The Hidden Costs of Complexity

Business complexity has a number of costs that tend not to be visible or properly accounted for in much decision making. This is particularly the case where there are excessive numbers of administration systems.

The complexity I’m referring to often results from a proliferation of legacy products as new products replace them for new customers, but the existing customers remain on the older products. This usually seems to be a sensible strategy at the time as no upgrade or migration program is required and the new product gets on the market earlier. The costs of this strategy can gradually accumulate over time.

Examples of these costs include:

• Interfaces and project costs:  Many other projects have to build interfaces into these old systems, which increases these project costs. This means that the project funding pool supports fewer projects and also each project has to meet a higher threshold to be justified. As project costs tend not to be included in the base level of expenses, this cost is not visible and there is little incentive to manage it.

• Option costs: Due to the increased difficulty and complexity of doing things, actions may be considered that are unable to be implemented in a timely or cost effective manner due to the underlying business complexity. This might mean that market opportunities are not exploited; first mover advantages are foregone and such.

• Training costs: The more systems and products, the more training is needed for staff.

• Lack of flexibility: In customer service, for example, because of knowledge limitations staff rosters are less flexible as personnel are less interchangeable. Higher staffing levels may be required in order to ensure that the appropriate levels of expertise are available to serve customers.

• Frictional costs: Often, the existence of all these systems results in various additional activities being required, which are often small in themselves but, in aggregate, accumulate to be quite large. Examples include additional reconciliations, additional feeds into various databases, maintaining additional documentation.

• Operational risks: Complexity can lead to increased operational risks, both on a day to day basis, but also for major decisions that may be made without fully understanding the impact on a particular group of customers due to an inadequate understanding of the unique contractual terms and conditions impacting on those customers, which may result in later customer compensation requirements.

So when evaluating project business cases a thorough, holistic, analysis of project costs and benefits will lead to better decisions about what projects to initiate and persist with.