The competitive environment is becoming more complex and unpredictable, and senior managers have no control over the underlying trends, from globalisation to technological change. The most damaging kinds of complexity, however, come from within.
There is no question that Nokia missed the boat when consumer markets shifted to the smartphone. This was not just the result of an unlucky strategic choice; there were signs that the firm had lost its way well before taking this wrong turn. It had embarked on a series of acquisitions and was building an increasingly diverse product portfolio through investments into software, content and services which were all adding complexity, but not value. More recently, new leadership and organisational restructuring have compounded, rather than solved the problem. Nokia has become even more complex and even less profitable.
Although Nokia is a current ‘fallen star’ favourite for the business media its experience with overwhelming complexity is common to firms across all industry sectors. We know that the competitive environment is becoming more complex, turbulent and unpredictable and senior managers have no control over the underlying trends, from globalisation to technological change. The most damaging kinds of complexity, however, come from within. This is where CEOs can act and need to be doing more.[ms-protect-content id=”9932″]
Our Research: Measuring the performance impacts of complexity
Although complexity is widely acknowledged as a growing barrier to business success, there are surprisingly few robust academic studies on its effects or how to cope with it. It is also apparent that CEOs are not doing enough to combat the problem. The challenge of identifying and removing costly complexity means it often goes on the ‘too difficult’ pile.
To address both issues we conducted two major studies on the impacts of complexity on firm performance. The first led to the development of the Global Simplicity Index (GSI), correlating increased complexity with reduced profitability. This revealed that the largest 200 companies in the Forbes Global 500 are losing, on average, 10.2 percent of their annual profits or $1.2 billion per year each due to value-destructive complexity. This adds up to an incredible collective loss of $237bn each year.1
However, the relationship between complexity and performance is not simple. As successful firms grow they add new products and services to their portfolios; enter new markets; engage in joint-ventures and acquisitions; add new business units and lines of management, profits also grow. There is a tipping point, however, when added complexity – a new line of products, one more acquisition, an extra layer of management – does not add proportionate value.
The GSI shows this in the form of an inverted-U performance-complexity curve.
The GSI also allows us to rank well-known firms, from our global 200, relative to this curve, as ‘Performers’ (such as GSK, China Mobile and Goldman Sachs), ‘Complicators’ (like IBM, Johnson & Johnson and BHP Billiton), ‘Simplifiers’ (Renault, Safeway and Nippon Life) and ‘Strugglers’ (Nokia, Hitachi, Fiat and EADS).
What is the impact of complexity on individual performance?
Our second major study was a large-scale survey of over 400 executives in large European firms, to identify high-impact sources of complexity and how these vary by manager, firm and industry.
We identified over 100 common sources of complexity, grouped into six overall categories.
The overall findings of this survey are a wake-up call to CEOs.
63 percent of managers in our survey reported that complexity was responsible for over 5 percent of productivity loss in their business. 10 percent of managers claimed that over 30 percent of productivity losses were due to complexity.
The top-10 drivers of complexity are ranked below in terms of our ‘complexity impact score’
(level of complexity caused by this source multiplied by the impact it has on performance).
Some of the key causes of high-impact complexity from our survey respondents include:
Changes in strategy or multiple project demands:
• 30% of managers are coping with 6 or more strategic initiatives at any one time; 12% are coping with over 16
Convoluted management hierarchies:
• 57% report 6 or more levels of management in their firms; 19% have over 16
Monitoring, control and planning procedures:
• 56% have 5 or more stages in their capital expenditure sign-off process; 11% have over 11 stages
• 41% manage 4 or more internal management reports each month; 9% manage over 16
• 61% of firms take 4 weeks or more for budget planning; 35% take over 6 weeks and 10% over 16 weeks
Processes and systems:
• 38% deal with 6 or more different kinds of specialised IT systems in their workplace; 13% deal with over 16 systems
Communication and coordination:
• 46% of managers are regularly interacting with 6 or more other internal divisions; 14% with over 11
• Emails take up about 8% of manager’s time, on average. But for 16% of managers dealing with emails consumes over 30% of their time.
Why does complexity reduce your profits so much?
So for the first time we have proven that complexity has a large and measurable impact on profitability. Why is this?
1.Complexity adds non-productive costs: you are paying for resources/activities that you don’t actually need. In fact they make it harder for you to achieve what you have set out to do!
2. Complexity reduces speed and agility: it makes you slow to respond to market forces. Simpler businesses do better in turbulent times.
3. Complexity reduces employee motivation: psychological studies indicate that people prefer to live in simpler organisations and that their performance declines as complexity becomes overwhelming.
4. Complexity wastes your employee’s time: it distracts employees from focusing on value generative activities, creating ‘busy fools’ – people who are working hard, running in the wrong direction, or struggling to get simple things done.
So, complexity is making it increasingly hard for managers to control, focus and drive their businesses forward. For many firms, internal processes, systems, products, strategic initiatives and organisation structures have evolved to a point where they are too complex to manage.
As one manager put it in one of our interviews “I can clearly see where A is and I can see where B is. I just can’t get to B due to the sheer complexity of my organisation and our processes.” In the worst cases ‘B’, the strategic target itself, is hidden by the corporate treacle. Managers do not know where to focus their efforts.
