ExpertActions has worked on projects across industries to help companies manage complexity. 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.
ExpertActions has worked on over 500 projects across industries to help companies effectively manage complexity. 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, our research from 110 companies in 17 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 wrecking 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 addresses 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 an organization emanates mainly or the points where business units, functions, geographies and management layers cross. Nodal complexity of this sort hamstrings many companies, 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 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. 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 IT. 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 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 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.
Our Model 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.