Tuesday, July 5, 2011

Complexity Begets Waste

Executive Summary:
As our businesses grow we add more capability, structure, or policy.  Unfortunately, with all of that added structure and capability comes complexity, confusion, and time and energy wasted trying to sort out how to navigate it.  Take time, periodically, to identify those elements of your business and systems that are complex and difficult and invest in efforts to simplify.

The Rest of the Story:
Complexity sneaks up on us.  We add new software systems to give us greater capability, we expand our business and add more structure, we diversify our offerings, we merge businesses, or we just create new rules or policies.  Eventually, we realize that our business systems have become disruptively complex. 

With complexity comes extra effort and time spent trying to figure out how to put all of the right pieces in the right place.  This extra effort is waste.

Recent personal experiences with the medical and medical insurance industry provide me with both the inspiration for this post, as well as a stunning example.  As an individual experienced in business and process improvement, I can’t help but cringe and squirm when I see the obvious waste in the U.S. health care sector.

By way of my own experience and example, I recently received a check from one party involved in my heath care activities, which I must subsequently endorse and turn over to another party because one is not allowed to transact financially with the other.  All of this creates unnecessary activity on the part of every party involved and added opportunities for defects.

In order to ensure that all of this is completed correctly, the party providing the check made extra communications with me to give me advance warning and to explain.  I made additional communications to ensure that everything was legitimate and that the receiving party would accept the transaction.  That means that at least three of us have spent several man-hours each sorting out the transaction, and I don’t even know yet if there will be repercussions with my medical insurance company who is also trying to ensure that everything is paid and properly accounted.  I’m dreading an imminent misunderstanding or defect in the billing/payment for the total expenses.

Just look at a ballpark breakdown of a bill for minor surgery.  Say the surgery’s total bill is $12,000, not including the expenses related to prescriptions and post-operation consultations and therapy.  Only about $600 of that bill is for the surgeon’s services.  Another $1200 goes to the anesthesiologist for his/her services.  That means that approximately 15% of the bill is for the experienced technical services and the remaining 85% is overhead in the form of payment to the surgical center and some miscellaneous supplies.  It’s actually worse than that because a portion of the surgeon’s fee and the anesthesiologist’s fee go to paying their individual insurances. 

I’ve never seen a successful capital business where 15% of the business costs went into producing product or providing service and the remaining 85% was overhead.  It just stinks of waste.

Another indicator of the extraordinary complexity is the challenge of estimating one’s health care costs.  When I go to the dentist and need some dental work done, my dentist can tell me to the penny what it will cost, how much my insurance will pay, and how much will be left for me to pay.  When I asked for an estimate for outpatient surgery, it took two weeks and several phone calls to get the answer and the response was, “It could be as low as X or as high as Y, and your insurance will probably pay for Z, but we really don’t know.”  Can you smell it?

Ok, so U.S. healthcare is easy to pick on, but it makes a stark point.  When things get too complex to navigate cleanly, the complexity drives waste. 

I read a recent article in my local newspaper that pointed out that there is somewhere between $400-billion and $500-billion in uncollected U.S. taxes for 2010.  The IRS doesn’t know for sure and it will take several months to establish a more precise estimate.  I don’t need to point out how helpful another $400-billion would be in balancing the U.S. federal budget right now.

According to the article, the IRS explained that most of the gap in uncollected tax revenue results from misunderstandings on the part of tax payers in their efforts to assess how much they should pay (because it isn’t simple).  Unfortunately, the IRS doesn’t have the resources, or a viable plan to recapture this missing revenue.  Again, complexity drives defects and waste trying to correct defects or even assess the size of the defect.

Now, your industry or function may not be as complex as the U.S. healthcare industry.   Your gap in unaccounted revenues may not be $400-billion.  But, how much waste do you experience because of complex bureaucracy, navigating policies, or complex information or material management systems?  How many man-hours are spent complying with rules, documenting communications or transactions, arguing, or asking how or what to do?  How often is it done incorrectly?

If you are having trouble identifying a problem of complexity right away, let me get you started with a very common source in corporate organizations.  Many large businesses and corporations adopt a matrix-style organization structure to allow specific resources and expertise to oversee several related avenues of the business.  It eliminates redundancy in management and overhead and makes sense at a basic level.

However, one side effect of many matrix organizations is uncertainty about who is ultimately responsible for a particular function.  The result is that a committee must make decisions, instead of an individual.  We may have eliminated redundant expert resources, but we created waste by indecision.

For example, one organization with which I am familiar did not have a single individual responsible for the product development function of the business.  The Marketing function was responsible for identifying the new products to develop and, along with Sales, for identifying the requirements of the products.  Engineering was responsible for developing the products, Sourcing for organizing the logistics, Production for the obvious, etc. 

However, when one Marketing channel’s product was at odds with another channel’s for the same resources, there was no one person to decide which project took priority.  The whole product development system could grind to a stall waiting for a committee of business leaders to understand the problem, hear the arguments, and finally agree as to a priority.  Consider that most of the correspondence takes place via e-mail!  Sometimes the declaration wouldn’t be made until the system had found it’s own workaround and moved on.  Sometimes the priority would be different a month later.  Sound familiar?

Complexity is a common, and often unavoidable problem.  As I wrote above, it sneaks up on us.  Don’t get angry that it happened to you.  Just recognize the opportunity and begin to attack the problem.

If you see where committee decisions are driving waste, gather some examples and make a case for a quick-decision alternative.  It may be as simple as a decision rule or matrix, or as assigning an arbiter to make the call.

If your team wastes hours searching for information in complex systems, or if certain processes are too complex to execute easily, pull out some process improvement tools, assign a team, and simplify the process.  Many times, we don’t even remember why we have rules or activities in place that drive the complexity and they can simply be removed.  Verify first, though.

The bottom line is this.  Take a step back this week and start making a list of the unnecessary, or cumbersome complexities within your business or function.  When you have a short list developed, prioritize it, make a plan, and begin your assault.  A few good hours spent simplifying your work systems could save you countless hours of waste.

Stay wise, friends.

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