Just before the Global Financial Crisis hit, there
was a number of high profile businesses that were making very high
profits. Then, seemingly in the blink of an eye, these businesses had
failed – for some reason their wheels had fallen off.
How could companies that were making so much money one minute be ruined in the next? Clearly they were very fragile in some way.
If you remember the stories in the press, it seems that many of these
companies were either selling complex products or they had complex
structures, or both.
So, does complexity in business contribute to fragility in the face of
surprising and extreme events such as economic changes and natural
disasters?
Could it be that there is a necessary level of robustness or resilience
in a business that gives it a good chance of overcoming the fallout from
these sorts of events? If so, how would you measure the level of
robustness or fragility of your business?
A fairly simple way is to ask your people how robust or fragile things
are in the way they deal with your customers every day? They’ll be
getting the feedback from your customers about any problems or
opportunities to improve. They’ll also be hearing the comments from your
staff about their reactions to the customer feedback. This is a
structured, qualitative approach, but we’ve found it to be very useful
over 15 years in finding how well your systems hang together when they
come under stress.
Another way is to calculate (or estimate) the net profit that comes from
each customer over a period of time, say three months or even a year.
Analysis of most businesses reveal that the top 20-30% of their
customers deliver 120-150% of the profits while the bottom 20-30% of
customers actually take away all this extra profit. We’ve noticed over
the years that the causes of this severe loss of profits by the bottom
range of customers lie mainly in the complications of dealing with
difficult customers, the product range being too broad and therefore
costly to manage, or the fact that the internal systems are too complex
for people to do good work easily. So analyzing which customers (or
customer groups) are being serviced at a loss will help you locate where
your business is fragile.
There’s a simple way to check if complexity is making it hard for people
in a business to do good work – this is to track the trends in the
ratio of Total Revenue / Total Wages paid. If everything is working well
and employees are getting better at what they do through better
training, systems, amenities and marketing, then as each year goes by,
the total sales output per unit of wages paid should increase slightly.
If this ratio is flat or decreasing, it means that something is getting
in the way of good work. This something is generally unnecessary
complexity within the business.
A fourth way is to calculate the Complexity Factor developed by John
Mariotti and described in his book The Complexity Crisis (Adams Media
2008). This factor comprises input such as the number of products,
customers, market segments, suppliers and staff, the different legal
entities and main sites of the business. It calculates a factor that
describes the level of complexity and hence the level of danger to the
business. Mariotti’s formula reflects the added risk, complexity and
fragility caused by a proliferation of legal entities (doing business in
many countries) and entering many different market segments in the
search for revenue growth.
Finally, the European company Ontonix Complexity Management has
developed an elegant way to compare the relationships between different
financial, production and economic variables that describe the
performance of a business.
The input to this analysis is a spreadsheet of the value of variables
such as sales, profits, product numbers, customer numbers, various
costs, assets and liabilities, stock levels, employee numbers etc. They
don’t have to be the same variables for each business, nor in any
particular order – they just have to be complete and placed into rows of
a spreadsheet that represent different historical times such as days,
weeks, months, quarters or years.
This Ontonix Self-Rating analysis allows you to calculate the level of
complexity in your business based on the data you have input. Naturally,
the more data you put in to the spreadsheet (eg the longer the history
of the variables), the more accurate your complexity measurement
becomes.
The complexity level is then translated to a Robustness Rating for the
business. This is done via a Star Rating – 5 Stars is very robust while 1
Star means it’s very fragile and may react badly to an external or
internal change event or crisis.
Finally, the service delivers you a report that shows how much each of
your business variables contributes to the overall complexity of your
organization. Some complexity is necessary in any business, but too much
complexity is a bad omen.
The diagram below comes from a report for a public financial
institution. You’ll see that the majority of the complexity of this
business resides in a number of variables at the top of the diagram.
This is a huge benefit because it guides you to where to start to change
your business to make it more robust, profitable and sustainable. And
this is where the Simpler Business Institute comes in – we have more
than 20 years experience in removing unnecessary complexity and
simplifying business to increase performance, profits and
sustainability.
The Simpler Business Institute has worked with both Ontonix and John
Mariotti to offer a world-first service of measuring, diagnosing and
treating costly complexity in business. Ontonix provides the ability to
measure the complexity of any system (eg a business). John Mariotti can
interpret the impact on a business of complexity as defined by his
Complexity Factor. The Simpler Business Institute gives guidance on how
to treat the profit-sucking complexity.
The small relative cost of the Ontonix self-rating diagnosis offers huge
value in understanding your business in a way you’ve never known
before.
To access the Self-Rating service, go to www.simplerbusiness.com and
click on the Rate-a-Business logo on the top right. You’ll then access
the service, download a free white paper and example reports and be on
the way to knowing how robust or fragile your business really is in the
face of the types of change we are seeing in business these days.
Applying the Ontonix techniques to businesses in the same sector, we
start to see benchmark data supporting the argument that the higher the
complexity, the lower the profitability. We’ve thought this for years
and now we’re getting the proof.
Complexity analysis is part of the business education and coaching
services offered by the Simpler Business Institute, so take the
opportunity soon to attend one of our seminars or request some help by
contacting us directly at info@simplerbusiness.com
Simply does it!
Posted by Ian Dover - Simpler Business Institute. 
