Keeping It Simple: CIOs have an important role to play in helping their enterprise minimize its process complexity

By Evan Hirsh, Matt Egol, Karla Martin, Gil Irwin & Giri Rao

Process complexity is one of the silent killers of profitability. Any time a new product is added or changed or a service level is increased without addressing complexity the result is a process that is a little more cumbersome and a little more costly. Over the long haul, many good strategies go wrong simply because of the drag created by all those incrementally increasing costs.

CIOs have an important role to play in managing that complexity. More than most top-level executives, the CIO tends to be keenly aware of the effect of process complexity on corporate performance. At the same time, since IT these days typically touches every silo , the CIO often has the strong cross-functional relationships to help address these “costs of complexity” with the rest of the executive team.

This isn’t just a matter of pushing for an elegant solution for its own sake. There’s real value to be created when complexity is reduced. A recent study by Booz-Allen Hamilton of 50 companies across a wide range of industries found that companies that successfully trade off the value of variety against the costs associated with adding more complexity outperform their peers by two to one in revenue growth. Their profit margins are also 5 percent to 10 percent above their competitors.

Reliant Energy is one company that’s realized how damaging the costs of complexity can be. A leading supplier of retail power solutions to the commercial and industrial markets, Reliant was catering to frequent requests for specialized offers from both existing and potential customers. These “offmenu” items for customized billing, information and other services seemed to be inexpensive ways to sweeten a dealtaken one at a time. Taken as a group, however, this steady stream of “one-off” changes in pricing, terms and services added significant complexity and cost throughout the delivery system.

Although Reliant made money on individual deals, its margins were shrinking, and corporate strategists could see that the deal-by-deal approach would eventually become unsustainable. Clearly, the firm needed a new approach. The way Reliant avoided disaster was by segmenting their lines of business driven by customer needs. Such needs-based segmentation allowed Reliant sales teams to offer custom solutions only where they were truly profitable, enabling Reliant to preserve its economies of scale.

The result: with its new segmentation strategy now in place, Reliant is on track to reduce its costs by 20 percent while improving its customer retention and growth in the market.

While it’s not sufficient, a necessary step in Smart Customization is simply making sure that often hidden costs of customization are exposed and trade-offs are made more explicit. Years of development experience have given most CIOs an intuitive appreciation of the costs that tend to go along with adding more complexityparticularly in service-oriented businesses where costs are even less easily seen and measuredexecutives in other functions often can’t see variety-versus-complexity tradeoffs quite so clearly, particularly when it comes to services rather than goods.

Articulating that hard-won insight to a team that may not be aware that there are any problems with all those scale-destroying one-off deals or added service enhancements isn’t always easy. One way CIOs can help make the case for Smart Customization is by asking four questions of any new product or process request:

1. What value is being created?

Most companies do not understand the value a new product or service creates and its impact on their old product mix. Instead, they rely largely on intuition and partial answers.

The BOC Group, a major U.K. supplier of industrial and medical gases, is one company that’s asked what value an offering is creating and acted upon what it learned. On taking a serious look at where its offerings were creating value, BOC executives discovered that the value of the company’s products depended on the particular set of customers they were trying to reach.

This led BOC to develop a deeper understanding of how the needs of its “service buyers” segment differed from other groups. By serving the needs of those specific service buyers in a different way than their market at large, BOC was able to target this more stable, higher-growth segment more effectively, which in turn led to a higher market share and better customer retention.

BOC’s situation is not unique. In most companies, 80 percent of what the business offers is stable, transferable across product lines or service segments. Only 20 percent requires some sort of tailoring to meet customer demand. Yet unlike BOC, most companies try to run all products and services through a single set of operations, built – and frequently jury-rigged – to serve the needs of the most complex offering the firm delivers. In businesses we have studied, this can lead to a tripling of the cost base.

2. What added complexity and costs would this change create?

As more complexity is introduced, overhead can easily grow and take on a life of its own.

Take, for example, the case of Boeing. Although two-third of the parts, build-processes and resource requirements almost never changed, a narrow cost-focus in its procurement arm led to a constant round of rebidding that actually added costs to its supply chain. Suppliers added staff – from engineers to tool-and-die craftsmen – to prepare new bids based on ever new round of specs. By limiting the areas that could be configured by the client to a few easier-to-manage choices, Boeing reduced its costs by more than 30 percent.

The costs of complexity often go unseen in part because they fall through the cracks between functional silos as they did at Boeing. Often, the problem comes down to a myopic focus on a single metric at the expense of the overall health of the business. At Boeing, for instance, the procurement officers who were energetically trimming part and component costs didn’t realize that they were adding to the overall cost structure of the extended enterprise.

Of course, the costs of complexity need to be monitored on an ongoing basis as well as analyzed at the start of a project. The CIO, as the keeper of the informational keys in most firms, is often very well positioned to help determine which metrics are monitored after a new product or service is added. Since the metrics will shape future debates on the value of the new product or service, choosing the right one is imperative. The particulars will vary by industry, of course, but we find that in general it pays to find measures that encompass the entire cost structure, not just one element of the cost.

3. How could we design a more modular approach to our business in a way that adds stability to the whole enterprise?

By working across functions with the chief marketing officer, the head of sales, and the head of operations, the CIO should also ask this more open-ended question about how processes might be improved.

Bank of America’s Global Treasury Group, a $4 billion business unit that provides cash management services to institutional clients, is one business that’s learned the value of such a question. At BofA, processes designed to meet the most complex customer needs were being used to serve all clients, driving an upward spiral in the average cost to serve and reducing the company’s ability to provide truly distinctive service to its most attractive customers.

In the past, multiple sources of complexity had impeded efforts to improve efficiency. Although it was delivering what was in essence a financial service commodity, cash management, the unit included more than 50 IT systems, several business owners across the organization, and operations in 20 countries. Processes and capabilities had been designed to meet the most complex needs of customers. As a result, the most sophisticated business processes and resources were utilized for all customers, no matter how simple their needs.

To address this challenge, the bank redesigned its delivery around three distinct business streams: self-service, standard and consultative. Under the new approach, the majority of customers flowed through the lower-cost, self-service stream. The most complex consultative business stream was reserved for customers who valued that additional service.

With this structure in place, customer care costs fell by 20 percent, even as overall service levels increased. All customers receive faster response times. The self-service and standardized business streams eliminated previous bottlenecks in access to specialized help desks. And the 5% of customers who needed more consultative services got what they needed.

Asking such tough questions isn’t always easy. And in the short run, it sometimes won’t be popular. But by focusing the discussion on this vital issue early on in the discussion, CIOs can help build a more profitable, higher growth company.