A Fresh Take on Complexity Costs
Jan 24, 2019
By Stephen A. Wilson and Andrei Perumal
For the last two decades, the pursuit of growth has created massive complexity in companies and, with it, massive complexity costs. In fact, complexity costs are today likely the biggest single determinant of your cost-competitiveness. The only good news about this is that your competitors may be carrying as much or more complexity cost as you are, and hence the opportunity: learn how to effectively remove complexity and you can regain competitive footing by creating a cost advantage over your competitors.
For many companies, attacking complexity can result in a 15%–30% reduction in costs in significant portions of their business. But few companies have earnestly tackled the issue of complexity costs. They may view their complexity as an intractable problem. Many do not fully appreciate the size of the prize that can be won by engaging in this war and most are lacking the battle strategies critical to identifying and removing complexity costs, such as we describe in our book Waging War on Complexity Costs (McGraw-Hill, 2009).
In our experience, framing the problem correctly is perhaps more important with complexity than almost any other business issue. Here, then, are six key principles that should inform your approach to tackling complexity costs:
Principle #1: There is good and bad complexity; reduce the latter and make the former less expensive to deliver.
The fact that some complexity is good means you can’t just focus on eliminating SKUs, parts, vendors, dealers, and so on. While these are important to controlling costs, it is only half the answer. Reducing complexity costs is not just about reducing the amount of complexity in your business. It is also about reducing the cost of delivering good complexity—making complexity less expensive.
Principle #2: Complexity is a multidimensional issue and must be viewed as such to be understood in its fullness.
By this we mean that complexity is a systemic problem—one that is dispersed in origin and affects everything inside the system. Therefore, the approach to tackle this also needs to have a systemic—or integrated—perspective. The best way to address a systemic issue is by taking a broad view but focused actions. Unfortunately many companies get this backward—taking a narrow view and looking at one facet of the issue, and then trying to push broad actions. This doesn’t work. Complexity is the result of the interactions of many different parties. Typically many companies think first of SKU or product complexity but that’s just a part of the issue. We look at the issue in terms of product, process, and organizational complexity. Each of these is a critical dimension but even more significantly is how they interact. This is where the costs reside.
Principle #3: Piecemeal approaches will not move the needle on cost reduction; don’t nibble at the edges of the issue.
In “peacetime,” it is not uncommon to see myriad diverse cost-reduction programs across an organization. In our experience, most of these nibble at the edges of cost management and do not address some of the core structural issues.
As the saying goes, if nothing changes…nothing changes! In order for a company to find and sustain significant improvements in their cost structure, a company needs to make some big changes in the way things are done. A cost-reduction strategy that focuses on doing the same things, the same way, but cheaper, is likely to lead to disappointing results.
Principle #4: Unlocking the benefits requires “concurrent actions.”
Given the systemic nature of complexity, unlocking the benefits requires a coordinated combination of actions. To achieve big savings, you need to understand how the three dimensions of complexity (process, product, and organization) work to trap costs in the business, and then you need to attack complexity with an integrated campaign.
For example, consider the pharmaceutical company that was looking to reduce its factory footprint and distribution network. As it examined the various factors involved, such as geography, channels, portfolio, and volumes, the focus soon became how to best rationalize the footprint assuming the same or near-same portfolio of products. This is a decision-trap—assuming an element is fixed and designing around it—but all-too-common.
Principle #5: Complexity costs “creep” in incrementally, but you need to remove them in chunks.
Consider a typical product portfolio: over a number of years, a portfolio has grown bloated with line extensions, new products, and new brands. The answer is not to trim the bottom 5% of SKUs. That will do little to free up capacity, cost, and focus; but when you can cut deep enough to cut a brand, close a warehouse, cease a productivity-draining process, then you will see substantive cost savings. The takeaway is that when addressing complexity costs, recognize that there are pivot-points at which fixed or semifixed costs are released. These points represent the staircase of cost targets that can release substantive benefits.
Principle #6: This need not be a long academic exercise.
Throughout your efforts, we urge you to focus on leveraging 80/20 thinking. Taking out complexity costs does not and should not be a long academic exercise. Ensure that you are not embarking on a months-long program that is long on analysis but short on insights. It is important to get a more grounded view of the drivers of complexity cost, but a broader view with less detail is more important than diving deep into any one area. Do enough to develop a battle strategy, and constantly ask yourself, What do I need to know to move forward on this? In our experience, it is possible to quickly develop hypotheses as to the drivers of complexity cost, which can then be validated, and this is a much faster approach than an exhaustive, bottoms-up approach.
Bertrand Russell made the comment that “the greatest challenge to any thinker is stating the problem in a way that will allow a solution.” This is absolutely the case with complexity costs. By correctly framing the issue—and approaching it with a fresh perspective that reflects the nature of the problem—you will not only see better results from your cost reduction efforts, but faster ones too.
About the Author(s)
Stephen A. Wilson and Andrei Perumal are managing directors of management consultancy WilsonPerumal (www.wilsonperumal.com) and coauthors of Waging War on Complexity Costs (McGraw-Hill, 2009)