MIT Sloan Executive Education Blog

Three ways to profit from business complexity

Business complexity is usually seen as an obstacle to increased profit margins. A publication of The Global Simplicity Index revealed that complexity is costing 200 of the biggest companies in the world 10.2% of their annual profits—which, collectively, totals over $237 billion. But other recent studies show there is a profitable flipside to business complexity—a relatively unexplored area of opportunity hiding in plain site. For some companies, managing business complexity can be a unique opportunity to grow their market share.

Not All Complexity in Business is Value Destroying

According to Martin Mocker, Research Scientist at MIT’s Sloan Center for Information Systems Research (CISR), not all complexity in business is value destroying. In fact, in some instances business complexity can be value-adding, offering companies an opportunity to grow their market share. The key, says Mocker, is to focus on complexity that delivers “variety seeking, one-stop-shopping, customization, or seamless integration.” Finding balance, “keeping the complexity of their processes and systems—both internal and customer-facing—under control,” is the way to manage business complexity toward a profitable advantage.

In a survey of 58 companies, Mocker and Jeanne Ross, Director and Principal Research Scientist at CISR, found that those companies that are able to create value from product complexity while maintaining simple processes were outperforming others. In the study, ING Direct Spain and USAA were two of several companies excelling in the area of managing their business complexity to grow their market share and more value for their customers.

ING Direct Spain built a business focused on savings but has, over time, increased its product and channel variety and has managed to become Spain’s primary bank of choice. The former pure savings player has increased its product portfolio to include payment accounts, credit cards, investment funds, pension plans, brokerage services, mortgages, personal loans, life insurance, and savings accounts. At the same time, ING Direct Spain expanded their operations nationwide. As a result, their profits have grown 28% per year between 2003 and 2011.

USAA is another example of a company that has managed to increase business complexity in ways that offer their customers more value. USAA has expanded from its humble beginnings as a singular auto service provider to now offering over one hundred P&C insurance, banking, life insurance, and investment management products. While increasing both variety and new service offerings, they have grown their Net Promoter Scores (customer loyalty metric) to rank higher than those of Amazon and Apple. Instead of losing money as a result of increased complexity, USAA continues to lead its competitors by a profit margin of 13.7% with a net income that has grown 4% since 2010.

Companies Creating Value and Managing Complexity

Both USAA and ING Direct Spain excel in finding the balance between increasing business complexity to add customer value and decreasing inefficiency in company processes. Here are three ways to achieve that balance:

1. Break the separation between those dealing with product complexity and those dealing with process complexity. In many organizations, the groups focusing on the benefits of adding variety and connectedness are often different and separate from those exposed to internal processes. Increasing communications between both camps will ensure that people who are dealing with the process complexity can provide pushback as well as insight into designing services or products in ways that avoid adding excessive difficulty and costly inefficiency to processes and systems.

2. Design processes and systems to cushion internal impacts of complexity. A number of companies are employing ways to dampen the process impact of adding variety or connectedness to their products. For example, DBS Bank, headquartered in Singapore and with over 200 locations throughout Asia, wanted to offer its customers gold bonds via ATMs, a product unique to a few Asian countries such as Taiwan. DBS could have allowed Taiwan to design its own gold bond feature and thus add another silo (a source of inefficiency), but a proliferation of unique products would soon increase the number of silos and hence the difficulty of processes. Instead, DBS decided to support this unique product as part of its ATM platform. All of the company’s ATMs use the same global platform, but each country can switch different products on or off.

3. Offer customers ways to deal with increased complexity. Giving customers options allows them to find a way to use new products or services without increasing the difficulty on their end. For example: categorize options, sequence options from low to high, and/or develop a way to help customers navigate the increase in product or service offerings. In Australia, Woolworth’s App allows customers to navigate the enormous amount of SKUs they have in their supermarkets, allowing customers to search for items on their list and minimize the time spent wandering aisles. It also helps customers compare prices and spot deals via real-time price changes—something shoppers without the app cannot accomplish unless they spend excess hours in the store.

Martin Mocker teaches in the Essential IT for Non-IT Executives and Revitalizing Your Digital Business Model programs at MIT Sloan Executive Education.