GLOBALISATION : Daniel Di Filippo – Managing complexity

First up any surprises from the latest PricewaterhouseCoopers Global Annual CEO survey?
This year’s results both confirmed earlier suspicions and surprised us. Firstly, the CEOs confirmed what we suspected, that complexity is increasing. According to respondents, over the past three years the overall level of complexity in their organisations has increased, and this increase has been caused by variety of factors. As result, managing complexity has become high priority among the CEOs we surveyed.
What exactly does managing complexity entail? To our survey participants, it means coping with complexity when it adds value and simplifying when it does not.
We were, however, surprised by the size of the “capability gap” we discovered between respondents’ clear understanding of the challenges that complexity poses and their ability to manage complexity effectively.
We found this to be true across the board, regardless of geographies, economies (developed or emerging), size or status (public or private).

Is complexity increasing?
More than three quarters of the CEOs responded that the level of complexity in their organisations is higher than it was three years ago, and 27 percent believe it is much higher. Only small number feel that it is the same (15 percent), somewhat lower (6 percent) or much lower (2 percent). And the overwhelming majority (73 percent) agree that complexity is not going away – that is, that increased complexity is an inevitable aspect of business today.

What’s driving this?
As the CEOs note, the causes of increased complexity are many and varied. Some, such as commercial activities, can be managed and add value. Others, such as geopolitical forces, can only be influenced. Commercial activities include launching new products and services, extending operations to new territories, forming strategic alliances and outsourcing functions to third parties. And because these commercial activities are considered to add value, most CEOs are engaged in more than one. In fact, less than one percent of respondents are performing none of these activities, while 86 percent are engaged in three or more, and two thirds are engaged in five or more.
Nearly all CEOs acknowledge that commercial activities increase complexity, though to varying degrees. Topping the list of commercial activities that most increase the level of complexity are extending operations to new territories (65 percent), engaging in mergers and acquisitions (65 percent), and launching new products and/or services (58 percent). Outsourcing functions to third parties is perceived as causing the least increase in complexity (36 percent).

Do the drivers of this increasing complexity represent good or bad news for CEOs?
While acknowledging that commercial activities increase complexity, the CEOs largely maintain that the advantages of engaging in those activities strongly outweigh the disadvantages. This is especially so when it comes to launching new products and/or services (88 percent) and to extending operations to new territories (83 percent).
In fact, even the most-complexity-causing activities (doing mergers and acquisitions, extending operations to new territories, and launching new products and services) are perceived as having advantages that far outweigh disadvantages.
In addition to commercial activities, respondents view geopolitical forces as having increased the level of complexity to medium or large extent over the past three years. Chief among them are national and international laws and regulations (62 percent), actions by competitors (62 percent) and changing customer requirements (61 percent).
Changing workforce attitudes and expectations and language and cultural differences are perceived as least likely to cause increased complexity (41 and 33 percent, respectively).
While 56 percent of the CEOs believe that the sources of complexity within their organisations are balance of commercial activities and geopolitical forces, nearly three times as many CEOs (31 percent) believe that those sources are primarily due to geopolitical forces as believe that they are due mainly to commercial activities (12 percent).
This is not surprising, since geopolitical forces are outside of the CEO’s control and are perceived as raising costs and risks to medium or large extent (56 and 51 percent, respectively).
Equally striking is the much smaller percentage of CEOs who believe that geopolitical drivers of complexity are hurting earnings and revenue growth (29 and 22 percent, respectively) or lowering stock price (11 percent). Apparently, the CEOs feel that geopolitical causes of complexity are not fundamentally hurting their businesses. However, higher levels of cost and risk are clearly problematic.
The CEOs might also be acknowledging that increasing geopolitical complexity is fact of life. It can be influenced but not managed – and certainly never eliminated.

What specific organisational capabilities are companies developing to help manage complexity?
The CEOs’ high level of interest in managing complexity is also evident in the clear views they express regarding how best to accomplish this. We selected seven capabilities for managing complexity to ask survey respondents. We based our selection on wide range of client experiences and on broad and deep review of the existing literature. In addition, we sought to include diverse set of capabilities ranging from “softer” organisational capabilities to “harder” analytical ones.
While our choice of capabilities is not definitive, it is nevertheless useful starting point for an examination of managing complexity.
The seven capabilities are:
• Having highly capable people
• Effective communications
• Ability to identify activities that are creating value
• Ability to identify activities that are destroying value
• Alignment of IT with business processes
• Ability to measure complexity
• corporate-wide framework for managing complexity.
When asked to rank the importance of these seven capabilities for complexity management, the CEOs responded with high numbers for each. Concerning the top five capabilities, 92 percent or more of CEOs view these as extremely important, very important or important. The CEOs ranked highly capable people as the single most important capability, with 55 percent of respondents rating it as extremely important. Even regarding the lowest ranked capabilities – the ability to measure complexity and having corporate-wide framework for managing complexity – 78 and 76 percent, respectively, believe them to be extremely important, very important or important.

How well did the CEOs feel their companies were progressing in developing strong capabilities to manage complexity?
We were struck by how few CEOs rate as “very good” their organisation’s capabilities for managing complexity. Only four percent of them, for example, feel their organisations are very good at measuring complexity; five percent at having corporate-wide framework for managing complexity; 15 percent at being able to identify activities that are creating value; 12 percent at being able to identify activities that are destroying value; and 12 percent at aligning IT with business processes.
Even in areas the CEOs ranked highest as being extremely important for managing complexity – highly capable people and effective communications – only 17 and 10 percent, respectively, feel that their organisations have very good capabilities.
In fact, all seven capabilities show double-digit gaps between how important the CEOs believe capability to be and how they evaluate their organisation’s performance in that area.
For example, there is 38 percentage point gap between CEOs who rate having highly capable people as extremely important and CEOs who rate their performance in this capability as very good.
The gaps with regard to the six other capabilities in descending order

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