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Killing Complexity Before Complexity Kills Growth
How to restore a Founder's Mentality, including intolerance for bureaucracy.
By Ron Kermisch and Jed Fallis
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Why do so many companies lose their way? When companies are just starting out, they have no problem identifying the path before them. The founders know where they’re headed, who their customers are and how they hope to succeed. Often, they see themselves as insurgents—on a mission to fill customer needs that incumbents have overlooked or ignored. Founders obsess over the details. They abhor bureaucracy and personally keep tabs on what is happening on the front line to make sure they’re still on top of their markets. Employees take their cues from the founders and keep finding new ways to please customers, do their jobs better and increase sales.
The problem is that most companies lose the Founder’s Mentality® as they grow. But size itself is not really the problem—some corporations (a lucky few) manage to maintain the founder’s mentality, even as they grow into major multinationals. What really hurts the founder’s mentality and hamstrings large organizations is complexity. Complexity is the “silent killer” of growth, creeping in unnoticed as companies expand into new geographies and lines of business. Layers, ranks and titles build up, and the connection to the front line is severed. Instead of keeping up with customers, management spends most of its time on process.
Explore how companies that nurture and maintain three key traits are more likely to sustain growth.
In many cases, what comes next is stall-out: a precipitous drop in sales, from which it is very difficult to recover. The company that has lost the founder’s mentality has morphed into the sluggish incumbent that the upstarts can beat. Indeed, only 11% of large companies (public companies with more than $500 million in sales) become sustained value creators. Two-thirds stall out, fail or are acquired. In a Bain & Company survey, 85% of CEOs in companies that have ceased to be value creators blame internal factors such as complexity, not external factors, for their woes (see Figure 1). Complexity kills, but companies don’t need to succumb. Leaders who recognize the threat can intervene and simplify their organizations before it’s too late. Done correctly, organizational simplification enables a company to build a new operating model that restores the speed and focus of the founder’s mentality and reenergizes its people. And, unlike reorganizations aimed primarily at cost—which, by the way, rarely stick because they deal mostly with symptoms—an organizational simplification can deliver sustained performance improvement because it addresses unneeded complexity that drives cost and limits responsiveness.
Organizational simplification does not mean just redrawing the org chart. It also requires streamlining processes through changes in accountabilities, governance and ways of working. Without all these elements, organizational simplification won’t deliver lasting results; before long, complexity will creep back in (see Figure 2). In practice, organizational simplification is often performed in tandem with business simplification, which might include shedding less productive geographies and lines of business to regain strategic focus.
The restructuring itself involves dramatically delayering the organization and eliminating unnecessary nodes. Nodes are intersections in the corporate matrix where an executive or manager sits, where decisions are made or where financial reporting takes place. Critical interactions needed to keep the company going take place at nodes, but companies tend to build up unnecessary nodes, which slow down decision making, reduce responsiveness and can inhibit change and innovation. Nodes can be viewed as a proxy for complexity; having too many is a danger sign.
To understand what effective organizational simplification looks like in practice, consider the turnaround at a major insurance company. The company had gone through a major reorganization after the global financial crisis, but seven years later it was still suffering from the effects of complexity. For example, its core insurance business had extensive country and product organizations, as well as functional units (finance, etc.). This created redundancies and thousands of unnecessary nodes since the matrix extended six or seven levels deep in the organization.
But what hurt the business—and created the urgency to change—was the loss of customer-centric focus that this complexity caused. A sharp focus on customers and markets had been...