The Speed and Cost of Complexity
Insurance Experts' Forum, January 5, 2011
It’s a warm, sunny Sunday at the end of summer, with hardly a cloud in the sky and only a slight breeze to disturb the tranquility. Thus all the harder to believe that the earth is spinning on its axis at 1,000 miles per hour and orbiting the sun at an incomprehensible 67,000 miles per hour. There isn’t the slightest indication that anything is moving except for the butterfly that just darted by.
With all this spinning and hurling, why don’t we get dizzy or at least have some sense of motion? Isn’t it reasonable to think we’d feel something?
But frequent fliers will agree that after takeoff, once the plane’s speed becomes constant; there is little sensation of movement. The constant rush of movement produces the sensation of no movement at all. When something becomes constant or omnipresent, we stop noticing it.
Perhaps that’s why the complexity that afflicts most businesses is so insidious. It spreads at such an astounding pace and seeps into so much of the day-to-day routine that we don’t notice it. But it’s there and it’s costing your business more than you think.
Complexity is like an iceberg with only a fraction of its mass visible above the water, and most of its bulk hidden below the surface. What’s hidden below the surface is what drives disproportionate cost in your organization. Costs related to complex products and services that were devised by some of your best and brightest employees. This makes it even harder for executives to recognize the unintended but nonetheless negative impact of complexity; they simply cannot believe that the work of their smartest employees is hurting, not helping, the economic health of their organization.
Like the movement of our planet or the hidden mass of an iceberg below the surface of the sea, complexity is not easy to see, and it didn’t get there in one giant leap. It got there one decision, one idea, one “enhancement” at a time—all piled up, layer upon layer.
Need to energize your sales force and give your revenue line a jolt? Just add one or two new, innovative features to an existing product line; give it a new name; introduce some updated marketing collateral; and you’re on your way to reaping new profits. Not so fast...
Even small extensions in a product or service have hidden dimensions. Supporting processes and technology and administrative and marketing overhead are just some of the hidden costs that come along with even a tweak to a product or service. And if your staff is really innovative in terms of what they can dream up, the associated process and infrastructure costs go up exponentially.
Complexity that comes from meeting real customer needs or demands, however, is a necessary cost of doing business. Complexity that feeds the ego of star performers without adding real value for the customer and the bottom line is pernicious, and needs to be rooted out. Being able to distinguish between customer demand and complexity for complexity’s sake isn’t always easy. One way to do this is to insist on rigorous profitability analysis, not mere “business case” justification, for new product and service initiatives.
Of course, this assumes that your organization has the ability to measure product or service profitability in the first place. This is often one of the most important and least understood weapons in the war against complexity.
How often are the business cases used to justify a new product or service put to the analytical test to determine the resulting impact on profitability? And even if this analysis is performed, does it address the hidden costs of complexity, or does it address only the 20% of costs that are visible above the water line? In most cases, the answer is that the analysis sees only the easily seen.
Undertaking rigorous profitability analysis entails more than a cursory look at sales, revenue, and standard operating costs. The costs associated with complexity got there bit-by-bit over time, and it can take detective work to uncover the layers that have built up. Doing this can be hard work, but it’s worth the effort to understand how complexity is impacting your organization’s performance, the rate at which it is using up your capital, how it is degrading staff productivity, and whether it is contributing to or detracting from your bottom line.
Because finding the costs of complexity can be hard, it’s no wonder that traditional cost reduction efforts often fall short of the mark in terms of producing significant and sustainable changes in cost structure. One-time, ad hoc attempts to ratchet down costs usually miss the expenses that, if found and eradicated, would transform your company’s cost structure. And even if you find those costs, it’s for naught unless you commit to eliminating the non-value-added activity that produced them in the first place.
Understanding the rate at which complexity drives up costs—and the corresponding extent to which gratuitous variety does nothing for customer value—is the key. The costs of complexity can be found dispersed throughout your organization:
• More administrative staff to handle new, more complicated work processes
• More IT investment as applications have to be updated to support more complex processes
• Whole new functional areas that sprout up to support product extensions and “coordinate” new activities across organizational lines
Cost-cutting measures that are not focused on finding and rooting out complexity are doomed to fail and be repeated at predictable intervals. That’s because the problems they end up fixing never ferret out the costs that remain hidden from view, draining profits.
Defining the metrics that quantify the cost of complexity can help you understand which intricacies really matter to your customers and drive profit versus those that merely add cost without adding to the bottom line. Only by measuring the right things can you distinguish good from bad complexity.
Products and services are changing at a frenetic pace—almost as fast as the earth’s relentless motion through space. Making sure your organization takes note of the impact this speed is having on your costs can set you apart and help you win the battle against complexity.
Effective innovation demands an understanding of the total cost of delivery. Of course, you must respond to customer demand for variety. But ignore the hidden costs of complexity at your own peril.
Linda Bambacus is a senior consultant for The Robert E. Nolan Co., a management consulting firm specializing in the insurance industry.
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The opinions posted in this blog do not necessarily reflect those of Insurance Networking News or SourceMedia.
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