Mired in complexity. Bogged down with inefficient processes. Hampered by inflexible systems. These are just some of the possible reactions to past inaction and current frustrations. We often speak with management teams struggling with either growth or performance. In many cases, there are a plethora of reasons for sub-optimal performance or sluggish growth. Often, the two go hand-in-hand. What looks like a great business financially can often mask trouble beneath the surface. High margins and bumper profits can reduce the focus on reducing complexity, tackling inefficiency and streamlining systems. However, when margins are tight, growth has stalled or problems are mounting, sifting through the quagmire can seem daunting. So, today we look at how a lack of transformation investment holds businesses back.
Business complexity
Although it may sound subjective, complexity makes things more difficult. The dictionary refers to ‘complexity’ as being formed of many parts or being difficult to understand. We posit that in business, complexity involves many people, processes, systems and partners. The higher the number of these and the more interconnections and interdependencies between them, the greater the malaise. There are other reasons for business complexity, such as (this list is not exhaustive):
- Complex matrix structures;
- Reporting structure/jurisdictions;
- Number of companies/subsidiaries/divisions;
- Exposure to PESTLE factors;
- Availability and skills of people;
- Numbers and lengths of processes;
- Modernity and number of systems;
- Types and size of customer;
- Types and size of supplier;
- Legacy operations.
Here is an example of complexity. Take a business with a matrix structure, 200 legal entities in multiple jurisdictions, 100,000+ employees, millions of customers, thousands of suppliers, oversight by a regulator and a legacy mainframe system at the core. The size and scale of the entity are one element. The number of transactions and interactions another. They are also held back by legacy systems, regulatory oversight and complex reporting requirements.
Transformation investment
The larger the business, the bigger the challenge. For example, Lloyds Banking Group, which employs more than 60,000 people, is 3 years into a £4bn transformation programme. The plan is to modernise the bank and reduce costs. They are looking to digitise banking services and invest in modern tools and automation to improve customer experience. Simultaneously, they are closing 130+ branches as was widely reported in February. It should be clear that this is a huge undertaking and change. However, under pressure from challenger banks, fintech firms and more agile competitors, Lloyds is seemingly forced to tackle their complexity and cost base.
Many businesses lack transformation investment. There are targets to meet, profits and free cash flow to generate and a share price and dividends to maintain. The surprising part to many employees is the ‘big bang’ nature of many transformation programmes. Rather than continuously improving and actively working to prevent and reduce complexity, it builds up. In the case of Lloyds, it was reported that they had over 20% market share prior to the pandemic. They have more recently lost customers more quickly than they have gained them, forcing their hand for a multi-year transformation. £4bn is a great headline number that tells the City how seriously they are addressing the competitive threat. To many insiders, it may be something that they have been crying out for over many years.
Holding businesses back
Since the largest of businesses, particularly those listed publicly, have published targets to meet, the room for manoeuvre is tight. If, for example, your EBIT is only 5% per annum, your parent Group is unlikely to sign off significant annual investment. In a good year where you manage to squeeze out 7% EBIT, you may be able to make a case for limited investment. Sometimes, these are out of necessity, such as a key platform reaching end-of-life (EOL). Other times, they are an investment with a clear return, such as to launch a new product or tooling that reduces unit costs. If some of your competitors are more diversified, they may have higher profit margins. In their case, they may transform faster than you can, advancing their digital transformation and earmarking new roles and teams for ongoing improvement.
What often frustrates your employees (and sometimes your customers), is the lack of a visible or tangible improvement that enhances their own experience. Replacing a complex ERP can cost millions of pounds and take a year or more. Typically, scope limited to as close to a replacement as possible – missing the chance to transform related processes and systems. Where digital tools are made available to customers or suppliers, especially those that include automation and self-service, it can reduce day-to-day churn and repetition. This only applies to high-volume transactional roles, however. Many professional roles are complex and multi-faceted and many transformations fail to reach them. New systems and processes are ‘bolted-on’ – year in, year out. As the number of customers and suppliers grows, processes can become cumbersome and systems not fit-for-purpose.
Pushing through the quagmire for transformation investment
From a business case perspective, transformation investment needs to see a return. Others must take a leap of faith because of declining fortunes or stagnant growth. As your employees suffer in ‘Frankenstein’ jobs and customers bash their heads against the metaphorical wall, something needs to give to step up the growth rate and EBIT. Since no market stays still indefinitely, even those in relatively ‘stable’ environments must keep up. As one director once told us, “we have to keep making more profit every year because our costs go up every year”. It works a little differently in publicly-traded companies where you also need to balance a level of justifiable investment against predictable returns and EPS growth. Ultimately, a lack of transformation investment holds businesses back,
If you would like to discuss your transformation journey, simply contact us via our website.
Alternatively, why not read a related article on job design and another about transforming your systems.
Finally, you can also find out more about our transformational service offerings.