Role of Complexity in Business: The Silent Killer

Complexity in Business can be a silent killer.

Yahoo’s Peanut Butter Manifesto reminded me of Systems Thinking. In Systems Thinking, there is a distinction between good complexity and bad complexity. Below are the following rules:

• End-to-End, systems is an organic ecosystem, with inter-dependent parts.
• From a business perspective, eliminate complexity that the customer is not willing to pay for (if she knew about the complexity).
• From a business perspective, exploit the complexity that the customer is willing to pay for.
• Minimize the costs of complexity you offer (costs in terms of time, effort, motion, and money).

Eliminate Complexity that the Customer is not Willing to Pay for

The author of Yahoo’s Peanut Butter Manifesto detests the fact that Yahoo has become so bloated with offering, some of which compete with each other, and the company as a whole has become redundant and confused. These are words that point to internal complexity, which always boils down to carrying costs that the customer eventually bears the burden for.

Another example is Southwest Airlines. Southwest only operates Boeing 737 aircrafts. With only 1 type of aircraft, Southwest effectively “designed out complexity” from their offerings. With only 1 aircraft to maintain, train on, purchase, etc., it reduces Southwest’s costs considerably and contributes to their healthy profitability.

On the other hand, American Airlines used to operate as many as 14 different aircrafts. Their thinking at the time was that each aircraft-type served a different customer need. Supporting 14 different aircrafts was tremendously costly, each aircraft having their own fleet, support group, facility, and labor. At the end of the day, did the customer really care about American’s offering of 14 different aircrafts? Was this a competetive advantage for American? The answer is “No” because American didn’t take time to learn about the customer’s needs. This, instead, was a cost that the customer eventually had to bear.

Yahoo’s product portfolio might be akin to American Airline’s 14 aircraft comparison: Yahoo Bookmarks and del.icio.us; Flickr and Yahoo Photos; on, and on, and on. I like Yahoo, but there doesn’t seem to be a sound product strategy — some of their products compete with each other, adding complexity upon complexity, further confusing the customer and burdening her with featuritis and an unmanaged proliferation of products and service offerings, with no rational thread that ties them together.

Eliminate Complexity that the customer is not willing to pay for — that’s the lesson here.

Exploit Complexity that the Customer is Willing to Pay for

Previously, credit card companies only provided one interest rate, regardless of your FICO or Credit Score. Capital One took a different approach and took your FICO score as a risk factor and saw that customer as a greater risk, and therefore assigned a higher “cost” of doing business with you — effectively a higher percentage rate. Capital One built a fascinating profiling system that assigns a score to you — a risk stratification score. It has built a business around this and is incredibly profitable. Capital One is a case of exploiting complexity that the customer is willing to pay for.

I had a chance to visit Capital One’s offices in Boise, Idaho 3 years ago. They are an efficient company, and their bread and butter is in their profiling system. It is incredibly complex and goes well far and beyond basic database marketing or your run-of-the-mill regression analysis. It has built an incredible and complex system, which has brought in economic profit for the firm, year over year.

Exploit Complexity that the Customer is willing to pay for — that’s the lesson here.

Minimize the Costs of Complexity you Offer

Whether it be in your present service or product offerings, or in your new offerings, we ought to question whether or not there is complexity costs added to or can be reduced or eliminated in our offerings. Some of the complexity that can be reduced or eliminated might be muda or waste that can be identified; or, it might be variation in our services, products, or offerings. Whatever the costs of complexity in our offerings, the point is that we ought to guard against unmanaged proliferation of offerings and associated costs. Complexity can be costly — we don’t want to burden the customer with internal, process, or organizational-specific problems — our problems — that manifest itself through complexity and eventually costs — in all its forms.