On average, the 200 biggest companies are losing an estimated 10.2% of their operating profit (EBITDA) as a result of the bad (value-destructive) form of complexity*. In addition bad complexity causes a bottom line impact due to IT project project failure, and cost/time over run of 30-40%.
During periods of dynamic market change many medium and large organizations struggle to react quickly and cost efficiently to competitive challenges.
Often they find that the competitive advantages of size and economies of scale become overwhelmed by the resistance to change created by tactical processes and systems which have solidified and become an unwanted part of the companies foundations.
To create increasing value for customer’s layers of resources and services come between business strategy and its realisation. In the absence of strong architecture and governance, constraints and dependencies cement themselves across once flexible solutions and over time the mortar hardens.
The first step in correcting or preventing these issues is ensuring that complexity is measured not only in the business processes and systems but also in financial measures such as increased transaction costs, operations, exception handling, design and implementation costs.
The second step is implementing strong IT governance and architectural principles.
Complexity Costs
What are the true transactional costs for your key product processes?
- Sell
- Fulfill
- Bill
- Assure
- Change
What are the true costs of managing products?
- Create
- Remove
- Change
In many organisations the only place where the costs of complexity are seen is in the bottom line at the end the quarter when it’s difficult to identify the causes, and too late to manage them.
Complexity is a destination; Simplicity is a journey.
As business drive for increased profits the obvious target is increased revenue. This can come from increased volumes or increased product portfolio, each resulting in increased transactions.
A company making 5% profit must sell $20 of product for every $1 they make in profit.
The impact of adding a new product in a high volume business could require the addition of a simple manual step to a fulfill process that could easily negate $100 of sales per transaction. If it costs the company $50 to fulfill an order then selling $50,000 of product just about covers the fulfill costs. In addition the occasional billing and assure issue will result in you company needing to sell over $200,000 of product to cover operational costs before it makes any profit.
Complexity hurts when a new product variation is added to a high volume system/process to meet the demands of a small market niche. In order to differentiate the processes and manage the extra variation requires additional steps in the high volume vanilla flow and the benefits of the new product could be swallowed up by the increased costs incurred for the vanilla product.
Metrics
This list starts with common high level business metrics and ends with more detailed metrics which will show trends for business complexity. It is not exhaustive and does not include sales or distribution channels but intended as a starting point for you companies thinking about managing complexity.
1) Sales and profit per:-
- product unit
- product category;
- customer;
- location;
- employee (full time equivalent, and total);
- components, (services, resources etc.)
2) Number of products and variants:-
- by business unit and company total;
- added and removed during the last quarter.
3) Cost per product, per product per customer and total to:-
- fulfill a customer order (end to end);
- bill;
- assure per quarter;
- set up, maintain and remove a product;
- serve by customer (including logistics and order processing costs);
4) For each process listed in 3 look at
- number of process steps including human and IT.
- defects per product
- costs per task/procedure.
Complexity Metrics
A complexity factor could also be generated for your organisation and have included some examples below. However we recommend you undertake a review of the complexity in your business to identify the key drivers. This could then be used as a trending guide, linked to the metrics above enabling the leadership team to make appropriate strategy decisions.
1) Business complexity is a function of:-
- number of products/variants;
- number of markets;
- number of suppliers;
- number of geographic locations/countries.
2) Process and systems complexity is a function of:-
- number of processes/product;
- number of system components.
3) Organisational complexity is a function of:-
- number of employees;
- number of management levels ;
- number of locations.