Taming costly complexity in service businesses

Taming complexity

Most managers recognize that complexity hurts their businesses. When Bain & Company last surveyed executives around the world for its "tool and techniques report," nearly 70 percent at 960 companies told us that complexity was driving up costs and hindering growth.[1] But complexity, in the form of endless permutations of offerings to customers, is an especially pernicious problem for service companies - from banks, retailers, and insurers to brokerage firms, telecom providers, and credit-card issuers.

For goods manufacturers, after all, it's easy to stumble over the evidence of complexity. It's stockpiled as inventory in parts suppliers' warehouses. It's found in costly downtime for production-line changeovers needed to make multiple product variations. It leads to higher error rates and waste. It sits as unsold merchandise on retailers' shelves or showrooms. But it's also true that it's easier for manufacturing managers to fix what they can see.

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At service companies, by contrast, complexity is all but invisible and can grow without restraint. Often a new "product" can be introduced simply by piggybacking on existing services and marketing campaigns, and adding a few new seats and scripts to call centers. Indeed, it is the very ease with which new service products can proliferate that makes the resulting build-up in complexity so problematic. The apparently low incremental costs are deceptive because most companies fail to reckon with the steep, hidden systemic costs that build up in underlying processes.

How serious is the problem? Consider the experience of the variable annuity business. Life insurance companies have had success accumulating assets in recent years, particularly as baby boomers face retirement and need a steady, guaranteed income. The companies responded by offering variable annuity products with guaranteed living benefits, which have sparked growth - but at a steep cost. Variable-annuity product features have proliferated as companies compete to win the attention of distributors based on the sophistication of their products. But annuities have become so complicated that many financial advisors are unable, or unwilling, to sell them, despite their clear benefits for some consumers. One single annuity we examined, for example, came in over seven billion permutations. The resulting high distribution and administrative costs cut deeply into the industry's profitable growth.

How can service companies rein in runaway complexity? They begin by adapting the practices of smart manufacturers, who start by zero-basing their product offerings to understand how they could organize their processes in a radically simplified environment. Harkening back to Henry Ford's dictum that customers could have any car they want as long as it was black, they apply what we call the "Model-T" approach. Obviously, cutting back to just one product of one color is not realistic, but engaging in that thought experiment is liberating and raises the potential for radical breakthroughs in what is possible.

Taking a clean-slate look at their product portfolio enables service company managers to focus on three key disciplines for rooting out complexity. First, they evaluate where complexity has accumulated and what it truly costs. Second, they identify the real needs of the customers they are best able to serve profitably and add back just enough variety to ensure that their expectations are met. Finally, they keep complexity in check even as the company innovates to meet current customers' evolving tastes. Let's examine each in turn.

Re-engineer processes. Often the right fix for avoiding complexity cost traps is to re-engineer processes that are driving costs up. That's the approach a major North American life insurance company took to move to the front of the competitive pack in its industry. The company had long prided itself on offering highly personalized service to its policyholders, assigning individual case managers to handle all policy-related matters from initial sales and application approvals to renewals and claims processing. But as the variety and complexity of policies increased, costs shot up and customer service began to suffer. Benchmarking the company's one-on-one case-management approach, company analysts discovered that the individual case managers were able to process just four policy applications per day, between one half and one third as many as its two leading competitors. The insurer reorganized its processing procedures, pooling the service of policies to more flexible dedicated teams made up of case coordinators backed up by an administrative-support staffer. Within a year, the new approach had boosted productivity by 25 percent, cut case turnaround times in half, and helped reignite growth.

Know what customers truly value. Too often, complexity of offerings is a telling sign that a company does not know its customers as well as it should. Many companies simply take customers at their word when their response to surveys is "more choice." But customers may really mean is that they wanted consistent availability. When it comes to offering choices, the lesson that less can be more has been repeated at a wide variety of retailers and service companies, many of which have found that just 5 percent of offering can account for up to 95 percent of sales.
Keep complexity in check. Customers, competitors, and profit pools don't stand still. As companies race to innovate to keep ahead of market trends, the likelihood is high that complexity will creep back in. Three safeguards can prevent that from happening:

  • Keep the business model simple. Continually re-examine the organization and ask, if we were to start afresh to build our business around just one service, what would it be?
  • Raise the hurdle rate any new service must clear. Doing so forces you to recognize the hidden complexity costs that come with product-line additions.
  • "Prune the garden." For every new service your company adds, eliminate one from your existing portfolio.

Steering clear of complexity has been a success factor at ING Direct, the retail bank that brought the consumer savings account into the Internet Age. Launched in Canada in 1997, ING Direct allowed customers to open and manage savings accounts exclusively online. ING Direct has stuck to its winning formula as it expanded its bare-bones model to the US, Europe, and Australia. The bank has added just a few elaborations, such as an online payments feature that made it easier for customers to make electronic transfers. Responding to customer needs and seeing opportunities to boost returns, ING Direct has introduced new products. But even as the product portfolio expands to include mortgages, checking accounts, and brokerage services, the company has stuck to its complexity-free model within each product category.

All service companies aspire to be innovation leaders, provide great customer experiences, and tailor products to the needs of their customers. But only those that can accomplish these laudable goals while taming complexity will likely achieve profitable growth.

Mark Gottfredson
Bain & Company partner based in Dallas, where he leads the firm's global Performance Improvement Practice. 

Andrew Schwedel
Bain partner based in New York, where he leads the firm's Financial Services Practice for the Americas.

Notes
1. Bain & Company, Management Tools and Trends Surveys (2006).