As businesses grow and diversify, they almost inevitably make their range of offerings more complex. Complexity brings costs — but smart use of today’s digital technologies can help companies finesse the trade-offs between complexity’s costs and benefits.
Imagine a retailer that has 10 million products and hundreds of variations for each product yet keeps it simple for customers to make a choice. Impossible? Not today. Amazon.com Inc. creates value from its product complexity with simple customer-facing processes, such as search, ratings, reviews and suggestions. Now imagine a diversified high-tech company with locally differentiated products in 60 categories in more than 100 different countries. A mess of internal processes and systems? Not necessarily. Royal Philips creates value by providing locally relevant products to different markets, while keeping the vast majority of its processes standardized on digitized platforms.
Until now, managing business complexity has usually involved a trade-off. This trade-off forced companies to compromise between creating value from complexity and benefiting from the efficiencies of simplicity. As businesses entered new geographies, developed new products, opened new channels and added more granular customer segments, they made their offerings more complex with the intention of adding value. But, as an almost inevitable consequence, companies also made it more difficult for customers to interact with the company and more unwieldy for employees to get things done.
However, with today’s increased digitization,1 companies can finesse this trade-off; they can increase value-adding complexity in their product offerings while keeping processes for customers and employees simple. Our research suggests that companies operating in this “complexity sweet spot” outperform their competitors on profitability. (See “About the Research.”) In this article, we explain how companies achieve this breakthrough in the digital world.
Why Companies Continue to Add Complexity
We define business complexity as the amount of variety and links in your company.2 Variety is the difference in one or more important characteristics, and links are connections or dependencies.
Complexity can show up in many parts of a company: its product and service offerings, its organizational structure and processes, or the environment it faces.3 We found that product and service complexity and the business process aspect of organizational complexity have the biggest impacts on achieving top performance.
Complexity can be good or bad.4 Frans van Houten, CEO and chairman of Royal Philips, calls this “rewarding” vs. “unrewarded” complexity, and Werner Zippold, former COO of ING Direct Spain, describes it as “value-adding” vs. “non-value-adding” complexity.
Because product variety and links are an opportunity to add value, most companies continue to add product complexity. Once merely a bookseller, Amazon now offers more than 10 million different products in categories ranging from music to auto parts, providing what it calls “Earth’s biggest selection” in an “Everything Store.” For almost any product, customers can choose between dozens, if not hundreds, of alternatives from different suppliers.
Once offering just savings accounts, ING Direct has deliberately grown its product and service complexity,5 increasing its product portfolio to also include payment accounts, credit cards, investment funds, pension plans, brokerage services, mortgages, personal loans and life insurance. ING Direct has also shifted from operating exclusively through phone and Internet channels to opening about 30 branch offices across Spain, with the goal of becoming a full-service bank. This growth in product variety has allowed customers to use ING Direct Spain as their primary bank. Today, more than half of ING Direct Spain’s 2.4 million customers use multiple ING Direct Spain products. The lifetime value of the average customer using more than one product is nine times that of those with only a savings account. As a result, the bank’s profits grew 28% per year between 2003 and 2011, while the customer base grew at a 16% compound annual rate.
Addressing local needs also adds complexity. Instead of selling globally standardized products around the world, Royal Philips develops locally relevant offerings, such as shaving products addressing the specific facial hair needs of different regions.6 “We are not shipping the same devices worldwide; our products reflect the specific needs of each market,” says Jeroen Tas, former Philips CIO and now CEO of Philips Healthcare Informatics Solutions and Services.
The Complexity Compromise
Traditionally, companies trying to add value by increasing variety and links in their product and service offerings almost inevitably have also added value-destroying complexity in their processes. On the customer side, increased product variety and links can make it more difficult for customers to choose. For example, in one research experiment, people who had to choose between 24 different types of jams were less likely to make a purchase than those who only had to choose between six varieties — although the table with 24 varieties attracted more people.7
In addition, internal process complexity often grows with increased product complexity. While confused customers can hurt revenues, difficult internal processes add costs. For example, when introducing new products, Royal Philips in the past allowed every product manager to create his or her own processes, diluting the bottom line benefits. “We have hundreds of product managers,” van Houten said. “I cannot allow hundreds of product managers to invent their own process. It’s unrewarded complexity when everybody invents their own process, as it hampers cross-learning and efficiency.