Where does this ‘bad’ complexity come from?
Managers and employees at all levels complain about the damaging effects of complexity, but complexity does not create itself, it is a result of the combined, cumulative decisions and behaviours of these same managers and employees. The overriding, ironic fact is that people are both the creators of complexity and the victims of it as well.
So, in the same way we are trained to consider the financial impact of our decisions we also need to learn to identify the ‘complexity impact’ of our decisions. You can’t tackle complexity without addressing the human behaviours that cause it. A big complexity reduction programme might make your company simpler in some key areas for now, just like ‘process reengineering’ or a ‘lean initiative’ but new complexity will creep back in if people don’t change their ways of thinking and working as well.
What can leaders do to address the problem?
Over 10% of profits are being wasted by excess complexity. Ignoring it is bordering on corporate negligence! So how do you change the above-mentioned behaviours? How can you engage the energy of your people across the whole organisation to eradicate complexity? How can you make simplicity a core value and a central operating principle in your company?
GE’s former CEO Jack Welsh made it his mission to reduce complexity. He undertook a series of simplification projects across the firm, arguing that “for a large organisation to be effective, it must be simple.”
Here’s some practical advice about what you can do to start a simplicity revolution in your business.
1. Start from the top. This is a whole business problem, so the revolution has to start with the leaders of the organisation demonstrating that they are deeply committed to reducing complexity wherever it hides.
2. Diagnose where your biggest complexity problems are. Complexity is hiding in every corner of big business. The first step is to identify the 5 -10 biggest complexity problems in your company (they are different in every organisation), then develop projects to reduce complexity where it is causing most harm. This will also reveal the specific management behaviours that underlie damaging complexity.
3. Develop a simplification strategy. All companies should have a clear strategy for reducing harmful complexity. This should consist of:
• Some core ‘Simplicity Principles’ that everyone in your company can live by day to day. These create a general set of rules that can be broadly applied by all your people every day.
• Some ‘Simplicity 101’ projects. These are easy-to-execute simplification ideas that everyone can quickly start to implement (e.g rules about simpler presentations, simpler decision making processes, etc)
• Some ‘High Impact Simplification Projects’: these are the big areas of complexity identified in the diagnostic that, once removed or reduced, will significantly reduce your overall complexity footprint (these are often hard, but they have to be done)
• A ‘Simplicity Change and Values’ program that shows how you will change the culture and behaviours of managers so you can make simplicity an everyday way of life in your company, forever.
4. Now engage the masses. Momentum for change now has to come from the bottom up as well. Communicate the need for change and demonstrate the personal and business benefits of simplification. Show that you have a credible strategy to tackle complexity. Get people to start living your Simplicity Principles and ask them to implement the ‘Simplicity 101’ projects in their area of the business right away.
5. Enable people by showing them ‘how to’ simplify and change. Knowing you need to change and want to change is essential. But knowing ‘what’ you need to do is not enough, you also need to know ‘how’ to make work simpler. Most people just don’t have the skills to simplify their business. So training people on diagnostic tools and on simplification techniques is essential as well. If you invest in this you can provide them with the tools they need to identify and remove their own local or departmental complexity problems.
6. Reinforce simplicity behaviours. Finally of course, as we all know, you have to reinforce the behaviours you are looking to change by building the value of simplicity into all elements of your business including:
• Reward and recognition systems
• Annual feedback and review
Conclusion: The Simplicity Imperative
Solving the complexity conundrum is at the heart of corporate competitive advantage in today’s business environment. It is clear that the leaders of big businesses need to take the problem of complexity seriously and make a lasting commitment to reducing it. Failure to tackle this problem is already hitting your people and your profits hard today, but it will also make it harder to respond to the ever-increasing turbulence and unpredictability of markets and economies in the future.
Successfully simplifying today will create the firm that is fit for tomorrow.
About the authors
Simon Collinson is Professor of International Business and Innovation at Henley Business School, University of Reading, UK. He was previously at Warwick Business School, where he held the posts of Deputy Dean and Associate Dean (MBAs). He is a co-Founder and the Research Director of the Simplicity Partnership and builds on over 20 years of executive teaching and consulting experience with a wide range of multinational companies. In the past year, his research on how to make organisations more innovative, adaptive and resilient has been featured in the Sunday Times, BBC Radio 4, the New Statesman and the US News and World Report.
Melvin Jay is a co-Founder and CEO of the Simplicity Partnership. He has over 25 years of commercial and consulting experience. Most recently, he was CEO and founder of the global consultancy Clear, which grew to over 100 consultants in less than 6 years. Melvin’s early career was spent working for blue chip companies like Danone and Novartis, where he saw and battled the reality of complexity from the management side. As a consultant, he has worked with a wide variety of the world’s biggest companies, across different sectors including, media, pharmaceuticals, financial services, technology and consumer goods.
1. The GSI uses 9 proxy measures of complexity derived from a list of over 100, produced from a meta-analysis of previous studies and discussions with senior managers. These include, for example a transnational index of multinationality, a business portfolio measure and an index of M&A activity. It relates these to 9 proxy measures of performance, many of which take a 5-year average to capture sustained performance. These include EBITDA, profit per employee and operating profit margin.