexity–because it simultaneously affects all the elements that intersect at that node–has a large multiplier effect on business performance. In fact, in our experience, reducing complexity at the nodes creates between three and four times as much value as the traditional approaches to right-sizing and functional excellence.
A useful way of analyzing the level of complexity in your company–and separating complexity that’s beneficial from complexity that hurts the business–is to begin from a base of zero. Imagine, for example, that your company produced just one product or service with no options or varieties, sort of like Henry Ford’s classic Model T. A manufacturer with only one product would still need a supply chain, a factory, a distribution network and a sales-and-marketing function. But it could greatly simplify its IT systems, its distribution and sales efforts, and its forecasting.
The point of the exercise, of course, isn’t to go back to the days of the Model T, which, after all, succumbed to the greater variety offered by General Motors. The point is to determine your zero-complexity costs, and then assess the costs of adding variety back in.
In a tractor plant, for example, you wouldn’t need a scheduling system for one or two models, but you probably would for four. Often the cost curve has just this kind of "knee"–a step change triggered by adding one more model or level of variety–and you can determine whether moving beyond the knee is worth the additional expense. You can also assess the benefits of innovation, and determine the focal point where a given innovation overshoots what most customers want and are willing to pay for.
Model T also puts in place the processes and practices that keep complexity out. Similar kinds of analyses can diagnose business strategy, customer, organizational and process complexity.
Complexity tends to take on a life of its own. As if by inertia, product portfolios expand, processes and systems proliferate, and organizational structures become increasingly elaborate. But because complexity's effects are scattered across the value chain, management often fails to see the relationship between complexity and cost—at a time when cost containment is more important than ever.
AaronRichards helps companies get beyond the low-hanging fruit, putting a spotlight on the cost—and value—of complexity to tackle opportunities for systematic, cross-functional complexity optimization. In fact, our complexity management projects frequently deliver margin increases of three to five percentage points.
Not all complexity is bad. There's a crucial difference between value-creating complexity, which should be actively and efficiently controlled, and value-destroying complexity, which should be reduced to a bare minimum.
AaronRichards' approach is to address both those areas that are visible to the company's customers (packaging and product variants, for example) and those that are not, such as manufacturing processes, supply chain configuration, or organizational structure. We do this by reallocating costs at activity level to calculate real profitability levels ("pocket margin"), carefully assessing complexity's strategic value in both quantitative and qualitative terms, and building a "multi-cube" data model to simulate and actively manage tradeoffs across the value chain.
Complexity originates in multiple departments and is difficult to root out, despite management's best efforts. Furthermore, it has a tendency to reemerge like weeds in an untended garden.
We help companies tackle undesirable complexity head on and keep it in check. We work with our clients to design cross-functional teams—armed with rigorous processes, clear guidelines, and powerful metrics—to drive out bad complexity and prevent non-value-adding complexity from creeping back into the business.
Managing complexity can be a significant untapped opportunity for companies across industries—leading to quick results and a stronger foundation for long-term success.