For senior executives facing the turbulence of todays financial crisis, reducing the cost base of their business operations now sits squarely at the top of the agenda. After decades of product and service variation, channel diversification, geographic and operational expansion, all supported by layers upon layers of technology, many institutions are finally compelled to deal with a fundamental reality: their businesses are overly complex for the value they generate.
Not only is this excess not valued by customers, it actually impedes value delivery by limiting the sales forces ability to respond, increasing service and fulfillment costs, compounding operational risk, and making the organization more unwieldy to manage. The siren call for a simpler core business approach, incorporating elements of modular design and industrial engineering is being heard across the industry.
But when senior executives take the first steps toward dialing down complexity, they rapidly come up against three immutable features that overshadow their ability to make change in their environment:
1. Complexity is structural, deeply embedded in the business and operating models of their institutions.
2. Poorly understood network effects across functions and businesses create linkages and interdependencies that compound complexity.
3. There is a general lack of transparency of the features of complexity required to generate value versus those that do not.
Eliminating complexity requires a front-to-back approach that identifies and addresses the root causes of complexity and all of its network effects. As an example, eliminating 20% of non-profitable products has limited impact if it is not followed through with a systemic simplification of the supporting operations and IT infrastructure.
By the same token, introducing new middleware to make the IT architecture more service-oriented is a waste of investment if the institutions operating model is not built around modular services at all.
Financial institutions have to not just cut, but eradicate complexity to regain their focus and flexibility, and sustain efficiency. The long-term rewards of eliminating complexity include a radically simplified operating model, an improved client experience and a dramatically reduced cost structure.
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