Cross-posted from Harvard Business Review
The ideas discussed in this post (along with those from the book Simply Effective) were covered in a free webinar that took place on Wednesday, March 2.
Managing complexity has always been part of the leader's job -- be it sorting out the variables involved in strategic decisions, orchestrating the interaction of different functions or responding to unanticipated events. But today, coping with complexity is an even bigger part of the manager's responsibilities. In fact, a 2010 study of over 1,500 chief executive officers by IBM's Institute for Business Value identified "the rapid escalation of complexity" as the number one challenge facing CEOs. Furthermore, while 80% of those interviewed predicted even greater complexity ahead, less than 50% felt adequately prepared to deal with it.
It's certainly not surprising that senior executives would worry about increasing complexity. The financial crisis has made them well aware that businesses are globally intertwined. They've learned how quickly problems in one sector (e.g., housing) can affect other industries and spark a worldwide contagion. More recently, senior executives have seen how unanticipated events can rapidly spin out of control and threaten even the very best companies' reputations, if not their survival. Just over the past year or so, we've seen formerly "best in class" companies like Goldman Sachs, Toyota, BP and Johnson & Johnson take huge hits to their reputations (and balance sheets) in ways that no one could have predicted. So if world-class organizations are facing the consequences of complexity, what could be in store for the rest of us?
This kind of thinking (and worrying) has the potential to let managers off the hook. If your assumption is that complexity comes largely from external factors like globalization and unexpected crises, then your only recourse is to be reactive. And when eventually things don't go well, pegging the blame on complexity -- although convenient -- is a high-level form of victim mentality.
On the other hand if you acknowledge that some amount of complexity is self-generated -- in the way that we structure and manage our organizations -- then you can take action.
The reality is that high degrees of internal complexity significantly reduce an organization's ability to respond effectively to complex, unanticipated events. In the wake of its recalls, Toyota found that its highly centralized, engineering-centric communication structure slowed down its ability to understand early warning signals about quality. The company also learned that its complex pattern of comprehensive data collection and analysis prevented it from taking faster action on recalls. Similarly, BP's response to the massive Gulf oil spill was clearly slowed down by its inability to easily coordinate the different businesses and functions involved in the crisis. You could also argue that J&J's manufacturing problems can be traced partially to a fragmented organizational structure with diffuse accountability for quality and customer communication.
There is no question that the interconnected business environment will bring unanticipated challenges to companies everywhere. In order to deal with these realities, managers may need to start embracing complexity instead of worrying about it. As the IBM study showed, "standout" companies (those who consistently improve operating margins) seem to be those that build "operating dexterity" and "reinvent customer relationships" without waiting for a crisis. In other words one of the ways that they deal with external complexity is to continually reduce their degree of internal complexity -- which allows them to respond to unanticipated events more quickly and creatively.
Every manager has the ability to reduce complexity -- from the CEO on down. The starting point is to realize that this is an important part of the job and not just an occasional campaign. In today's environment, every manager needs to be a chief complexity-reduction officer. Are you?