Your Business May Be More Complicated Than It Needs to Be

One of the easiest ways to make a business harder to run is to keep saying yes.

Yes to another product.

Yes to another customer.

Yes to another vendor or to another exception.

Yes to another report, another process, another way of doing something 

because this particular situation is just a little bit different.

And the strange thing is, 

none of those decisions necessarily looks bad when you make it.

Most of them probably make perfect sense.

But eventually, all those perfectly reasonable yeses can add up to a business nobody fully understands anymore.

And when that happens, complexity doesn't just make the business harder to manage.

It can make it less profitable.

[INTRO MUSIC] 

Welcome to Things Entrepreneurs Should Know — a podcast about the decisions, tradeoffs, and occasional hard lessons that come with building a business of lasting value. 

I’m Chip Schweiger. 

And, I’ve spent more than thirty years working with businesses and the people who run them. 

In that time, I’ve learned that business can be complicated enough on its own. 

But sometimes, we make it more complicated than it needs to be.

Because as businesses grow, they naturally add things — 

products, customers, employees, vendors, systems, processes.

Most of those additions make sense when they're made. 

But over time, they can accumulate into a business that's harder to manage, 

more expensive to operate, 

and sometimes less profitable than anyone realizes.

So today on the show, I want to talk about how that happens, 

where the cost of complexity tends to hide, 

and why sometimes the best thing you can do for a growing business 

is figure out what you no longer need.

[MUSIC RISES THEN FADES OUT]

Welcome back. There’s a natural tendency to associate complexity with success.

A young business might have one product, a handful of customers, a couple of employees and maybe a few key vendors.

Then it grows.

Now there are more products. More customers. More employees. More locations. More systems and vendors. And probably more managers.

And that's usually considered progress.

Sometimes it is.

But somewhere along the way, something interesting can happen.

The business gets bigger without necessarily getting better.

Revenue goes up, but margins don't.

Headcount grows, but productivity doesn't.

Management spends more time putting out fires.

The owner gets pulled into more decisions instead of fewer.

And everybody seems busier than they used to be.

When I see that, one of the questions I start asking is pretty simple:

Has this business become more complicated than it needs to be?

Because complexity has a cost.

The problem is that the cost usually doesn't appear anywhere on the income statement under a line called "complexity."

Instead, it gets scattered throughout the business.

It shows up in labor.

And in inventory, and in purchasing.

Soon, you start to see it in lower margins.

And in mistakes and rework.

In more management time.

And sometimes it shows up in a business that generates a lot of revenue without generating nearly as much cash as the owner thinks it should.

Chapter 1 - THE PROBLEM WITH AVERAGES

One of the first places I see this is in profitability.

I've worked with businesses where management could tell me total sales and total expenses almost instantly.

What they couldn't tell me was where the profit actually came from.

And those are two very different things.

Knowing that your company generated ten million dollars of revenue doesn't tell you whether all ten million dollars of that revenue was equally valuable.

It almost certainly wasn't.

The same is true of customers.

A customer buying a million dollars from you sounds more valuable than one buying a hundred thousand.

But what if that million-dollar customer demands special pricing?

What if they require special handling?

What if they pay slowly?

What if they generate returns, rush orders, service calls or other costs that aren't being allocated directly to them?

And what if your people spend five times as much time managing that customer as they do managing everyone else?

That million-dollar customer may still be a terrific customer.

But revenue alone won't tell you.

And that's where complexity starts hiding.

The business looks at the average.

Average gross margin.

Average labor cost.

Average profitability.

But averages can conceal enormous differences underneath them.

I've seen this with products as well.

You can have products that generate significant sales but very little actual profit 

once you understand everything required to sell and support them.

Meanwhile, a relatively small group of products may be producing the majority of the company's economics.

Until you separate those things, you don't really know what business you're in.

You know how much business you're doing.

And that's not the same thing.

Chapter 2 - HOW COMPLEXITY SNEAKS IN

Very few owners wake up one morning and say, "I'd like to make my company unnecessarily complicated."

Complexity usually arrives one reasonable decision at a time.

A good customer asks you to carry something you don't normally sell.

You say yes.

A salesperson wants flexibility on pricing to close a deal.

You say yes.

A manager has a preferred vendor.

You add the vendor.

A customer needs slightly different payment terms.

You make an exception.

Someone develops a spreadsheet because the existing system doesn't quite produce the report they need.

Then somebody else builds another spreadsheet.

A new employee is hired, and instead of eliminating an old process, the company simply adds a new one.

Now none of these decisions is necessarily wrong.

And that’s important to understand.

The lesson here isn't that you should never make exceptions or add products or accommodate good customers.

Business requires judgment.

But exceptions have a tendency to become permanent.

And companies are generally much better at adding things than removing them.

So the complexity accumulates.

Five years later, somebody asks why the company does something a certain way.

And the answer is:

"That's just how we've always done it."

If you hear that, that's usually a sentence worth investigating.

Chapter 3- COMPLEXITY CREATES FRICTION

Let’s talk about friction.

Think about a business with twenty vendors supplying similar products.

There may have been a perfectly good reason for adding every one of them.

But twenty vendors means twenty relationships.

Twenty sets of terms.

Twenty ordering processes.

Twenty invoices to process.

Potentially twenty different pricing structures.

And perhaps twenty different opportunities to lose purchasing leverage.

Now imagine reducing that to eight.

You might negotiate better pricing because you're concentrating your purchases.

Your purchasing people have fewer relationships to manage.

Accounts payable has fewer vendors to process.

Inventory may become easier to control.

And quality may become more consistent.

That doesn't mean eight is some magical number.

The point is that every additional layer in a business creates some amount of friction.

Products do it.

Customers do it.

Vendors and Systems do it.

Policies do it.

