A second factor is an increase in the number of relevant stakeholders. Companies must answer to customers, shareholders, and employees as well as to any number of political, regulatory, and compliance authorities. Each of these groups has specific demands, and it has become penalizing for companies to satisfy one at the expense of any other.
Some observers think increasing business complexity is the problem. We disagree. We believe that while complexity brings immense challenges, it also offers a tremendous opportunity for companies. Increasingly, the winners in today’s business environment are those companies that know how to leverage complexity and exploit it to create competitive advantage.
The real curse is not complexity so much as “complicatedness,” by which we mean the proliferation of cumbersome organizational mechanisms—structures, procedures, rules, and roles—that companies put in place in an effort to deal with the mounting complexity of modern business (see the sidebar “The Complicatedness Trap”). It is this internal complicatedness, with its attendant bureaucracy, that destroys a company’s ability to leverage complexity for competitive advantage. Even worse, this organizational complicatedness destroys a company’s ability to get anything done. However, although complicatedness is a curse, it is not the fundamental root cause of the problem; it is, as we shall see, only a by-product of outdated, ineffectual, and irrelevant management thinking and practices.
THE COMPLICATEDNESS TRAP
Fewer Value-Adding Activities, More Useless Work on Work
The BCG Institute for Organization created an index of the number of procedures, vertical layers, interface structures, coordination bodies, scorecards, and decision approvals over the past fifteen years. Across our sample of companies, this index has increased annually by 6.7 percent, which, over the fifty-five years we studied, yields a thirty-five-fold increase.
Managers in the top quintile of the most complicated organizations spend more than 40 percent of their time writing reports and between 30 percent and 60 percent of their total work hours in coordination meetings—work on work. That doesn’t leave much time for them to work with their teams, which, as a result, are often misdirected and therefore expend a lot of effort in vain. Our analysis shows that in the top quintile of complicated organizations, teams spend between 40 percent and 80 percent of their time wasting their time. It is not that teams are idle. On the contrary, they often work harder and harder but on non-value-adding activities. It means they have to do, undo, and redo, and when their efforts seem to make less and less of a difference, people lose their sense of meaning. It’s hardly surprising that, based on our analysis, employees of these organizations are three times as likely to be disengaged as employees of the other companies we studied. (See figure I-1.)
FIGURE I-1
The response to complexity
Source: BCG analysis.
But first it’s necessary to understand just how pervasive and troubling the phenomenon of organizational complicatedness really is. We have done research into the rise of complicatedness, and the findings are striking. Over the past fifteen years, the number of procedures, vertical layers, interface structures, coordination bodies, scorecards, and decision approvals has increased dramatically—between 50 percent and 350 percent, depending on the company.3
This rapid rise in complicatedness is shocking. What also surprised us is that our analysis shows absolutely no correlation between the size of companies and their degree of complicatedness. A big company is just as likely to be relatively uncomplicated (compared to the average index) as a small company is to be very complicated. Nor is there any correlation between complicatedness and the degree of diversification. The diversity of the business portfolio does not automatically increase complicatedness. What matters, then, is not the size of the company or the number of businesses in which it competes; what matters is how the resulting business complexity is managed.4
Complicatedness spells trouble for a company’s performance and productivity, trapping people in non-value-adding activities and causing waste and overconsumption of resources of all kinds: equipment, systems, inventories, committees, and teams. Complicatedness also has a pronounced negative effect on a company’s ability to formulate a winning business strategy, causing it to miss new opportunities and fail to meet new challenges. As we have witnessed firsthand, complicatedness has deleterious effects on the human beings who are trapped in such organizations, inevitably leading to frustration, dissatisfaction, and disengagement.5
Indeed, we think that organizational complicatedness is the primary reason that disengagement and dissatisfaction at work have become so damaging. Surveys by The Conference Board show that the percentage of Americans who are satisfied at work declined from 61 percent in 1987 to 47 percent in 2011.6 Studies abound on stress, burnout, work-related suicide, even death from exhaustion (the Japanese have a word for it: karoshi).7
Some argue that declining engagement is a cause of the stagnant productivity that afflicts companies, industries, and socie-ties in many parts of the world.8 Is it poor engagement that saps productivity?9 Or is it the pressure to improve productivity and the discouragement people feel when efforts fail that undermine engagement at work?10 This chicken-and-egg discussion is irrelevant; whenever we have intervened on such issues, we have always found that employee disengagement and stagnant productivity are triggered by a common factor: organizational complicatedness.
The Root Causes of Complicatedness
But, as we have hinted, complicatedness is itself only a by-product, a symptom, of the real problem. To understand the root causes of complicatedness, we must go deeper to explore a set of deeply engrained assumptions that guide how companies have responded to complexity. In struggling with the problem, most organizations have relied on two approaches with a long history in management theory and practice. We refer to them as the “hard” approach and the “soft” approach, and they are the product of two major revolutions in management theory and practice during the twentieth century and, unfortunately, remain to this day the two basic pillars of modern management. Almost all management thinking and best practice today is based on one of these two approaches, and usually a combination of the two—be it for restructuring, reorganizing, cultural transformation, reengineering, or improving engagement or motivation.
The “Hard” Approach to Management
The hard approach is the product of more than a century of managerial thinking that began with Frederick W. Taylor’s work on scientific management. It was further developed in the discipline of industrial engineering and continues to this day in practices such as reengineering, restructuring, and business process design.11
The hard approach rests on two fundamental assumptions. The first is the belief that structures, processes, and systems have a direct and predictable effect on performance, and as long as managers pick the right ones, they will get the performance they want. So, for example, if you want your employees to customize your offering to local market demands, you choose a decentralized organizational structure; if you want to leverage economies of scale, you choose a centralized structure, and so on. The second assumption is that the human factor is the weakest and least reliable link of the organization and that it is essential to control people’s behavior through the proliferation of rules to specify their actions and through financial incentives linked to carefully designed metrics and key performance indicators (KPIs) to motivate them to perform in the way the organization wants them to.
Perhaps the hard approach made sense in the past, but it is dangerously counterproductive in today’s complex business environment. When the company needs to meet new performance requirements, the hard response is to add new structures, processes, and systems to help satisfy those requirements, hence, the introduction of the innovation czar, the risk management team, the compliance unit, the customer-centricity