Full Report: Taming Organisational Complexity—Start at the Top

Complexity is a serious threat to organisations around the world. It stems from a variety of sources, is challenging to address, and hinders companies’ ability to bring products to market in timely fashion, to serve customers effectively and to attract and retain employees. Ultimately, it’s a threat to the bottom line, but just how costly is complexity and what can be done to counter it?

The Economist Intelligence UnitThe Economist Intelligence Unit

Introduction

Taming organisational complexity—start at the top

Complexity is a serious threat to organisations around the world. It stems from a variety of sources, is challenging to address, and hinders companies’ ability to bring products to market in timely fashion, to serve customers effectively and to attract and retain employees. Ultimately, it’s a threat to the bottom line, but just how costly is complexity and what can be done to counter it?

In a recent survey of executives at large companies around the world conducted by the Economist Intelligence Unit (EIU), more than half say complexity has cut into their profits. Furthermore, 38% of all respondents report that managing complexity occupied 16-25% of their time—time that could have been spent on more productive pursuits—and 17% spent a whopping 26-50% of their workday dealing with complexity. That translates into at least 8.6m hours a week that could be spent more productively by executives in the US alone—or 45 minutes for every executive every day.

Executives indicate that the sources of complexity vary widely. It’s easy to think of complexity as simply a natural offshoot of growth, whether in size, product lines or geography, but that’s not necessarily and needn’t be the case. “I  don’t use the phrase `Too big to manage’ because there are some small companies that are too complex,” says Jacques Kemp, former CEO and vice chairman of ING Insurance Asia/Pacific, now CEO of the Netherlands-based ToBecome consultancy where he coaches businesses on issues including reducing complexity. “I use the phrase `Too complex to manage.’”

The survey also shows how companies are trying to reduce complexity’s impact, with many taking a number of steps to address it, with none being more than moderately successful. Remarkably, 8% of respondents say their company has gone as far as deliberately slowing growth in an effort to reduce complexity.

Of course, not all efforts to reduce complexity are successful. Of those surveyed, 9% report that none of their efforts to reduce complexity succeeded. “Often people don’t realise they have a complexity issue. They think they have a cost issue,” says Torsten Lichtenau, a partner at Bain & Company in London. “Often they confuse complexity with cost.” That often results in short-term cost-cutting measures like lay-offs, rather than taking steps that fundamentally address complexity.

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Where complexity lurks

To understand the causes of and solutions to organisational complexity, the EIU surveyed 331 executives from companies in all regions of the world, all with annual revenue greater than $500m and representing a variety of industries. The survey, sponsored by SAP, was in the field in July and August 2015.

The survey’s findings reveal that complexity is a common feature among large companies, with 55% of respondents saying that their organisational structure is extremely or very complex. (Only 1% of respondents indicate that their organisational structure is not complex at all.) However, a slightly smaller percentage of respondents (44%) say that their company is very or extremely complex and that it is very or somewhat difficult to get things done.

Degree of complexity and difficulty of getting things doneComplexity was evident across various types of organisational structures, but none more so than organisations based on hierarchies in business units that report to regional headquarters that, in turn, report to global headquarters—with functions managed regionally. Fully 100% of executives in organisations with such structures describe their organisations as somewhat, very or extremely complex.

Not surprisingly, that level of complexity makes getting things done difficult. Of organisations with hierarchies in business units reporting to regional headquarters that, in turn, report to global headquarters (regardless of whether functions were managed regionally or globally), 64% of executives report that it is somewhat or very difficult to get things.

Looking at the issue of complexity regionally, 77% of respondents in Germany describe their organisation as somewhat or very complex, while 66% of respondents in the rest of Europe describe their organisation as such. Of North American executives surveyed, 62% describe their organisation as complex, as do 49% in Asia excluding China, 44% in Latin America and 40% in China.

Although size is not inevitably linked to complexity, as Mr Kemp notes, the survey suggests a frequent link. Sixty-eight percent of respondents at companies with more than $5bn in annual revenue describe their organisation as extremely or very complex, compared with 42% of those at companies with revenue of less than $5bn.

Geographic scope is another common factor, with 67% of respondents who work at companies with operations in 50 or more countries describing their organisation as extremely or very complex, compared with 41% of those operating in 5 or fewer countries.

Among industries, respondents in the IT and technology industry more often than others describe their organisation as extremely or very complex.

Complexity’s sources and effects

The sources of complexity executives cite vary widely. The causes most often mentioned are decision-making processes (12%) and organisational structure (9%). Five other sources of complexity were each chosen by 8% of respondents.

“When I talk to executives, many of them are frustrated by the symptoms of complexity. They do feel and they do worry there is this underlying root cause that’s creating it, but they struggle to put their finger on it,” said Mr Lichtenau.

