The cost of complexity: when variety eats your margin

Key takeaways

The cost of complexity is the extra operating cost created by variety: more products, options, price lists, customer terms and ways of doing things. Each addition looks cheap on its own. Together they multiply exceptions, training and errors. Complexity costs are hard to see because they sit in overheads, not against the product that caused them.

• Complexity cost: overhead created by variety, not volume.
• Each special case adds exceptions, training and errors.
• The cost sits in overheads, so the cause is hidden.
• Simplify the offer before making the admin cheaper.

What is the cost of complexity?

The cost of complexity is the additional cost a business incurs because of the number of different things it sells, the ways it sells them and the exceptions it allows. It is separate from the cost of volume. Selling twice as much of one product doubles some costs. Selling the same amount across twenty variants adds costs that volume never would.

• How BPO can help businesses reduce operational costs
• Cost drivers: what really moves your operating costs

Where does complexity come from?

Complexity comes from saying yes one reasonable request at a time. A custom payment term for a good client. A product variant for one order. A separate process for a customer who prefers fax. Each decision made sense. Nobody decided to have forty price lists.

• Product and service variants with small sales.
• Customer-specific prices, terms and paperwork.
• Several systems or channels doing the same job.
• Legacy processes kept for a handful of customers.
• Different ways of working at each site.

• Exception handling: the few cases that drive most cost
• Diseconomies of scale: when a bigger team costs more

How do you measure it?

Measure it by ranking products, customers and processes by revenue and by the effort they consume. Most firms find a long tail: a large share of variants producing a small share of revenue and a disproportionate share of work.

In an illustrative firm with 60 product lines, the bottom 30 bring in 8% of revenue. A two-week log shows they generate 30% of customer queries and most of the special handling. The tail is not paying for the admin it creates.

• 1. Rank products and customers by revenue.
• 2. Log queries, exceptions and admin time against each.
• 3. Compare share of revenue with share of effort.
• 4. Flag anything with a large gap.

• Activity based costing for small businesses
• Unit economics: does each new customer still make money?

How do you reduce complexity?

Reduce complexity by removing, standardising or charging for it. Remove variants nobody would miss. Standardise terms so most customers share one set. Where a special arrangement is worth keeping, price it so it pays for its own handling.

• Retire low-selling variants.
• Move customers onto standard terms at renewal.
• Set a price or minimum for non-standard requests.
• Close duplicate channels and systems.
• Agree one process across sites.

• Process standardisation: one best way, lower cost per task
• Why profit margin falls as a business grows, and the fix

When is complexity worth paying for?

Complexity is worth paying for when customers value it and pay for it. A bespoke service is complexity sold at a premium. The problem is unpriced complexity: variety given away because nobody knew what it cost. The aim is deliberate complexity, not none.

• Cut costs or grow revenue: which should come first?
• Core vs non-core activities: what to keep in-house

Can outsourcing absorb complexity?

Outsourcing can absorb complexity, at a price. A managed team will handle forty price lists if you document all forty, but training takes longer, errors are likelier and the cost per task is higher than for a simple process. Simplify first. Providers quote more keenly, and deliver more reliably, for work with clear rules.

• How to compare outsourcing quotes like for like
• The cost lever scorecard: find savings process by process

What does this look like in practice?

A pattern we see in established firms: a new starter takes months to become useful because of everything they must remember about individual customers. The business reads that as a training problem. It is a complexity problem. Halving the number of special arrangements does more for training time than any manual.

• See client work
• BPO Solutions for UK businesses

Complexity checklist

Review these once a year.

• How many products or services bring in the last 10% of revenue?
• How many customers have non-standard terms?
• How many price lists are live?
• How many systems hold customer data?
• How long does a new starter take to work alone?
• Which special arrangements are priced to cover their cost?

• How to run a cost review in a small business
• Operational cost reduction checklist: 20 checks

Next step

Tell us how many products, price lists and special terms your team has to manage. We will help you see which are earning their keep and which are quietly raising your costs.