Simplification doesn’t have to be complicated


20 Jun 2006

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Complexity in large companies is a given. Add mergers and acquisitions, company growth, increased competition, expanding territories and regulatory developments such as International Financial Reporting Standards, Sarbanes-Oxley, Markets in Financial Instruments Directive and the Company Act 2003 into the mix and the problems expand.

The result: costly inefficiencies and the inability to access accurate, timely and easily digestible information from which to manage, forecast, report and drive performance. Embracing a simplification programme to counter complexity (whether organisation-wide or within targeted areas) allows a company to focus on driving performance and creating value. While not a simple task, it is achievable.

Some might argue that complexity is unavoidable. It is true that some things are by nature and always will be complex. But the complexities of business do not require complexity of process. There is a way out but it involves making the time to remove those layers that have been cobbled together over time.

How did it get this way? Complexity in business comes from people: each adding his or her own nuanced contribution. Complexity has many roots, such as compliance with new regulations, cost pressures, no clear IT strategy, time constraints and failure to properly structure the work environment. When companies discover a problem, the natural tendency is to devise a solution and implement the fix — as quickly and inexpensively as possible. But arbitrary changes to a process without understanding the entire process often result in unintended consequences, creating a web of patches, fixes and workarounds.

Another major driver of complexity is acquisitions. Companies in a merger or acquisition may find themselves in a catch-22 situation: the new company has more resources and new products but creates multiple and disparate processes, systems and definitions that are often maintained long after the acquisitions have taken place.

Mapping the right course

Companies have different objectives for undertaking simplification programmes. For some, the main reason is to reduce costs. Others are more concerned about improving timeliness or accuracy of information for better decision-making or to meet regulatory reporting requirements. Still others see the need to improve their customer satisfaction or their employees’ work-life balance.

Whatever the objectives, leading companies that have successfully simplified have overcome four major hurdles: the premise that standardisation equals rigidity; the natural resistance of people to change; the difficulty of an enterprise-wide change; and the discipline needed to align simplification with business strategy.

Becoming flexible

Companies often face resistance to attempts to standardise, based on the perception that it will result in a loss of the agility to respond to changing needs.

In fact, the opposite is true. Appropriate standardisation of definitions, processes and data allows a company to lower costs and foster a more rigorous control environment, while also eliminating non-value-adding steps and reducing the ambiguity produced when disparate business units and subsidiaries retain proprietary processes. Appropriate standardisation frees up employees to do more creative work in those areas where it is appropriate. For example, while transaction processing may not call for added creativity, the time freed up by automating that processing can liberate employees to be creative in areas that add value — for instance, determining how to better serve customers or how to better use current results to anticipate needed course corrections to optimise future operations.

Common standards in definitions, processes, data and systems across an organisation can help a company quickly integrate an acquisition. A common best practice for quickly assimilating a newly acquired company’s finance function into the buyer’s is the use of turnkey systems, policies and departmental processes. The turnkey integration follows a standardised methodology and calendar and marches the newly acquired company quickly into the buyer’s standard model for its finance function.

Standardisation also facilitates communication and sharing of information, which can result in more powerful and effective use of best practices, forecasting and decision-making across the business. It allows a company to move its people amongst its different locations more easily. Not only does this provide the company with more flexibility, it also captures institutional knowledge and provides employees with additional career advancement opportunities.

Change management

The natural response for employees is to resist change and to try to maintain autonomy and creativity for themselves. Effective and sustainable simplification requires people to take on new, different roles. Yet in most organisations change programmes fail, largely because employees feel left out of the process and lack the motivation, skills and knowledge to adopt new systems and procedures.

For instance, in the finance area, freeing up employees from duplicative or unnecessary tasks does not alone ensure they will have the business acumen, communication skills or diplomatic sophistication necessary to take on new, more value-enhancing roles such as strategy and decision support. Effective large-scale simplification in the finance area requires an organisation to create a team with the skill and experience to do higher-level finance work than it has traditionally been asked to do. This type of change can be threatening.

How does a company overcome this resistance? One way is by direct and frequent communications that helps to reduce the uncertainty of the changes. Another is by appealing to a different aspect of human nature: the ‘what’s in it for me?’ attitude. The answer might be improved work-life balance. Or changes may enable employees to cross-train in new areas, providing them with new skills and opportunities for personal growth. The new work that employees are asked to do may be more important to the company and more rewarding to the employee.

Company-wide

Complexity reaches across functional units, business units and geographical areas. Thus, effective simplification often requires cross-business or enterprise-wide implementation. It requires the ability to look at the whole, rather than maximising the individual parts. This can be difficult, especially when individuals have responsibility for optimising a particular function or area within the company. Leadership support, strong project ownership and communication of expected benefits are needed to combat complexity.

Simplification is powerful when aligned with business strategy. For simplification to be truly meaningful it should be aligned with a well-articulated, top-down business strategy. A goal of simplification is to create a business structure that is streamlined yet supports the business.

Successful organisations drill down and identify key performance indicators (KPIs) that drive value and, importantly, develop the associated metrics to track them. Redefining and paring down KPIs can be a daunting task. Leading companies use two simple principles to stay focused when refining their KPIs: “measure what matters”, which leads to “what gets measured gets done”.

Establishing baseline metrics is a key first step in simplification — and a key element in sustaining it. There is no silver bullet. Simplification is hard work and requires sustained efforts. People need goals and constant reminders to sustain performance. We are by nature competitive and feel a need to measure our performance against our goals and the performance of others. People want to know “how are we doing?”. Metrics provide the means to answer that question. Without that answer and the resultant focus, people tend to go back to their day jobs, which is no change — business as usual.

Creating value

Simplification is more than a cost-cutting mechanism. While it can result in cost savings when introduced correctly, simplification can also result in better, faster reporting and decision-making, improved customer service, better work-life balance for employees as well as increased flexibility for the company and its employees. In short, it creates value. Simplification is also more than a buzzword. And it is frequently paired up with ‘standardisation’. The two concepts, when implemented together, can lead to straightforward, sustainable and improved processes.

One dynamic that moves companies forward today is their ability to make better decisions faster than their competitors. Processes and operations that bring clarity to the important elements and cut through the irrelevant allow business leaders to see what is going on in the organisation, understand it and make informed decisions that ultimately give them a truly competitive edge.

What areas can be simplified?

Many organisations are looking to simplify. The functional areas we see commonly being addressed in Irish companies today are:

* Technology adoption and application (use of standard technology solutions and consistent application across the organisation);
* Human resources (standard baseline processes for effective recruitment, aligned to standard reward systems that also allow for high performers to be compensated appropriately);
* Project management (the adoption of corporate project management, project governance and reporting toolsets that ensure that projects succeed and/or remedial action can be taken within a reasonable period of time);
* Document management (using standard approach to documentation retention and storage and the increased use of document imaging to address a long overdue issue among Irish corporates);
* Purchase to pay (inventory, fixed assets, supplies and services sourcing through to payment);
* Order to cash (customer order of goods or services through to collection of receivables); and
* Record to report (recording of detail transactions through to internal and external reporting).

Each of these areas cuts across the entire organisation: finance, sales, purchasing, human resources, operations, IT and so on and may involve multiple locations and business units.

By Ciaran Kelly, leader of technology advisory services at PricewaterhouseCoopers