*This article by Stephen Wilson originally appeared on Forbes and is republished here with permission.*
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Our mission is to help companies learn to navigate complexity and thrive, and through this work, we’ve found that “complexity” is frequently cited by CEOs as one of their greatest challenges—and one they feel least equipped to address. Their self-doubt is well-grounded. Through research, we found that as companies grow, only about half become more profitable, while the other half lose profitability. This second group frequently tries to grow by doing and offering more things instead of doing the same things better, which inadvertently adds complexity and cost.
The first step to navigating complexity is for business leaders to increase their Complexity IQ. We’ve created the following FAQ to help companies gain a deeper understanding of complexity and how it impacts their business.
What is Complexity?
We define “complexity” as simply the number of things in a business—the number of products, services, factories, processes, and even IT systems. At a deeper level, complexity is the interactions among these things and the business activity required to maintain them.
For example, when a manufacturing company adds new SKUs, it requires additional setups on the production line, new raw materials, and potentially expanded warehouse space for inventory—all of which are complexity costs.
Is Complexity Always Bad?
No, of course not. Customers seek variety and choice, such as new product features or service options.
However, too much complexity is bad, and companies nearly always have too much complexity. Bad complexity includes things customers will not pay for and that do not add value, such as internal processes and organizational complexity, which are almost never valued by customers.
How Does Complexity Affect Your Business?
Imagine a situation where 20% to 30% of a company’s products and services drive 300% of its profitability. It sounds extreme, but this is frequently the case. With complexity comes profit concentration, business risk, and slower growth rates. The financial and human resources tied to the 70% to 80% of products and services that destroy profitability could be better used in pursuit of additional growth.
Complexity also slows down organizations. In matrixed, multinational organizations, there’s often frustration that decision-making takes months—a symptom of complexity that affects organizations and processes.
Bottom line: Complexity is frequently an additional tax on businesses, but it’s one that is avoidable.
How Does Complexity Show Up in Organizations?
Complexity enters an organization via three dimensions: product, process, and organization. A business has products and services. These are delivered to market by a variety of processes. These are supported by organizational assets such as real estate, IT systems, and people.
Businesses may have complexity across all three areas, such as too many SKUs, duplicate processes, and overlapping organizations. But the impacts of complexity show up in the interactions among these dimensions. For example, after an acquisition, duplicate processes may remain from the two merging organizations, leading to process-organization complexity.
We’ve found complexity often creeps into organizations as a result of “good” decisions by those who are not privy to the downstream effects. The benefits of complexity are local, for instance, new sales from adding a feature, while the costs are distributed, such as increased production costs. Consider a beverage company that launches a short-term promotion to drive incremental revenue, but it cannibalizes existing sales and requires additional support costs. And once the promotion ends, these temporary selling, general, and administrative (SG&A) costs remain.
What is the Best Way to Tackle Complexity?
When confronted with big issues, most businesses look to break down the problem into small, digestible projects. Complexity, however, requires a more holistic approach because it is a systemic issue that relates to the interactions and downstream effects of business decisions.
For example, if a company is looking to rein in its portfolio, it can scope its initiative to include the impacts of product complexity on both its processes and organization. We see this frequently: a company conducts SKU rationalization actions but doesn’t follow through with reshaping the organization and cost structure in line with the tighter product portfolio.
To avoid these traps, executives should consider a series of questions before launching a complexity-reduction initiative:
- Does the scope sufficiently include what the company believes to be some of the upstream sources of complexity, as well as the downstream impacts?
- Which two dimensions of complexity is the company putting into play? Product, process, or organizational? One dimension is too few.
- Does the company understand where it truly makes money after accounting for the cross-subsidization of costs? If not, it might be fishing in the wrong pond.
How Does Complexity Affect Industries Differently?
We have worked across most industries, all with diverse complexity issues, albeit frequently manifesting in similar ways. In manufacturing companies, trimming thousands of SKUs can release significant costs and improve key service levels such as on-time delivery, a metric that might ultimately fuel growth. In service companies, complexity often manifests as high levels of SG&A; as they add services, they add people.
In theory, software providers should be able to scale with less friction, but we often see tech companies adding cumbersome processes as they grow, in turn slowing down decision-making and losing the agile nature that made them successful in the first place.
Complexity is not a singular issue to be solved. Instead, it’s an “underlying condition” against which executives need to manage and grow their businesses. We all operate in complex environments, independent of industry, and the approaches designed for simpler times no longer suffice.
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Final Thoughts for Leaders
For executives who understand how to measure, manage, and even exploit complexity, there’s a big opportunity—a differentiating capability. For those who get “managed by complexity,” it’s a world of headaches. Leaders must start to think of their organization as a system and evaluate the unintended consequences of their decisions. Leaders also need to upskill their teams to ensure they can manage complexity as well. Becoming fluent in complexity is now a key management capability.
About the Author
Stephen Wilson is a Managing Director at Innosight, based in Dallas. stwilson@innosight.com
