The modern business world is rife with complexity. Part of this complexity emanates from frequent technological innovation or from political or business-related uncertainties. Sometimes, it arises as a result of regulatory limitations, and sometimes it is due to the desire to provide unique solutions for a variety of clients, each coming from a different geographical area and cultural background. As a result, management’s attention is spread across many subjects, and a great amount of human resources is required. This complexity causes a lack of focus and loss of business opportunities, and comes at a high cost.
A more in-depth analysis shows that most of the administrative complexity can be managed and even substantially reduced when management and the board of directors apply the right strategy.
In order to reduce administrative complexity, the board and management must focus on products, services, and global geographical distribution, in accordance with the company’s strategy and their contribution to the company’s value. There is no need for the sale and maintenance of 1,000 financial products when 40 of them, easy to modify and maintain, are responsible for 70% of the company’s contribution margin. A contribution analysis shows that many of the products or services carry a virtually negligible contribution margin and can thus be abandoned. Discontinuing the sale of products and services should be accompanied by proposals for replacements out of the existing range.
A high-tech company operating in this manner was able to cut its variety of products and services by a half while profits doubled over time. An insurance company dismissed the least profitable 10% of its agents. Within a short time, the company increased their revenues and market share.
Price quotes and the development of new products and services must conform to the strategic focus that was decided upon. A policy of “we reply to every quote” or “we never miss a business opportunity” leads to administrative complexity, preoccupation with irregular cases, and lack of focus.
Reducing administrative complexity is often done by creating business and organizational structures that are as independent as possible and aimed at handling market segments, technologies or various products. The advantages of a simplified organizational structure and the independence granted to those who head the various units contribute to reducing the administrative complexity. The same is true on an individual level; working in integrated teams, each responsible for providing comprehensive customer care or entrusted with every stage in the development of a new product, also reduces the administrative complexity.
Administrative complexity is often the result of developing and managing projects that are independent of each other. The planning process should examine a project’s degree of decoupling from other projects. Ideally, projects should be as independent as possible.
A different approach to reducing complexity is the “mushroom” production model, often employed by car manufacturers: All cars go through the same manufacture process, with the final stage (the “mushroom head”) being designing the car according to a specific model. This results in a less complex process that addresses all market segments. Financial services providers, for example, adopt this approach by designing a single product family that by changing some of its parameters can be suited for a variety of clients.
Handing over an entire service or product to subcontractors significantly decrease system complexity.
A process for reducing complexity must be supported by the board of directors, as it has strategic implications. These steps simplify the organization, make it easier to manage, and increase its potential for value enhancement. When it comes to reducing complexity, stick to the KISS principle – Keep It Simple, Stupid!
Prof. Boaz Ronen coaches the corporate enhancement and value creation workshop at Lahav Executive Education, Tel Aviv University’s faculty of management, and has implemented dozens of projects for corporate enhancement and innovative approaches to management, in Israel and abroad. Served as guest lecturer at many business schools in universities such as NYU, Colombia, and Bocconi, among others. Published seven books and dozens of articles in leading journals around the world.