Nitin Kumar • 2022-04-13
Almost every executive that I speak to, be it a CEO of a global multi-national firm, a CEO of a startup or a business leader...
Almost every executive that I speak to, be it a CEO of a global multi-national firm, a CEO of a startup or a business leader speaks about the incredibly complex environment they operate in today making their jobs more stressful than 10 years ago. I believe that this so-called complexity is only going in rise with globalization, multiple regulations, disruptive business models, new competitors, changing customer preferences, more M&A and a plethora of emerging technologies etc.
The larger issue at play is executives not understanding complexity well enough to dimension it or resolve it. Key questions of complexity to be understood are:
§ How does this complexity come into being?
§ What causes it?
§ How to dimension it or measure it?
§ What levers could one pull to contain or eliminate it?
§ How do we reduce enterprise complexity?
First and foremost, complexity has a different size, shape and form depending on where in the organization you view it from. For executives, complexity arises from the size of an organization, the diversity of the products, the several distribution channels, multi-country operations, cross border legal and tax issues, diversity of skills and competencies etc.
For middle managers who often operate within a given country, business or department worry less about executive definitions of complexity. For them complexity revolves around the ability to get their jobs done, the levels of authority, accountability, the clarity of their own role, systems and the business processes that enable their own productivity etc.
These different definitions of enterprise complexity versus individual complexity being looked at from different vantage points makes one group oblivious to the other’s issues. There are more people affected by the complexity at individual levels which cascade up and further amplify existing enterprise complexity.
Another fundamental issue is that some of the complexity problems have been looked at in silos not organizationally. For example, executing an organization design project to minimize roles overlaps, clear reporting relationships and trying to resolve these issues often neglect nuances with functions e.g., IT, access control and end up transferring complexity from one area to another without truly eliminating it from the organization. Complexity in an organization will not go away unless it is addressed holistically.
Measuring complexity at the business process level at minimum and not at a functional level. Metrics and benchmarks with respect to complexity can be captured by looking at variability of processes, average decision-making time, productivity, throughput of a business process, response and resolution times to support or number of systems etc.
Not all complexity is bad hence differentiating between good complexity versus bad complexity is important. Good complexity adds competitive advantage due to its sophistication or makes it hard for the competition to replicate. Good complexity is always controlled whereas bad complexity is uncontrolled and drives ambiguity, reduces accountability, creates confusion and takes a toll on productivity and increases costs, it often grows at an alarming due to lack of proper controls or governance.
Let us understand this with an example, the planes of the 1950s and 60s which were accident prone and crashed much more frequently on technical failures but today’s planes although are a lot more complex and sophisticated but safer and more reliable, hence not all complexity is bad.
An organization likely has a mix of both good and bad complexity; therefore, it is important to understand the complexity profile of the enterprise before we start to mitigate it ensuring good complexity is preserved and the bad is eliminated.
A transaction is a perfect catalyst to address and remove complexity from the combined organization. There are several value creation opportunities when we remove complexity from an organization including enhance speed to market, increased service levels, optimized costs, efficient systems, an effective organization, reduced variability etc. Transactions which are not solely focused on cost but want to create operational competitive advantage should consider complexity reduction as a primary driver. Various phases of a transaction should address the reduction of complexity in different ways.
Understand the geographic footprint, product mix, # of channels, organization structure, process/system variability, level of standardization, service levels, speed to market etc. of each organization and document required level of variability. Clearly define what needs to be protected i.e., good complexity and what needs to eliminated i.e., bad complexity. The latter should inform the synergies and execution roadmap during integration planning. Cost synergy, though is not the primary driver it is still a favorable byproduct. Clearly document and dimension the revenue impact realized through speed to market and enhanced customer experience etc.
The integration planning needs to factor in a variability reduction plan starting from the customer, markets and products with the supporting processes, systems and functions quickly enabling the plan. The right complexity reduction KPIs (both operational and commercial need to be set in place). All areas of risk needs to be documented, the big two risks typically are, the risk of transferring complexity from one function to another and not having developed mechanisms for permanently elimination complexity as a governance, process and system level.
In my experience, complexity in any organization can fall into are four major profiles per the figure. It is evident that any organization with low levels of good and bad complexity is an unsophisticated business, while on the other hand if the levels of good and bad complexity are high then the competitive advantage is negated due to the deadlock positions assumed between the two. Before embarking on a complexity reduction, understand where your organization lies on this grid and try to reduce complexity holistically, also make sure processes are put in place to stop the reappearance of bad complexity.
As with any other type of M&A value creation, execution is key. Ensure the IMO is not configured in a typical functional posture, but complexity drivers need to tackled x-functionally and a value driver lead by complexity area is a good practice to follow. Complexity reduction is typically done in waves of twos or threes, with the first two taking 100 days of less (depending on the transaction) and wave 3 going longer. Typical scenario, wave 1 is organization, products, channels, brands etc. and wave 2 is processes, systems, facilities and revisiting the organization structure, wave 3 tends to be area such as contracts, sales, reducing components from R&D/Products/Platforms etc.
Reporting on the complete KPIs on the posture of each value driver is critical and should reflect in both cost and revenue synergy plans.
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