A complex process overwhelms customers and employees, making them contact multiple people, enter data multiple times, log into different systems or contact different call centers for different products from the same company. Customers perceive companies with complex processes as difficult to deal with and may spread the word on social media.8 Employees find it difficult to get things done and create work-arounds that can undermine a company’s risk management or data quality.
The net impact of a company’s “good” product complexity and “bad” process complexity determines whether adding complexity pays off or not. Consequently, mastering complexity before the era of ubiquitous digitization meant finding the point where the right amount of product variety and links still allowed customers and employees to cope with the process complexity.9 Finding this point, of course, is challenging, as complexity is not easy to measure, and customers’ reactions only surfaced after the fact.10
Ubiquitous digitization changes the calculation: It allows companies to create more value for customers by increasing product variety and links — but without adding complexity on the process side. Companies that achieve both increased product variety and process simplicity operate at their complexity sweet spot.
Decoupling Product and Process Complexity
To find their complexity sweet spot, companies need to get value from product complexity without confusing customers or making it too difficult for employees to get things done. How can companies find the sweet spot if good and bad complexity are linked? Top-performing companies use digitization to help maximize good complexity and minimize bad complexity by decoupling product and process complexity. (See “How Digitization Helps Master Complexity.”)
How Digitization Helps Master Complexity
Digitization helps with complexity management by effectively delivering on a customer promise of simple but tailored engagement. At the same time, digitization helps internal process simplification despite growing product variety and links. Digitization effectively facilitates the decoupling of product and process complexity, allowing top-performing companies to both delight customers and streamline internal operations. While achieving the same result without significant digitization is possible in principle in smaller companies, it used to be close to impossible in large companies.
How Digitization Helps Simplify the Customer Experience
How does Amazon make it simple to navigate its store, with 10 million products in various categories, when customers get overwhelmed by a mere 24 jam choices in grocery stores? The answer is that the digital world offers tools that simplify and narrow the decision-making process. Using search, recommendations, customer reviews, seller ratings and other mechanisms, Amazon has so far been able to provide simple customer-facing processes despite its product complexity. Searching in the physical world is much more complicated. For example, where does a customer find organic cookies — in the organic aisle of a supermarket or in the cookies aisle?
Hipmunk, Inc., a travel website based in San Francisco, California, is another example of a company that uses digitization to simplify the customer experience. By creatively sorting flights (Hipmunk’s “agony” rating is based on a combination of price, duration and number of stopovers), adding visualization and limiting options that are less likely to be chosen (such as a flight with the same price but more stopovers), Hipmunk offers customers a simplified way to make a selection.11
USAA, a provider of financial products and services based in San Antonio, Texas, has taken the approach of getting value from complex products while simplifying customers’ lives a step further. Since its founding in 1922, USAA has grown its product offerings from just auto insurance to more than 100 property and casualty insurance, banking, life insurance and investment management products.12 More recently, to better meet customer needs, USAA added links between different products to address life events such as buying a house, getting married or dealing with the aftermath of a hurricane. Each life event involves a bundle of linked products such as loans, investments and insurance.
One of the company’s first multiproduct solutions, Auto Circle, targeted the car-buying life event. Previously, customers had to visit different car dealers to get prices, compare those prices and negotiate a purchase, contact the USAA bank for a loan and then ask USAA property and casualty insurance for a quote. The new integrated one-stop-shopping experience guides members through a process to select, buy (at prenegotiated and attractive prices), finance and insure a car in one seamless process. Customers can perform all steps with an easy-to-use app on a mobile device or via USAA’s website.
USAA’s customers love these seamlessly integrated solutions. USAA’s outstanding Net Promoter Scores are the highest in financial services, but they’ve also been the highest across all U.S. consumer industries for the last five years — higher than those of Amazon or Apple.13 For USAA, increasing product complexity (variety and links) has paid off; in addition to its great customer satisfaction ratings, USAA has a profit margin that is well above the average for its industry.14 USAA has found its complexity sweet spot by reframing product complexity around life events.
