Reorganization is seen as the most effective technique for managing complexity, but only marginally and this doesn’t include outsourcing. Only 42 percent said they had outsourced functions to deal with complexity in the past two years, and this was thought to be very effective by only 34 percent.
The least effective action was trying to influence public policy, despite the significant impact that regulation has on increasing complexity. While direct interaction with policymakers may not be an easy task, businesses are an important source of input and expertise to government in helping to find more efficient ways of doing business. Business leaders may, therefore, need to provide greater clarity of purpose around their operations to help in shaping policies and regulations that contribute to economic well-being.
This clarity of purpose is also a necessary foundation for the rationalization of risk management (including compliance risk) which many businesses now believe is necessary. This is one of the more challenging routes to reducing complexity since it often involves reducing the influence of people who are responsible for ensuring regulatory compliance in their part of the organization.
To win support for rationalization, it is important to have a clearly stated business purpose that can be translated into an equally clear and defendable appetite for risk. Together with a good set of figures outlining the cost of compliance within a company (with the corresponding return on investment), it becomes substantially easier to make the necessary arguments for change.
A US management school professor summarized the benefits very clearly. “If something is more complex, it is just more risky. But when companies go beyond that to actively manage unnecessary complexity out of their business processes… they benefit not only from lower risk, but also higher efficiency and agility.”
The specific actions mentioned in this report can clearly have an impact on how complexity affects an organization. Some of them, like improving information management, are simply best practice in operation. But even the most effective measure is only thought to work well by a minority of the people polled, and a clear majority feels that none of these options really helps to manage or reduce complexity.
There is a view, which emerges from the in-depth interviews with respondents and also from KPMG’s experience, that the only really effective way to manage complexity is either to avoid it as far as is possible or to embrace it.
There are organizations in every sector that have done well by keeping their business models simple. They do what they know, provide a valued set of goods or services in an efficient way, and avoid markets they don’t understand.
These organizations deal with externally imposed complexity as best they can, but they place a huge premium on internal simplicity and will go to some lengths to preserve it. Many of the reorganizations that KPMG has assisted are designed to help simplify business models that have moved too far from the core.
One Irish strategy director captured this approach. “I think first of all you have to understand what is complex – you have to identify it and break it down into parts,” he said.
“You then have to have a business strategy which will translate into a tactical plan that breaks down and simplifies processes. The end result is simplification.”
His thoughts were echoed by a finance director from India whose comment was,“ Be as simple as possible in all actions. Don’t try to make anything complex, and be transparent.”
The alternative view is that complexity is a necessary part of a vibrant and rapidly developing market. It drives innovation by presenting a constant stream of new problems to solve. It highlights areas of outdated thinking and forces businesses to improve constantly.
This is a common view held by many of the emerging economy businesses. For these companies, cutting through complexity to focus sharply on the opportunities it presents is a major part of their corporate strategy.
In Mexico, the view taken by one consumer markets finance director was, “It is the current situation that makes you innovate, be more efficient and look for strategies that allow the company to achieve its objectives in the medium and long term.”
These may not be comfortable strategies, and they certainly require a large personal commitment from managers determined to keep up to date with rapidly changing markets. But the rewards are there. The advice from one UK-based finance director was, “Embrace it. A lot of people can get overwhelmed by it. The key is to take advantage of the opportunities, while understanding the need to simplify complexity and bring some clarity.”
Alan Buckle, Global Head of Advisory Services, KPMG International