Complexity cannot be reduced; it is a natural phenomenon. Consequently, instead of fighting complexity, organizations should embrace it. Building on the Be Informed white paper Embrace complexity, simplify your organization, this white paper explains how organizations should embrace three important aspects of complexity: dynamic complexity, social complexity and emerging complexity. It also outlines what may happen with organizations that fail to do so. Co-authored by JW Ebbige and F. Buytendijk.
1. Mastering disruption, Embracing complexity White Paper
2. 1Mastering disruption, Embracing complexity Executive summary Complexity cannot be reduced; it is a natural phenomenon. Consequently, instead of fighting complexity, organizations should embrace it. This, in short, is Be Informeds view. Building on the Be Informed white paper Embrace complexity, simplify your organization, 1 this white paper explains how organizations should embrace three important aspects of complexity: dynamic complexity, social complexity and emerging complexity. It also outlines what may happen with organizations that fail to do so. Not all organizations are the same, and the Be Informed impact assessment test will help you establish which aspects of complexity are most relevant for your organization. The Be Informed business process platform, and the available solutions for financial services and the public sector, helps organizations to turn the complexity of their business into a competitive advantage or effective and efficient execution of public policy. 1 www.beinformed.com, white papers
3. 2Mastering disruption, Embracing complexity Introduction The rapid escalation of complexity is the number one challenge CEOs are facing, according to a recent study by IBMs Institute for Business Value 2 . Furthermore, an overwhelming majority of respondents expect that complexity will continue to grow, while less than half feel their organization is equipped to deal with it. The logical reaction for organizations is to try to reduce complexity. However, as a natural phenomenon, complexity cannot be reduced. And as the clich goes the world is getting more complex in an ever-increasing pace. In fact, trying to reduce complexity is a dangerous and often even counterproductive approach. It leads to oversimplified processes, systems and controls that are disconnected from reality. Lethal in any public or private organization. This seems to contradict what Einstein said, and what has become a well- established business best practice: Everything should be made as simple as possible, but not simpler. But there is a difference between what makes the world complex and what makes it complicated. Complicatedness is a human concept. It encompasses all the systems, processes and exceptions organizations have created. Over the years, companies have built complicated systems and processes, but this has rarely given them greater control. On the contrary: complicatedness leads to less control, inefficient operations and a growing distance from the customer. A competitive advantage in the private sector or sustainable government in the public sector can be achieved through a different competence: embracing complexity. 3 If an organization understands what complexity really means, by tackling this phenomenon they turn an organizational risk into an organizational asset. After all, if you can adapt to the changing needs in the market quicker than the competition, or even better, drive the changes yourself, you can achieve a competitive advantage in business, or as a public sector organization a better service proposition to citizens. 2 www-935.ibm.com/services/us/ceo/ceostudy2010/ 3 Also see Embrace Complexity, Simplify Your Organization, www.beinformed.com, 2011 Trying to reduce complexity is a dangerous approach.
4. 3Mastering disruption, Embracing complexity The three types of complexity Not all complexity is the same. In fact, complexity is multifaceted. Some aspects simply cannot be described on a single piece of paper, while others have too many moving parts to keep up with, or need to function in a void where there are no rules or the rules are unclear. Depth/breadth Change Uncertainty Mass customization Componentization Regulation Continuous transformation Blue ocean Black swans Co-creation Value networks Sourcing Stakeholders Dynamic complexity Social complexity Emerging complexity Figure 1: Aspects of complexity Focusing on business operations, including strategies, processes, policies, product and service structures, regulations and so forth, three aspects of complexity stand out: Dynamic complexity can describe matters in both depth and breadth. When a subject requires extensive explanation, it is complex in terms of depth. When a subject is multifaceted, it is complexity in terms of breadth. Moreover, the rules change continuously, which makes it hard to keep up with reality. Social complexity arises when there are many interactions with a fast- changing environment. For instance, business operations usually involve multiple stakeholders, each having different and sometimes conflicting requirements. Emerging complexity is characterized by disruptive change and the uncertainty that these disruptions create. Organizations which are unable to deal with the risk of uncertainty risk being outperformed by new entrants and existing competitors.
5. 4Mastering disruption, Embracing complexity Why todays best practices no longer work Todays business jargon is dominated by terms such as co-creation, mass customization, value networks, smart sourcing, collaboration, connectivity, continuous transformation, uncertainty management and so forth. They are all consequences of a more fundamental shift that has taken place, from a manufacturing paradigm that was dominated by transactions, to a services, information and combination economy based on interactions. It seems that most trends in business operations affect the aspects of complexity directly. Unfortunately, the way we structure our organizations, the controls we have put in place, the best practices we use, and the processes we have designed often do not reflect that new reality.