And people definitely do it.

Heck, even meetings do it.

And if the economic benefit of that additional complexity is greater than the cost, terrific.

Keep it.

But somebody needs to ask the question.

Because businesses rarely calculate the cost of complexity when they're adding it.

Chapter 4 - SOMETIMES THE ANSWER ISN'T ANOTHER PERSON

There's another pattern I've seen many times.

A business becomes overwhelmed.

Things aren't getting done.

Reports are late.

Customers aren't getting called back quickly enough.

Managers are stretched thin.

So the obvious answer is:

We need another person.

Sometimes you absolutely do.

But before adding another salary, I think there's another question worth asking.

Why is everybody so busy?

Because hiring another person to manage unnecessary complexity doesn't eliminate the complexity.

It institutionalizes it.

Maybe your people are spending hours producing reports nobody uses.

Maybe three people approve something that only needs one approval.

Maybe you're maintaining products that barely contribute to profit.

Maybe your team is manually reconciling information between systems because nobody ever fixed the underlying process.

Maybe your salespeople are spending enormous amounts of time servicing customers that don't generate enough profit to justify the attention.

Or maybe you've got meetings that exist because they've always existed.

Before adding capacity, look at the work.

Some of it may not need to be done at all.

And eliminating unnecessary work can be much more valuable than becoming more efficient at doing unnecessary work.

Chapter 5 - GROWTH CAN MAKE THIS WORSE

This is one reason I'm cautious when somebody tells me the solution to a business problem is simply more revenue.

Revenue can solve some problems.

It can also amplify them.

If you have an unprofitable product and sell twice as much of it, you haven't necessarily improved the business.

If your processes don't scale, more volume can create more mistakes.

If working capital is poorly managed, rapid growth can consume enormous amounts of cash.

If the owner already has to approve everything, doubling the size of the company may just double the number of decisions waiting on that owner.

Here’s the plain truth: Growth magnifies the economics that are already there.

Good and bad.

So before asking how to make the business bigger, it's sometimes worth asking how to make the business better.

And occasionally, better means simpler.

Chapter 6 - SIMPLER DOESN'T MEAN SMALLER

Now, I want to make an important distinction here.

Simplifying a business isn't the same thing as shrinking it.

This isn't about arbitrarily cutting products or firing customers or eliminating vendors just so you can say you streamlined the company.

It's about understanding what creates value and what consumes it.

That requires information.

Start looking beneath the totals.

Sales by customer.

Profitability by customer.

Sales by product or service line.

Margins by product or service line.

Revenue per employee.

Profit per employee.

Vendor concentration and purchasing patterns.

Working capital requirements.

And then combine the numbers with what the people inside the business know.

Because sometimes the financial statements will point you toward a problem without explaining it.

You may discover that one customer appears less profitable than the others.

Then you talk to the people serving that customer and find out why.

Maybe the customer constantly changes orders.

Maybe they're buying something nobody else buys.

Perhaps they require an unusual delivery schedule.

Or maybe the pricing was negotiated five years ago and never revisited.

Now you've got something you can act on.

And importantly, the answer doesn't necessarily have to be "fire the customer."

You could change the price.

Or change the terms.

Maybe you change the service level.

Or maybe you simply stop offering the exception.

The goal isn't simplicity for its own sake.

The goal is a business where the complexity you're carrying earns its keep.

Chapter 7 - THE OWNER CAN BE PART OF THE COMPLEXITY

There's one more uncomfortable version of this.

Sometimes the owner is the exception system.

Every unusual situation gets routed to the owner.

Pricing exceptions.

Hiring decisions.

Customer problems.

Purchasing decisions.

Capital expenditures.

Contract terms.

And Employee disputes.

The business has processes right up until something falls outside the process.

Then the process becomes:

Ask the owner.

That can work surprisingly well for a long time.

Especially when the owner knows the business better than anyone else.

But eventually it creates a bottleneck.

And here's the irony.

The owner may look around and conclude that the company needs better people because nobody seems capable of making decisions without them.

But the company may have spent years teaching people not to make decisions without them.

Simplifying the business sometimes means clarifying who gets to decide what.

Not every decision needs a committee.

And not every decision needs the owner.

Chapter 8 - WHAT WOULD YOU BUILD TODAY?

Here's an exercise I like.

Forget for a moment about how your company currently operates.

Imagine you were starting the same business today, knowing everything you know now.

Would you sell every product you currently sell?

Would you serve every type of customer?

Would you use every vendor?

Have the same organizational structure?

Produce all the same reports?

Would you hold all the same meetings?

And have the same approval processes?

Or maybe it’s simply would you create all the exceptions you're currently managing?

Probably not.

And that gap — between the business you’d build today and the business you're actually running — is worth examining.

You can't rebuild a mature company from scratch every few years.

Nor should you.

But you can periodically ask whether decisions made for yesterday's business still make sense for today's.

Because complexity isn't automatically bad.

Some complexity is the result of serving sophisticated customers or operating in a difficult industry.

Some of it creates genuine competitive advantage.

Some of it is simply the price of operating at scale.

But often a lot of it is just accumulated history.

And accumulated history can be expensive.

So as your company grows, don't only ask what you should add next.

Every once in a while, ask what you could take away.

You may discover that one of the best ways to improve the business isn't to do more.

It's to stop doing a few things that no longer earn their keep.

And that's something entrepreneurs should know.

[OUTRO MUSIC BEGINS]

Well, that's all for this episode. 

Thanks for spending a few minutes with me.

If this episode made you think about your own business a little differently, send it to another owner or business leader who might appreciate it.

You can also find the show notes and more episodes at TESKPod.com.

This is Chip Schweiger, reminding you that if you always do what you've always done, you'll always get what you've always gotten.

I look forward to seeing ya next time.