Manage complexity and add 5% to earnings! OK, so don’t take my word for it…
Tuesday, 29 June, 2010 Leave a comment
…80 year old Global Consultancy firm AT Kearney (ATK) say so. ATK appear to have a better understanding of complexity than most. So, I will happily let them tell you that, even by using the methodology they outline below, they claim that managing complexity will add up to 5% to earnings.
I hope that’s got your attention!? Because it gets even better.
WE BELIEVE THEM but can’t help but wonder how much more could be achieved if their means of calculation didn’t sound like a question for contestants in a Mensa “Brain of the Year” IQ competition! The process sounds pretty daunting and has all the potential to be a source of complexity in itself.
What they need is a means to measure complexity utilising the type of data that any well-run corporation collate as a matter of course. So that the measurement and management of complexity is an ongoing process NOT one of the jobs that the CFO or his/her staff dread.
There is only one company that can deliver that type of capability.
If ATK have such confidence in adding (up to) 5% to earnings as a result of a protracted, consultative, (qualitative/subjective) process – where the “observer”, inevitably, affects outcomes – imagine what could be achieved by undertaking a 100% quantitative (objective) assessment, using data currently generated by the enterprise!
“Risk Leaders” are those who recognise the competitive advantage to be gained by managing complexity: in existing operations (improving operational effectiveness); asset management; designing new processes; mapping & monitoring interdependencies; creating new products; internal risk and credit management; IT systems management; assessing Mergers & Acquisitions; managing supply chain risks, etc.
In short we believe that they are only scratching the surface of the many merits of measuring and managing system complexity. But we aren’t salesmen so will, gladly, let them make the case for what we (ontonix) do. Let’s face it, when it comes to sales and marketing, THEIR message about what we do is always going to carry so much more weight than anything we could produce (no doubt at enormous expense!). And if you don’t want to rely solely upon what AT Kearney say about “our chosen specialised subject” feel free to check out some of the other high profile firms and individuals referenced in previous blog items. There is plenty of “good reading” there. Honest.
Recognize the Relationship between Complexity and Costs
An A.T. Kearney analysis reveals that many companies fail to understand the relationship between complexity and costs. The reason is that these connections often get lost in isolated, silo-like departments and IT structures. It becomes nearly impossible to analyze the information flowing across a company’s value chain…
Understand Real Profitability and Strategic Value
The real cost of complexity can be construed through a pragmatic, activity-based cost calculation. Typically, this requires formulating a contribution margin statement for each product and using it as a control variable. This can be a difficult process, as companies often incorrectly assess their products’ profitability margins—for example when key costs (in sales and R&D) are not available for a product or product cluster, or when these are allocated incorrectly due to an inappropriate cost key.
Keep in mind that a product’s contribution margin isn’t defined in terms of profitability alone. It is just as important to consider the strategic causes that sometimes justify complexity. These include new products that haven’t yet delivered the necessary contribution margin, the targeted increase of a company’s market share through aggressive pricing, and specific innovative offers leveraged primarily for strategic positioning. In addition, the strategic value of products should also be taken into account. Here, numerous key factors need to be considered, such as technology substitution options, customer loyalty, market size, share and growth.
Once a company has assigned values to its products’ contribution margins, it can use a strategic value and real profitability matrix to analyze the importance of all its portfolio components—such as product groups, technologies and brands
- Updated – Reveal Your Hidden Profits: Looking at complexity in business? (fitforrandomness.wordpress.com)
- Harvard Business Review: Complex Risk Management (fitforrandomness.wordpress.com)
- Complexity lessons from nature for a better economic future… (fitforrandomness.wordpress.com)