Regardless of the source, complexity has a direct impact on the bottom line, survey respondents say. Fifty-five percent of respondents indicate that over the past three years complexity has cut into their organisation’s profits, with 5% saying it has affected profits significantly. Complexity also takes a significant toll on productivity, with nearly half of respondents saying their organisation would be up to 25% more productive if they could cut organisational complexity in half, and nearly 19% reporting that they would expect their organisation to be up to 50% more productive were complexity to be halved.

Areas of the organisation most negatively affected by complexity, respondents say, include general management (29%), employee relations (23%), customer service (21%), governance and compliance (19%) and product development (18%). It’s notable that the two areas most frequently cited are not externally facing, perhaps suggesting one reason that addressing complexity can be (and seems often to be) put on a back burner.

What is the primary source of complexity in your organisation today?

Indeed, Michael Wade, professor of innovation and strategy at the International Institute for Management Development in Lausanne, Switzerland, suggests that while many executives recognise complexity and its pitfalls, the many other competing demands for their attention often push complexity reduction to the side. “Complexity is not in your face like shareholders are or boards of directors are or customers are,” he says. “They recognise the importance of it, but there’s always some more pressing demand. So, yes, they see it, but it often gets pushed back.”

What executives say about their company

In addition to complexity itself, a large number of respondents also describe aspects of their organisation as siloed rather than collaborative: 37% say their company is somewhat or very siloed by region, 27% by function and 26% among business units. Interestingly, C-level executives more often report higher levels of collaboration at their company compared with other respondents: 60% compared with 37% say their regions are very or somewhat collaborative; 62% compared with 45% say the same about functions; and 64% compared with 47% say the same about business units.

These perceptions may be part of the reason why—although minimal differences exist in the degree of organisational complexity C-level and non-C-level respondents report (54% of C-levels say their company is very or extremely complex, compared with 57% of other respondents)—far more C-level executives say that they find it easy to get things done (24% compared with 9%).

Digging deeper, the survey reveals the wide range of specific ways complexity puts organisations at a competitive disadvantage. Among respondents who say that general management is the area most negatively affected by complexity, for example, 55% also say it forces executives to spend more time on coordination than the company can spare. At companies where product development is the main area affected, 51% of respondents indicate that complexity causes their organisation to take longer to bring new products to market compared with competitors. And among those most concerned about employee relations, 43% indicate that complexity damages morale and interferes with collaboration.

Respondents in human resources seem particularly sensitive to complexity’s impact on employee relations. Of that group, 50% say complexity makes retaining employees more difficult and that complexity interferes with employees’ understanding of the organisation’s strategy. In addition, 40% say complexity has a negative impact on employee morale, hinders employees’ ability to collaborate across the organisation and makes training employees more difficult.

Then there’s the toll on individual executives, 22% of whom say they’re spending at least one-quarter of their time managing complexity instead of on more productive tasks. In the US, cutting the time wasted by all executives in half would mean reducing wasted time for each private-company executive each week from at least 7.5 hours to 3.7. That translates into at least 8.6m hours a week that could be spent more productively by executives in the US alone—or 447m hours a year.

Trying to tame the complexity beast

In hopes of mitigating complexity’s impact, companies surveyed report taking a variety of steps. Among the most common are promoting a culture of collaboration (39%) and implementing new technology tools or infrastructure (33%); creating cross-functional roles to facilitate collaboration, implementing new decision-making processes and improving leadership skills were each chosen by 30% of respondents. A notable 8% say that their company deliberately slowed its growth to reduce complexity.

Of the steps taken to reduce complexity, respondents whose companies used each one indicated that the most frequently successful is creating cross-functional roles to promote collaboration, followed by implementing new decision-making processes and implementing new technological tools or infrastructure. Notably, the highest share of respondents citing success with any tactic is 56%, suggesting that companies have a long way to go.

The most common benefits of efforts to reduce complexity include more efficient decision-making, increased collaboration, improved customer satisfaction, less time spent finding needed information and improved employee retention. Those benefits make sense to Mr. Lichtenau. Complexity’s impact on decision-making is “almost worse than (its impact on) cost”, he says. Meanwhile, in a complex environment, “You also start to get demotivated and disengaged people”, Mr. Lichtenau says. If the company can’t reduce complexity, it might find itself losing good employees and “left with people who like the coziness of the complexity”.

Most helpful steps to reduce complexity

What kinds of companies slow growth to reduce complexity?