How Digitization Helps Keep Internal Processes Simple
Adding new products is relatively easy; keeping internal processes manageable is much harder. In the physical world, product platforms, such as those for cars, reuse common physical parts.15 The digital equivalent of product platforms is digitized process platforms: coherent sets of standardized processes supported by standardized applications, data and technology.16
For example, Singapore-based DBS Bank Ltd. uses a digitized process platform to increase valuable local product variety in 15 countries without creating process complexity.17 DBS offers gold bonds — a product popular in a few Asian countries, such as Taiwan — via its digitized ATM platform. DBS could have allowed Taiwan to design its own gold-bond feature and, with that, its own systems and processes for handling gold bonds. But a proliferation of process variation and system silos would ultimately increase process and systems complexity. Instead, DBS decided to support local products as part of its global ATM platform. All countries use the same ATM platform, but each country can switch different products on or off. This way, DBS gets the value from product complexity, but without a significant increase in process complexity.
Similarly, to standardize idea-to-market, market-to-order and order-to-cash processes globally, Royal Philips uses and reuses digitized platforms. If designed in a modular and reusable way, digitized process platforms can help companies decouple valuable product complexity from value-destroying complexity in processes and systems.
Finding Your Complexity Sweet Spot
As anyone who has had a frustrating experience as an online customer knows, digitization is not an automatic solution for mastering complexity. One of the authors of this article had a recent experience trying to shop for a new mobile phone plan online that was tortuous. In a single plan, one large U.S.-based telecommunications company offered 24 different data features (per-use payment vs. different volume packages, each package for non-smartphones vs. iPhones vs. “other” smartphones supporting 3G, 4G or 4G LTE technologies) and a plethora of GPS, insurance, live TV, messaging, voice mail, sharing, push-to-talk, roadside assistance and “additional” features. Some of these could be combined, others could not, making it difficult — no, impossible — to compose the ideal configuration. The problem, however, was not due to too much product complexity; the company failed to simplify the process of guiding customers through the choices.
By looking at product and process complexity simultaneously, companies can find their complexity sweet spot. In our research, we found that companies capturing value from product complexity while maintaining simple processes outperform their competitors. (See “Finding Profits in the Complexity Sweet Spot.”) Companies that had found this complexity sweet spot had three-year average profit margins 6.3 percentage points above the average for their industry.18
Finding Profits in the Complexity Sweet Spot
Companies not able to keep processes simple while growing product complexity (the upper left quadrant in the exhibit) suffer from higher cost or lose on the customer side by offering cumbersome access to their products and services. The result is profitability 1.9 percentage points below the average for their industry. It is also insufficient for companies to focus on keeping processes simple if they do not offer customers the product variety and links that add value (the lower right quadrant in the exhibit). The worst case — where 23% of the companies operate — is offering low-value product complexity and little process simplification. Essentially, these companies aren’t meeting customer needs, make hard work of their operations and have profitability 3.5 percentage points below the average for their industry (the lower left quadrant in the exhibit).
In our research, we repeatedly found two predictors of success. First, transforming a company to reach its complexity sweet spot requires a vision of where the company wants to be in terms of product offerings and customer and employee experience. What kind of improvement is being sought: Is it a step change in customer satisfaction, cost reduction or some other goal? Second, what are the simple metrics that the whole company can go after? For example, in leading the transformation of the Commonwealth Bank of Australia, headquartered in Sydney, now-retired CEO Ralph Norris and his team targeted the dual goals of being No. 1 in customer experience in Australia and having a cost-to-income ratio below 40%. CBA has achieved these goals to become a top 10 global bank in terms of shareholder return.19
With a clear vision and a simple set of metrics identified, we suggest companies seeking their complexity sweet spot consider the following steps:
1. Assess your company’s current complexity position. The first step is to determine where your company is now on product complexity and process simplification. The best place to start is by assessing your customers’ needs against your product and service offerings. Are your key customers satisfied with your level of product variety and linking? To find the answer, we suggest asking three questions:
- Do your best customers buy from companies similar to yours? Why?
