8 ways to reduce complexity
1 Grasp the scale of the problem
There are two types of organisational complexity: the kind that creates value to give your firm a competitive advantage or helps solve knotty problems, or there’s bad complexity.
“Most organisations start with simple path dependencies,” explains Simon Collinson, professor of international business and innovation at Warwick Business School. “Then you develop internal processes to support those. Then you get layers of management – or you roll out new IT systems, or regulations change. Complexity is then embedded and self-replicating.”
Prof Collinson’s research among the largest 200 global companies showed they’re losing an estimated 10.2 per cent of their profit (EBITBA) as a result of harmful complexity in their business. So it’s well worth looking at your own finance function and across your organisation to see whether reducing complexity can help.
2 Take ownership
Finance is probably the best-placed team to address complexity. “The FD is the guardian of profit and that means the finance function must lead on removing complexity,” says Melvin Jay, CEO of consultancy Simplicity.
“It’s often the management accountants who have the right tools for this, too.”
For example, it’s important to use valuation techniques to assess exactly which activities cost the most – and generate the most value.
And, Jay adds, because finance sits at the hub of so many information flows it can trace complexity: “It can be as simple as being aware of what reports the team is producing. Then you need to look at what that information is doing in the rest of the business. Is it supporting value-creating decisions or is it just being ignored?”
3 Carry out an information audit
The first task is an information audit. “For example, you can use tools to see where information is flowing and who’s actually using it – and then why,” says Collinson.
“A typical example in a global business is finance teams offering departmental, then organisation-wide, regional, national and finally global versions of reports, all containing more or less the same data. And in many cases there’s a perceived demand for information that’s actually not helping anyone to add value.”
He cites one company in the automotive sector which “cut right back from 200 reports to zero – then added them back as managers requested the information”, says Collinson.
4 Focus on value
It’s easy for each individual or department to understand how they contribute to profits in smaller organisations, but in larger organisations that visibility declines rapidly. That makes transparency and self-analysis valuable tools in eliminating complexity.
“There’s no reason why the principles of lean manufacturing can’t be applied more generally to the processes governing the back office functions,” says Paul Lee, CFO at warranty provider Domestic & General.
“That means you have to identify what value every procedure generates, then focus your efforts on the ones that add it.”
And there are usually quick wins. “For example, if the processes around closing out a transaction are time-consuming, you’re taking salespeople away from customer-facing activities,” says Jay.
5 Be clear about strategy
Framing the big picture more simply can help. “The organisation’s strategy is the acid test for what actually adds value,” says Collinson.
“If it’s clear and coherent it should offer middle management and frontline staff well-defined boundaries for their decision-making.”
That’s endorsed by Richard Hutton, group finance director at food retailer Greggs. “We have a statement that outlines our values and how we like to behave. That’s what guides people and what comes across in our advertising. It’s one and the same.”
In other words, it’s simple for staff to check their activities are helping to deliver on that strategy – rather than just adding complexity.
6 Get the systems right
In theory enterprise-wide IT systems ought to reduce complexity by automating processes, making it easier to disseminate the right information to people that need it.
“But because technology makes it easy to do things – like run off reports, for example – it’s common to see over-engineered systems,” says Jay.
“Why not design the system with 20 per cent of the features or capabilities to cover 80 per cent of situations, then manage the rest by exception?”
7 Change behaviour and culture
It’s one thing to talk about simplifying the business. “But it’s better to show people how to be more efficient rather than telling them,” says Collinson.
“Equally, some complexity actually creates competitive advantage. So this isn’t about an at-all-costs efficiency drive.”
If the finance function is addressing obvious areas of complexity rather than simply nagging about costs, the project will go much more smoothly.
“Ultimately, this is a question of leadership and behaviour,” says Jay.
8 Savage pruning
If it’s proving difficult to unpick the value-enhancing complexity from the mesh of interconnecting systems and processes it might be time to take a drastic approach. Outsourcing can help.
“One good method we use is ‘provocation’ – getting management to create a process or even a whole business from scratch,” says Jay.
And don’t be afraid to prune hard in your own team, too. “The key question for finance people is, ‘why are we producing all these reports?’” says Lee. “You have to look at who’s getting them and ask directly how they’re being used.”
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