The Simplicity Partnership is trying to quantify the cost of complexity and Mick James, Top-Consultant.com’s management consultancy columnist, finds that a little simplicity can be golden.

Putting a price on complexity

Is complexity good or bad for business? We are told we live in an increasingly complex world, but our response to that is often to complicate further the systems and organisations we build in response. The question is, at what cost?

That’s the question that consultancy The Simplicity Partnership have attempted to study in a groundbreaking survey created in conjunction with Warwick Business School. The survey attempts, for the first time, to quantify the effects of complexity and the answer is fairly stark: complexity cost the largest 200 Fortune Global 500 companies a combined £237bn in 2010, or 10.2% in EBIT.

“Different academics had studied different aspects of complexity but no one had connected all the dots up,” explains Simon Collinson, Professor of International Business and Innovation at Warwick Business School. “For example, it’s long been known that increasing ‘multinationality’ has a negative effect on performance, but not how all the potential sources of complexity interacted with it.”

The results of the survey, which was backed up the analysis of public data from the Fortune 500 with a more in depth survey of 500 managers across Europe, are fascinating. It clearly demonstrates that increasing the complexity of a business increases performance and then reaches a tipping point after which it starts to decline. Businesses can therefore be broken down into four types. “Performers” are those who have achieved the optimum level of complexity. “Complicators” could benefit from simplifying their businesses, while “Simplifiers” could in fact do with a more sophisticated business model. “Strugglers,” on the other hand, are simply sinking under the weight of their own complexity.

The survey finds that different companies handle complexity very differently. Large American retailers and Japanese insurers, for example, have managed to achieve considerable scale and profitability in their domestic markets without sacrificing simplicity. Within sectors, companies that face similar levels of external complexity react very differently internally—with marked effects on performance.

The research identifies sources of complexity: external, strategic, people, organisational, process and product. All were seen as making a significant contribution, but the worst offender was strategy.

“People don’t understand what their business is trying to do,” says Simplicity Founder Melvin Jay. “Senior managers can often spend four months out of every year in planning.”

In contrast, products and processes were seen as contributing relatively less to complexity, indicating that people have found it relatively easy to rationalise portfolios and streamline processes. In the less tangible areas of the business the human tendency to embellish and enhance has taken over, particularly in response to risk and external factors where the temptation is to “fight fire with fire” and react to complexity by making things more complex.

Jay cites the case of two pharmaceutical companies, both facing the same complex regulatory environment.

“One does twice as much mitigation as the other—but neither goes to court,” he says.

The problem is that up until now it’s been hard to get a handle on what all the bells and whistles we’ve added to our organisations “just in case” were actually costing us. Now, with the launch of this research and the “Global Simplicity Index,” companies have a chance to quantify what complexity is costing them and how they can benefit from reducing it. And there’s good news: most companies not only recognised there was a problem but actually thought they were worse than they really were.

In an economic environment where growth is tough and opportunities hard to come by, the chance to gain even 5% of EBIT just by making your life a bit simpler must be tempting to any organisation. According to Jay, companies need to recognise that complexity will always tend to proliferate. They need to nurture “good complexity,” while eliminating the bad kind, as well as the behaviours that encourage it. At the very least it could make all our lives a little less intense.

“People don’t enjoy working in highly complex systems,” says Jay. “They want to see the impact of their work—complexity is sapping morale.”



All views expressed in this article are those of Mick James and do not necessarily reflect the views of Top-Consultant.com and Consultant-News.com.

Contact Mick with your views or suggestions at: mick.james@top-consultant.com
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