Managing Complexity: How To Capture Latent Value From Products, Customers, and Operations
Everything should be made as simple as possible, but not simpler," said Albert Einstein. It's easy to lose sight of this advice in the constant crunch of today's business environment, but Einstein was right. Achieving the optimal level of complexity in products, services, and operations is one of the best ways that companies can attract customers, maximize revenues, and grow market capitalization.
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It may seem counterintuitive, but a product with too many features may be as limited in its use to a customer as one with too few. In addition, when companies overdiversify their products or services, they introduce significant invisible costs and "dis-synergies" into their systems. Complexity eats away at corporate profits by diverting scarce resources from where they're most valuable, diluting the management team's focus, raising operating costs, masking the true drivers of profitability, and exhausting the organization. All of which result not in competitive advantage and a company's focused differentiation from its peers, but in the exact opposite: competitive disadvantage and diffusion.
Think about how complexity affects your company's performance. Do you have people, processes, and metrics in place for optimizing complexity? Do you know how much value your low-volume, nonstandard products generate or destroy? Do you believe your organizational resources could be put to better use but also find it hard to figure out where, how, and when? Is complexity, perhaps, draining your resources at the same time that real opportunities may be presenting themselves? If so, it's time to pull back and consider ways in which to simplify your business.
What Is Complexity, and Why Does It Matter?
In this context, complexity is the excessive proliferation of products, processes, parts, organizational entities, customers, or markets. Complexity can also involve an excess of actions and functions for which customers and the marketplace are not rewarding you. How does complexity become a problem in an organization? The first thing to recognize is that it's a very human response to often difficult, unclear, and fleeting competitive and customer events and conditions. It's natural to think that because a tough competitor has added a feature or service to a product similar to yours, you should respond by adding one or two. Like some perfectly natural instincts, however, this one can be counterproductive.
The Internet contributes to the problem. At the click of a mouse, customers can compare prices, features, and options on products and services. Efforts to achieve parity with competitors are often reflexive, instigated without determining the project's objective value to customers or its overall costs to the organization. Consequently, companies often end up chasing phantom revenue. To make matters worse, some products, services, features, and options that are right for your market today may become superfluous over time. Customers' values, wants, and needs change -- toward both increased complexity and reduced complexity -- and resource constraints make it hard for a company to recognize these changes and respond to them quickly and precisely.
Most organizations lack the analytical tools and the associated operational bandwidth required to manage complexity. A recent study by PricewaterhouseCoopers found that only 5 percent of CEOs believe they have the capabilities to manage complexity effectively. They understand the importance of managing complexity, but many don't know its true causes, let alone its true costs. Furthermore, they're unable to surmount the real challenge in our constantly changing world -- achieving the optimal degree of complexity, which is neither more nor less than what their customers value, want, and need.
We all are familiar with highly successful products that offer myriad configurations, like the iPod and BlackBerry. But what about products that are designed with so many options that the number of possible configurations in which they can be bought exceeds the number of customers buying the product? An IBM study revealed one company that was geared to support digital subscriber lines (xDSL) in 33 million different configurations. Although this is an extreme example, situations like this do exist. They are not helpful to customers. On a personal level, do you know how to use most of the functions on your cell phone, HDTV, or even your personal computer? Do you tap their optimal power and possibilities? Most people will answer "no." Technology and ingenuity have allowed us to make products and services that go way beyond the needs of most people. Often a company, its customers, and its suppliers can all benefit if a few options are removed from its products.
IBM teams have helped to manage the complexity associated with a wide range of businesses, products, and functions, from simple laptops (if there ever was one) to mainframes to complex telecommunications services. What we have found is that the rewards for managing complexity can be dramatic. Revenues can increase 5 percent to 25 percent. Cycle times can improve 10 percent to 50 percent. Budgeted costs are usually reduced in the neighborhood of 2 percent to 15 percent, and 15 percent to 33 percent of unbudgeted costs may be avoided.