6. 5Mastering disruption, Embracing complexity Dynamic complexity Some topics are simply complex in nature, and cannot be explained on a single sheet of paper. Insurance premiums and pension plans are based on complex actuarial calculations. Government grants and subsidies depend on many regulations. Airline pricing and seating is a continuous and dynamic planning process. In general, the way organizations interact with their customers has changed. In the public sector, treating citizens fairly used to mean treating everyone equally. Now it means taking everyones personal circumstances into account. In business, there are often countless ways to configure a product or a service. In the 1980s, Volkswagen was already able to offer 15.7 million different combinations for a Volkswagen Golf, instead of just a few standard configurations and a handful of colors. This principle, now common practice in business and the public sector, is called mass customization. In short, every transaction and interaction is different. Business processes, and operations in general, become complex when they consist of many elements, many combinations of elements, and many different types of relations between elements. A further complicating factor is that all these business components often interact with others, and have cause-and-effect relationships. This makes the complexity of business even more dynamic. Lack of insight and oversight with respect to the components and their interdependencies leads to loss of control and organizational inertia. Consider the following examples: Hospitals have a large catalogue of procedures and treatments. Many have dependencies. Some can be combined, others cannot. They can also be subject to preconditions. For instance, some procedures require an empty stomach, whereas others require the opposite. This raises the question of how every single combination of steps can be defined. A pension plan has many elements. There are multiple risk profiles, various other pension plans from previous employers may be incorporated, the output can be fixed or variable, and so forth. As a result, every single pension plan can have different components and results. However, the configuration needs to be transparent. Consequently, the result needs to be explained to a consumer in a personal, yet repeatable and structured manner. Tax systems are generally subject to many different complex sets of rules. There is an endless list of combinations of income, deductibles, assets and other factors that determine the amount of tax that needs to be paid or returned. As a result, the question is how taxpayers can be guided seamlessly through a complex tax-return process in a manner that optimizes their rights and, at the same time, maximizes the tax income for the authorities. Every interaction is different.
7. 6Mastering disruption, Embracing complexity What happens if you do not embrace dynamic complexity? Every trend has a countertrend. Some organizations have created a value proposition by simply ruling out dynamic complexity and offering one or just a few variations on a product or service. Take budget airlines, without pre-seating, or straightforward call plans offered by telecoms. This is a perfectly valid strategy. Still, as margins continue to erode, it is hard to compete on price alone. Organizations adopting a different strategy have no choice but to embrace dynamic complexity. If they do not, their processes and systems will simply not be capable of handling the variety of customer requirements. Or even worse, as these systems were only built to deal with a predetermined world, these organizations will not even notice the customers attempts to interact with them.
8. 7Mastering disruption, Embracing complexity Social complexity In addition to dynamic complexity, social complexity arises in interaction with the environment. Particularly in the interaction economy, many stakeholders are involved, each having their own requirements and expectations. Shareholders have a different view from employees on the business, and their requirements may very well be at odds with each other, proposing almost opposed paths of optimization. Different customer segments can also have very different requirements. Moreover, sometimes even a single person may have conflicting requirements, for instance as a citizen demanding businesses to be green, and as a consumer demanding cheap products and driving an SUV. Social complexity is even more prevalent when stakeholders not only have different requirements, but also their own values and belief systems. Social complexity often goes hand in hand with dynamic complexity, with the requirements changing all the time. Business trends underlying social complexity include globalization and sourcing practices leading to value networks and increased market transparency. Stakeholder requirements Business objectives Market trends Regulatory requirements Figure 2: Reconciling different forces Consider the following examples: Transportation insurance can be dauntingly complex, as insurance premiums and cover are determined based on the cargo, destination, point of departure, type of transportation and so forth. One extreme example is supertanker transportation. Supertankers often change ownership (and associated stakeholders) multiple times during their trips overseas, and changes in destination are not uncommon. Every time there is a change, regulatory requirements can be different based on ownership and destination. The question is therefore how to administer such a volatile environment in a transparent and secure way. Immigration services deal with tens of thousands of rules, based on a countrys internal politics, treaties between countries, and supranational regulations such as those of the EU. At the same time, changes occur all the time. One immigration service estimates it has over fifty major policy
9. 8Mastering disruption, Embracing complexity changes per year to deal with. This raises the question of how that level of change can be kept up with, without loss of transparency. Infrastructure projects, ranging from private infrastructure projects such home renovation, to complex public infrastructure projects such as the construction of railways or highways, are subject to infrastructural and environmental permits. Complex public infrastructure projects can be subject to thousands of different permits, some of which can be in conflict with one another. Even after permits have been granted, reality may change. During implementation of the project, archaeological or environmental discoveries may be made, leading to re-evaluation of permits. This presents the challenge of managing this dynamic process without endangering the deadlines, whilst also respecting the interests of all of the stakeholders. What happens if you do not embrace social complexity? By its very nature, social complexity cannot be reduced. Furthermore, the complexity arises outside of most organizations circle of control or even influence. Being able to reconcile different requirements is the key to social complexity. Rigid organizations that are only optimized to deal with single stakeholder requirements, such as efficiency within the organization itself, or are overly focused on shareholders, may suffer from diminishing responsiveness. They may also miss strategic opportunities, risk non-compliance, have a long backlog of required changes, and a very high cost of change or transformation in their operations.
10. 9Mastering disruption, Embracing complexity Emerging complexity Sometimes the rules do not change, but are simply absent. They need to be made up on the spot. This is the world of emerging complexity. Emerging complexity is characterized by disruptive change and the uncertainty that these disruptions create. It may be the case that these disruptions come as a surprise, because of sudden changes in economy, technology or po...