In an increasingly complex world, the idea of simplifying business is an appealing one. Partner this with the publication of the Global Simplicity Index (GSI) recently – which has estimated that the world’s largest 200 companies lost $237 billion dollars collectively over the past year as a result of business complexity – and a desire for simplicity becomes a necessity.
The GSI is a joint work between Simon Collinson, Professor of International Business and Innovation at Warwick Business School, and the Simplicity Partnership, a management consultancy committed to simplifying the way that companies operate.
Together, they have calculated that ‘bad complexity’ within companies reduces profits (EBITDA) on average by 10.2%. However, the stage at which companies begin to destroy value as a result of their overcomplicated methods can be difficult to identify. Essentially, when a company grows it naturally develops processes which initially enable the company to flourish, but they inevitably reach a ‘tipping point’ whereby the benefits of additional complexity are outweighed by costs. Add this to pressing issues such as economic volatility, and the detrimental impact of complexity becomes ever more apparent.
Nevertheless, for large (and sometimes even small) companies who have become almost acclimatised to the complications of working life, it is difficult to identify what quantifies negative complexity. In their study, the Simplicity Partnership identified five main internal drivers of complexity: Products & Services, Strategy, People, Organisation and Processes. It is important, therefore, that companies review complexity more holistically than before. Although many companies have explored ways to reduce complexity from their processes, Simplicity Partnership argue it is unproductive to tackle complexity in this area alone.
So who should take responsibility for company complexity? The natural route would appear to be the finance department – not simply because monitoring company profitability is one of their key roles, but also as a result of the fact that the finance function is one of the few departments that has the luxury of working across the business. With attempting to increase company profits as the consistent bottom line for finance teams, it makes sense for them to also consider the detrimental effect that complexity may be having throughout the business. Indeed, when analysing companies, it was noted that some finance directors were taking up to four months out of every year in planning as a result of over-complicated scenario forecasting. It is actions such as these that truly demonstrate the pitfalls of excessive business complexity.
By tackling business complexity, the benefits could go beyond simply increasing profit margins. The founder of Simplicity Partnership, Melvin Jay, observed that “people don’t enjoy working in highly complex systems, they want to see the impact of their work – complexity is sapping morale”. Therefore, by identifying potential areas for simplification with the ultimate aim of increasing profits, it can easily evolve into equally beneficial changes for the company as a whole.
Ultimately, it is rational to suggest that in order to strive towards growth and increased profits, companies – finance teams in particular – need to look beyond the standard and assumed and assess the company as a whole. The myth that complexity signifies a highly advanced and functional business needs to be reconsidered. Instead, finance departments need to lead a culture of simplicity in order to see companies thrive.
Megan Evans is a Researcher for Trace Recruitment. Trace delivers senior finance recruitment briefs in industry, financial services and the third sector across London, the South East and Europe.