- Is your customer satisfaction rating (such as a Net Promoter Score or similar measure) lower than those of competitors that offer more product variety and linking?
- Is there work your customers do that you could do for them? For example, the USAA service to purchase a car includes negotiating with the car dealer for the best price.
If the answer to any of these three questions is a strong yes, then there is an opportunity to create more value for customers by adding more product variety and linking. Virtually every company and individual customer today wants to feel special and receive a customized set of offerings. Digitization makes this more and more possible. For example, one of the most popular ways to use USAA’s Auto Circle is on a tablet — and the resulting multiproduct offers are targeted to the customer’s requirements. Furthermore, in a digital world, companies can cater to the “long tail” and meet the specialized desires of virtually any customer.20 Does that mean every increase in product complexity is good? Of course not. Many companies have a lot of “deadwood” products that do not add value.21 But, with effective use of digitization, there’s also no defined limit to how much product complexity a company should have.
To assess your internal process simplification, several classic measures help, including business process cost and the time and variance for core processes. How long does it take your company to get from order to cash? Or to provide a proposal for a new data center for a business-to-business client? And what does that cost you? How much does the way a process is performed depend on who does it? That is, how many different ways are there for getting the same thing done in your company?
To assess customer-facing processes, executives need to find ways to amplify the voices of their customers inside the company. Customer Effort Scores, for example, ask customers to rate “How much effort did you personally have to put forth to handle your request?” on a scale from 1 to 5.22 Companies with simple customer-facing processes like USAA and ING Direct Spain take customer satisfaction scores seriously and score well on metrics like Net Promoter Score. Other companies go even further to understand the complexity their customers face. Legal-information provider LexisNexis employs anthropologists to observe and interview customers to understand the most frustrating parts of their work. They then use that information to create solutions.23 The digital world gives customers more room to make their voices heard — just take a look at TripAdvisor or Yelp. But it also enhances companies’ abilities to understand their customers by observing actual behavior online.
2. Choose a path to the sweet spot. The journey toward the complexity sweet spot depends on where your company is today. There are three different approaches companies can take. (See “Three Paths to the Complexity Sweet Spot.”) Royal Philips is moving to the right (more process simplification) by reducing process variance and cost (arrow A). ING Direct Spain is evolving from a one-product company with very low product complexity to a full-service bank (arrow B). Some companies are “zigzagging” to their complexity sweet spot (arrow C).
Three Paths to the Complexity Sweet Spot
Zigzagging has the advantage of avoiding the high risk of “big bang” change projects. Instead, a company makes a series of incremental improvements, first on one dimension and then on another, creating continuous organizational learning. For example, when USAA introduced its first integrated life-event product offerings (increasing product complexity), more and more decisions were made by the company’s executive committee, as the decisions affected multiple product lines. The committee was meeting multiple times each week. To make life simpler and faster for decision makers (moving toward process simplification), cross-functional governance structures were developed to make joint decisions. This moved decision making to lower staff levels, enabling more rapid decisions and fostering learning about how to improve the customer experience enterprisewide. Using this learning, USAA was then ready to introduce more life events. In general, digitization enables quick learning from customers’ behavior using techniques like A/B testing, which involves having subsets of customers use competing versions of a process and then rolling out the more effective one.
3. Increase the value from product complexity (if starting at points B or C). Product variety and links can add value by enabling choice (Amazon), one-stop shopping (ING Direct’s full-service bank approach), customization (Philips’s locally relevant products) or integrated solutions (USAA’s life events). Listening to customers helps companies determine which complexity adds value. The challenge quickly becomes how to improve the customer experience while adding product variety and links.
Despite significantly increasing product complexity, ING Direct Spain has managed to keep customers happy. It has been the most recommended bank in Spain for four consecutive years.24 ING Direct Spain achieved this with an “obsession for customer experience” and allowing only complexity that adds value. For example, the bank identified the hassle in the account-opening process as one of the barriers to having clients switch their bank account to ING Direct. Driven by its goal of providing a simple customer experience, the bank reduced the number of mailings required to open a checking account, first to two and later — after encouragement from the organization’s CEO — to one.
