How market complexity simplifies your life

Posted by Marc Hodak on July 10, 2007 under Patterns without intention | 4 Comments to Read

The McKinsey Quarterly features an interesting article on organizational complexity, offering the following advice:

Executives should distinguish between two types of complexity—institutional and individual. The former concerns the number and nature of interactions within a company, the latter the way individual employees and managers experience and deal with complexity.

This is similar to the powerful distinction of internalizing complexity. That’s when an organization takes on additional work processes in order to spare individuals from having to deal with them. For example, consider where electricity comes from. For the producer, it comes from a bewilderingly complex system of plants, wires, engineers, etc. And behind that, the complexity mushrooms into coal suppliers, an educated labor pool, ad infinitum. But for you and me, it comes from a wall outlet. Where does water come from? The faucet. Where does your friend’s voice come from? The cell phone. How does a car move? Push down on the accelerator.

One of the things that markets do extremely well is simplify our lives. Complexity has a cost, and producers compete on minimizing costs to their customers. So, if a producer has a choice between complicating their own life versus that of their customer, the producer will tend to absorb the complexity. Only then will they seek ways to minimize complexity within their organization so it can function more efficiently. Disney World is a notoriously difficult place to work precisely because it’s a seamless paradise for kids and families. All the complexity required to produce the “Disney Magic” is absorbed by the folks behind the scenes.

Contrast that with how well government “services” internalize complexity–or not.

Think of proliferating, 75,000+ pages of rules issued by the Federal government alone. So, for example, while the time and costs of making movies has plummeted over the last 20 years, the time and costs to fill out our tax forms has swollen out of control. And, among government agencies, I believe the IRS is unusually sensitive about the time it takes its “customers” to comply with the law. Still, people are flocking to TurboTax. TurboTax competes with TaxCut to simplify your life by internalizing as much complexity as possible. Then it’s up to them to manage that internal complexity–with or without McKinsey’s help–as much as possible.

McKinsey finishes this article with the following recommendations:

Companies must get three things right to manage complexity for value: organizational design, coordinating processes and systems, and capability building.

This confirms my experience that McKinsey is better at diagnosis than prescription, generally omitting the most important thing of all: incentives. In this case, if your complex organization is riddled with perverse incentives (and whose isn’t?), then design and coordination can only go so far. And increased capabilities exposed to perverse incentives simply brings on organizational ruin that much quicker.

Then again, if every company systematically eliminated their perverse organizational incentives, demand for McKinsey’s services would be cut 80 percent. Hmm…maybe they aren’t so ignorant about incentives, after all.