Complexity: roots, effects and remedies
Etymologically, complexity comes from the Latin “cum plexus”, which means “what is woven together”. A system is said to be complex if it consists of a multiplicity of interdependent and interconnected elements.
In fact, most companies nowadays are complex systems. Achieving economic goals depends as much on the intrinsic quality of their fundamentals and the relevance of their strategy as on the ability of their leaders to master internal interactions by orchestrating all the elements of the organization and its fundamental processes.
Managers and investors generally agree that revenue growth is a positive sign of good health. However, when sales growth is mostly driven by the expansion of the offering, it ends up dampening business agility. More management effort is required and financial performance is dented.
In many cases, the Offering portfolio is inherited through the accumulation of products and services developed over time. Some are less requested than in the past, or obsolete, but nobody dares to remove them from the catalog. Many product variants have also flourished at the request of customers. Sometimes the company has expanded its geographic presence, either through organic growth or acquisition, and new organizational units have been created to produce certain ranges or bring the company closer to its multiple customers. The supplier base has progressively expanded as well as the number of materials and components purchased.
The amount of work in progress has swollen and the operational staff feels torn apart and put under constant pressure. Activities are diluted on too many fronts whereas in the past density of actions based their efficiency.
As a result, the company has gradually let in amounts of complexity that have become insidiously rooted. This hinders its operational fluidity, congests its processes, monopolizes its staff and structurally erodes its performance. Paradoxically is that in such circumstances, even the loss of customers or markets no longer leads to an equivalent decrease in the mass of costs which seems to have turned sticky. As for the forecast of activity and results, it is now even more difficult than ever before.
The “excessive” variety of the Offering is most of the times confusing for customers. Instead of conferring a competitive advantage, it is generally harmful. This overabundance also creates unwieldiness in the Supply Chain and Product Marketing, with its harmful consequences in terms of costs. The monitoring and control of the margin also suffer from this hypertrophy.
Impact on Profitability
In reality, the offering’s weaker products tend to prosper at the expense of other more competitive ones. These weigh on the overall profitability. The fault lies in the mutual interferences that arise inside the value chain. In particular, weaker products consume a disproportionate share of resources and available capacity, eating out those devoted to other products, and ultimately affecting their profitability. To support the broader Offering, business processes need more branches and a host of ad hoc sub-processes come on top. And to cope with this additional workload, management must add resources, even as volumes are stable or even running out of steam. Costs increase in a non-linear fashion, going so far as to completely cancel the margin of the additional products.
Impact on Steering
The “mechanics” of the company’s operations turns fuzzy for its management. The entanglement of hidden costs escapes the watch of the Management Control department and its capacity to measure or predict them correctly. They become volatile, escaping any rational explanation. The visibility on the overall result of the company is thence remarkedly weakened. But this widespread phenomenon, although ill understood, not only puts the traditional measurement and control tools at fault, but it also contributes significantly to keeping the company permanently out of its economic optimum.
It is then necessary to uncover the extent of the problem by resorting to adequate analytics based on the available data, without ever losing sight of its global or systemic nature. Suitable quantitative methods are needed to highlight the links between the evolution of revenues and the real costs of complexity in the functioning of the business.
Thanks to this in-depth work, one can have the means to tackle the resizing of the Offering and its redensification. As it is not only a matter of removing low-volume, low-margin products, this transformation must include the reorganization of the processes that the Offering depends on for products and services to be delivered to customers. It requires to actively involve their stakeholders. One does not go without the other, and it is precisely the combination of coherent measures on both fronts, Offering + Process, that provides substantial and lasting benefits. Once this process is well underway, an organizational simplification cycle can be activated to consolidate the gains.
Anyway, a de-complexification project properly designed and duly shared with teams, is most often welcomed with relief and enthusiasm by all the forces of the company. The project acceptance arises and ramps up with the first results, which do not take long to snowball.