In many companies, groups focusing on adding product variety and links (such as marketing and product management) are often separate from those managing internal processes (such as operations and IT) and customer-facing processes (such as customer service and sales). ING Direct Spain brought these groups together early in cross-functional teams and decision-making councils, helping to identify the impacts that adding product complexity has on processes.25 When thinking about a new product, one of the first conversations the product management team must have is with the operations and IT groups to discuss implications on processes and systems.
4. Work toward more process simplification (if starting at points A or C). Companies achieve process simplification in two ways: by reducing process complexity or by building tools, roles and other mechanisms that help make a complex process easier to execute for employees and customers. To reduce complexity in processes, efforts like “lean” and “Six Sigma” work, but they are big commitments. To succeed, those initiatives have to be driven from the top down and involve changing the culture and creating the kind of digitized platforms discussed above. In 2007, Bayer MaterialScience — the 10 billion Bayer AG subsidiary that developed the FIFA World Cup Soccer ball — had countless variations in its key business processes, including order-to-cash, demand-to-supply, purchase-to-pay and maintain-to-settle. Over time, BMS’s 30 production sites developed their own process variants, whether for perceived or real differences in customer needs and legal requirements. The opportunity cost of having this process variety was calculated as 50 million per year. BMS initiated “Program One” to reduce complexity with global process standards. Instead of trying to convince every country manager of the benefits of global process standards, Program One reversed the burden of proof so that all process deviations were considered non-value-adding unless proven otherwise through business cases. BMS thus reduced the number of process variants from thousands to 400, all supported by a single digitized process platform.26
Maintaining process standards in the long run is a balancing act between tight governance of the standard and allowing exceptions to the standard to promote innovation. International express-mail service DHL Express makes all investments of more than 5,000 go through a multistep change request process to protect its process and systems standard from creeping complexity. Change requesters have to convince executives on local, regional and global levels that either an exception should be granted or a change should be rolled out globally and become part of the standard. Exceptions are granted for only one year and then reviewed again.27
Though reducing process complexity sounds like a good idea, it can be politically difficult and is not always feasible. There are situations in which increased process complexity is a necessary consequence of increased product complexity, at least temporarily. But great companies don’t leave employees to their own devices on this front. When USAA introduced life events and service representatives had to give integrated advice on multiple products, the company cross-trained employees, coached them continuously on how to do their jobs better and supported them with integrated information systems. While process complexity was not reduced, USAA helped make it easier for employees to perform more complex processes.
The Leadership Challenge
Who should lead the company to its complexity sweet spot? As business complexity is a cross-company issue, no individual business unit leader can typically be in charge. Looking at corporate-level leadership, the CFO would be a natural fit if complexity management was mostly about cost reduction. The COO knows the internal process simplification needs of the company but doesn’t typically have a say on products. With the CMO (or the head of innovation), it is the other way around. The CIO often owns neither processes nor products but is especially attuned to a company’s complexity as it is layered into IT systems year after year. CIOs are also at the heart of the digitization that helps to rethink complexity management. The CEO sits across both product and process but is often too busy. So what about making a group of people responsible for managing complexity, especially as it’s a companywide issue? The executive committee comes to mind, but it’s also hard to get a larger group like this to be accountable for both changing and running the company.
The companies we studied chose various approaches. At ING Direct Spain, the COO is driving maximizing value from complexity, together with the CIO and in collaboration with the head of products. Royal Philips has created and redesigned its executive committee to deal with rewarding versus unrewarded complexity. USAA has distributed the accountability on making decisions related to life events away from the executive committee to several governance forums that bring together product line and customer experience leaders. Whoever is leading a company’s search for the complexity sweet spot needs to lead a cultural change to embed complexity management into the company’s DNA — after first creating the vision and the simple set of metrics. The good news is that there are almost always quick wins, and the rewards are, well, sweet.