Looking more deeply at the 8% of respondents who say their company deliberately slowed growth to reduce complexity reveals hidden desperation: 10% of respondents who also say their company is very or extremely complex say they tried this tactic, compared with 6% at less-complex companies; and 12% of C-suite respondents say their company did this, compared with only 4% of lower-level respondents—perhaps indicating that such tactic was never explained, or visible, to executives outside the C suite. From a structural perspective, it’s notable that 14% of respondents at companies where the current structure offers, at best, slight support for operational needs say their company deliberately slowed growth, compared with 7% of those where the structure does so at least adequately. Twenty-six percent of respondents at companies with a regionally based structure that manage functions globally indicate that they have deliberately slowed growth, compared with 9% of those at companies with a business-unit-based structure that manage functions globally. The latter pair of findings suggest that structure that follows the business may lead to less-unmanageable complexity.

At organisations where none of their efforts to reduce complexity worked, poor management of the changes was most often cited as the problem (44%). Lack of buy-in across the organisation, a culture that slowed or prevented change and still having too much data to manage were each cited as major obstacles by nearly 30% of those whose complexity-reduction efforts failed, while a new structure that failed to support or reflect the business was a problem for 26%.

Mr. Lichtenau distilled an effective strategy for combatting complexity into six steps:

  1. Taking a holistic approach;
  2. Focusing on the interfaces between business units and functions;
  3. Eliminating wasteful activity;
  4. Driving the effort from the top;
  5. Measuring the value produced by complexity-reduction efforts; and
  6. Changing mindsets and behaviours to create a long-term awareness of complexity.

“When organisations are really agile and really simple, it’s being displayed in very simple behaviour,” Mr. Lichtenau says. “If you go to a meeting and there are 15 people someone might say `Why do we have 15 people? We only need five.’ Or people are questioning requests for information that don’t make sense. But it takes a while to get there.”

Mr. Kemp suggests a “framework” for addressing complexity that involves identifying and categorising all the “dots”—the who, what and how—of processes, operation or functions. The result is not unlike a restaurant’s menu, he says, which organises offerings into such groups as beverages, appetizers, entrees, desserts and the like. “A restaurant would increase complexity not reduce complexity if they didn’t use a menu,” Mr. Kemp says.

Why were none of the tactics your company used to reduce complexity helpful?

If efforts to combat complexity are to succeed, it’s also necessary to have a means of measuring complexity and the success of efforts to reduce it. “Unless it’s explicitly measured and assessed and incentivised, not much is going to change,” says Mr. Wade. “If you don’t have the metrics and the processes and the systems in place, it just comes back.”

Commonly used metrics, according to the survey, include efficiency (38%), productivity (37%), number of layers of hierarchy (24%), and number of different technology systems in use (20%). Examining these against the survey’s findings of the steps companies have taken to reduce complexity, as in the exhibit below, suggests even greater emphasis should be placed on metrics involving the number of technology systems and employee collaboration.

For the metrics to be useful, they must be relevant and aligned with the organisation’s goals for reducing complexity—tracking the wrong data won’t help a company understand its complexity or whether its efforts to reduce it are succeeding. Mr. Wade suggests counting steps in processes, the number of products or the number of IT systems as possibly useful metrics for measuring and for fighting complexity.

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In total, the findings suggest that leadership decisions, effective change management and follow-through are key to reducing complexity and that a failure of leadership or role-modelling likely lies behind many unsuccessful efforts to reduce complexity—as it does in unsuccessful efforts to manage change of any kind. Given C-level executives’ different perceptions of how hard it is to get things done, they may not focus on reducing complexity quite as much as their companies require unless they are truly desperate.

Conclusion

Embracing the fight

Experts and the survey data suggest that not only is complexity costly, it’s an insidious foe and a continuous threat to even the most efficient companies. Combatting it, then, requires thoughtful, committed leadership combined with a culture geared to identifying and reducing complexity and employing effective means of measuring the impact of complexity-reduction efforts.

“The thing about complexity is it’s created by us,” says Mr. Wade. “There is complexity in the environment, but when there’s complexity in organisations we’ve created it. So management has a role in that.” Few organisations have “simplification officers” or some other specified function meant to identify complexity and lead in its reduction, he says.

“If you want to tackle complexity, it’s probably a multi-year journey,” Mr. Lichtenau says. “You won’t squeeze out all unnecessary complexity in six months. You might see some substantial progress in six months, though.”

The survey results make clear the impact complexity has on organisations and the challenges associated with addressing it, highlighting a clear need for leaders to make reducing complexity a priority—a point reinforced by the perspective and wide-ranging experience of the experts interviewed for this report. To succeed, the effort to squeeze out complexity must be driven from the top down, with executives leading by example in promoting a culture that favours collaboration and by providing the tools and technologies that enable such efforts.

No effort can be successful without measuring impact, so leaders must also determine the metrics that are appropriate for their organisation.

Finally, leaders need to ensure that reducing complexity remains a priority for everyone and that sound change management ensures that initial efforts to reduce complexity take root and produce the increased productivity, better time management and greater profits  those who truly control complexity can gain.

Download the full report here.

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Tags:

future of work, Simplicity