Professor Simon Collinson tells
Douglas Blakey that complexity is one of the
biggest challenges facing modern business, slowing companies down
and costing them over 10% of their profits and harming employee
morale. Yet very few people are offering practical advice on how to
solve this problem
What is complexity? What is
simplicity? What are the true financial costs of complexity and how
can business change its behaviour to remove harmful complexity from
processes, organisation design, strategy, product & service
And how do such questions resonate
within the banking sector?
According to Simon Collinson,
Professor of International Business and Innovation at Henley
Business School, Reading University (UK) and Guangbiao Chair
Professor, Zhejiang University (China), the banking industry is one
of the most complex industries.
He tells RBI that the reaction of
governments to the banking crisis of 2008 has significantly
increased regulatory oversight, further adding to the complexity of
operating in this sector.
A study led by Collinson
established what he calls a Global Simplicity Index (GSI).
It ranks 200 companies according
to their complexity and performance over the past 5-years. There
are 48 major financial services firms in the GSI.
A comparison of these firms
against those in other industry sectors concludes that financial
services in general is the 6th highest-performing industry and the
6th most-complex industry.
At first glance, that may not
sound as bad as some commentators may have forecast, if there are
five other major industry sectors even more complex than
Less encouraging is Collinson’s
finding that the majority of global banks are close to or beyond
what he terms the “complexity tipping point.”
In addition, almost another 20% of
the world’s biggest banks are “dangerously close to the complexity
He argues that, as most
organisations evolve to become more complex, not less complex over
time, all of the banks close to the “tipping point” are at
significant risk of seeing complexity increase at the expense of
Banks performing strongly
according to Collinson are adjudged to be in the ‘performer’
category and include China’s ICBC, Bank of China and China
Construction Bank as well as Wells Fargo in the US and Banco do
Brasil and Bradesco in South America.
Such banks are simpler in terms of
their geographic spread.
In China and Brazil, state support
lifts their performance ‘artificially’ and protects them against
some global financial risks.
Sources of harmful
Operating across too many
geographical territories has a negative effect for banks. This one
factor was a far higher indicator of negative performance than any
other factor in banking. Operating in more countries requires banks
to deal with different capital markets, institutions and regulatory
regimes; different business cultures; different customers,
marketing approaches and distribution channels.
Add to these issues are branding
issues, marketing strategy, distribution strategy and products –
not just widening the product portfolio but increasing diversity
across many other dimensions.
This suggests that the priority of
banks should be to obtain extensive knowledge of fewer geographical
markets, rather than spreading operations across too many different
geographical regions each with different customer needs,
competitors and regulatory environments.
Alternatively, says Collinson,
banks need to become much better at managing geographical diversity
than they are at present.
Maybe surprisingly, having a wide
range of products and services across different market segments did
not have a strong negative impact on the performance of banks.
In other words, the benefits of
having a broad portfolio of products and services, with segment
branding and common back-office platforms, seem to outweigh the
costs of the additional complexity.
This suggests that the ability for
banks to cross sell products and services and meet the needs of
multiple client segments is at least equal to costs of the
additional complexity that it brings.
One of the most surprising aspects
of the Collinson survey is that the highest performing banks were
those that undertook the most M&A activity – this contrasts
very markedly with findings in other industry sectors.
Generally high levels of M&A
are associated with poorer performance, so this finding suggests
that firms in the banking industry are able to integrate
acquisitions more effectively than companies in other
A number of very notable
exceptions come to mind, notably the suicidal acquisition of ABN
AMRO by Royal Bank of Scotland.
- Reduce geographical
complexity: It may be very difficult for the major banks to reduce
the number of countries across which they operate – however a
review of their geographic portfolio to focus on fewer key
countries would be advisable for the majority of the global
- Increase external focus:
The overt focus on internal organisation, process and decision
making structures has reduced the agility and competitiveness of
many banks. The banks need to refocus their energies on the
external factors like changing customer needs, competitors and
technological change. They should consider delayering to put
leaders closer to the customer and refocus people’s roles and
responsibilities to emphasise external customer focus. They should
also start the process of developing an externally-focused,
customer-facing culture, encouraging everyone to be more in tune
with your markets and your customers’ needs and
- Reduce organisational
complexity: A fundamental review of banks’ organisation design is
essential with the aim of delayering, optimising spans of control,
reducing matrix complexity, devolving control to local or customer
facing managers and simplifying decision making. Without these
changes the banks will not have the agility they will need to adapt
to the future;
- Increase strategic focus
and communication: It is also clear that lack of strategic clarity
is harming banks’ performance. This may come from being unclear on
what the core strategy is, from trying to do too many things, or
from constantly changing the strategy, and
- Streamline knowledge based
processes: Many of the more transactional and systems-based banking
processes have already been transformed but attention should now
focus on the more knowledge based banking processes which can be
Professor Simon Collinson is
co-author with Melvin Jay of From Complexity to Simplicity:
Unleash Your Organisation’s Potential