Over the last two years, we’ve experienced the unhappy consequences of the unmanaged complexity of the world economy—culminating in the dramatic and traumatic collapse of Lehman Brothers, the forced sale of Merrill Lynch, multiple bailouts, Treasury liquidity programs, and government stimulus packages. We’ve seen what happens when you combine financial products that even Warren Buffet couldn’t understand with a fragmented regulatory system in a global, 24/7 environment. We’ve also seen the results of too much complexity on individual companies, such as General Motors, which collapsed under the weight of too many brands, too many models, and too many programs; or even Starbucks, which got into trouble by introducing too many products into too many stores, and losing its core focus on the coffee experience.

At the same time, however, there’s another story beneath the headlines: For most managers, dealing with complexity has become an ongoing, day-to-day challenge: keeping up with constant e-mails, attending innumerable meetings, connecting with the right people across the matrix to make decisions, coordinating processes across cultures and time zones. It’s exhausting, and many managers are frustrated, overwhelmed, and worried that they might unintentionally be creating the next Lehman.

But it doesn’t have to be this way. While some of the complexity that managers experience comes from globalization and new technologies, a large portion is of their own making. If we want to prevent the next Lehman, and if we want companies to be more successful and managers to be more energized and innovative, then directors have a responsibility to insist that simplification be part of the executive agenda.

Four Sources of Complexity
Nobody gets up in the morning with the intention of making the organization more complex. Rather, like weeds in the garden, complexity continually insinuates itself into the fabric of a company in four principle ways: through changing structures and reporting relationships; through product design and proliferation; through the evolution of work processes; and through unconscious managerial behaviors. Directors need to challenge executives to address each of these sources of complexity, both individually and in combination. Here are some brief descriptions of these complexity-creators and a few ways that directors might work with their executive leaders to counter them:

Structural complexity: Organizational structures are like biological organisms in which cells continuously grow, split, and reform. Reorganizations don’t happen alone, but rather are initiated by executives to align people by function, product, geography, business unit, customer, or some other factor in an attempt to be as competitive and efficient as possible. At the same time, managers add or combine units due to acquisitions or internal growth; and they add or subtract layers based on people’s capabilities and their beliefs about how many people should report to any one manager. The result of all this seismic structural activity is that many organizations end up being fragmented, sprawling, and confusing, without a clear logic to how things were put together—leading to unnecessary costs, poor communications, and the danger that high-risk or poorly performing units get lost in the maze. For example, AIG’s structural complexity was one factor that allowed a small, under-the-radar unit to operate in a way that almost destroyed the company.

To counter this type of complexity, directors should ask executives questions such as:

• How does the structure of the company directly support and advance the business strategy?
• Can most employees explain the logic of how the company is organized?
• How many levels of management are there between the CEO and first line supervisors?

Product complexity: Products and services are the lifeblood of any organization, and managers are constantly looking for new ways to satisfy and delight customers. Unfortunately, it is much easier to add new products than to subtract—so most companies end up with vast portfolios of products and services that are costly to maintain, control, update, support, and sell. In addition, many product developers focus on the technical elegance of their products without worrying about whether their customers, or their own internal colleagues, truly understand how they work and what will happen to them over time. This kind of complexity was clearly at play in the financial crisis, as investment banking wizards created collateralized debt obligations (CDOs) and other arcane securitized products that neither customers nor their own risk managers fully understood—until it was too late.

To counter product complexity, directors should ask for thorough reviews of new products and services to make sure executives fully understand how they work and the risks involved. In addition, directors should make sure that managers are reviewing the entire product portfolio with an eye towards sunsetting and retiring products as appropriate.

Process complexity: Most work in organizations is done through processes. Sometimes these are highly structured and disciplined, such as with manufacturing activities. At other times, the processes are loose and ad hoc. However, no matter how much rigor and six sigma-type efforts managers put into process management, the processes continually evolve and change as new people get involved, new issues emerge, and new ideas are introduced. Changing organizational arrangements and new product requirements further complicate processes, often making it difficult for people to understand how things really get done. The result is that companies often find themselves with convoluted decision-making, multiple committees, un-ending budgeting and planning cycles, and general lack of control. For example, many of the problematic financial institutions in the past year found themselves with fragmented and inadequate risk management and forecasting processes that left them unprepared for the downturn.

To counter process complexity, directors should first agree on the key processes that are most critically in need of being controlled and disciplined (such as risk management, new product commercialization, or succession planning). They then need to periodically ask executives to walk through the “map” of these processes to make sure that the right controls are in place, that roles are clear, and that cycle times are appropriate.

Managerial complexity: In addition to structures, products, and processes, managers also cause complexity through their own ways of directing and leading organizations. Particularly in dynamic environments, when processes and structures don’t provide clear guidance, managers create the neural networks that give people direction about what to do and how to do it. When managers are clear with their instructions, they can actually reduce complexity. But when managers unintentionally give nebulous assignments, open-ended deadlines, conflicting instructions, mixed messages, and foster fuzzy accountability, they create enormous amounts of additional complexity and confusion. For example, leading up to and during the financial crisis, executives at many of the financial firms gave their people extremely mixed messages about continuing or stopping product transactions, were unclear about what data was needed for decisions, and rewarded people for poor performance.

It is impossible to counter managerially-generated complexity completely, since much of it is unconscious and unintentional. But directors can hold a mirror up to their executive leaders to help them make their own assessments about the clarity of their directions, the crispness of their decision processes, and the discipline applied to getting things done. In addition, directors can make sure that executive compensation plans are simple, straightforward, and geared to rewarding the right strategic actions over time versus only short-term performance. Finally, directors can insist that succession plans take into account the ability of managers to simplify their organizations.

Simplification as a Business Imperative
Almost every company quite naturally focuses most of its attention on growth, particularly in today’s highly competitive environment, adding more products, services, geographic locations, and employees. But what companies don’t do very well—unless they are forced by an economic or competitive crisis—is prune these growth shoots. Managers don’t like to say “no” or make choices, especially when they are trying to respond to customer needs, beat their competitors, and satisfy shareholder expectations. So, instead, managers keep adding more plants and fertilizer to the garden and end up with a tangled jungle. But to maintain healthy organizations, managers and executives need to constantly prune while simultaneously fostering growth, without waiting for a crisis to force the issue.

The crisis of the past year forced almost every company to cut back, perhaps faster and more deeply than anyone would have preferred. But as the crisis passes, and companies move back into growth mode, it will be easy to slip back into old patterns as the lessons of Lehman and the pain of the financial downturn fade away. One way to prevent this from happening is for directors to insist that simplification become an ongoing business imperative for their companies, such that executives keep a focus on simplification not only in bad times, but in good times as well.

Ron Ashkenas is a managing partner of Robert H. Schaffer & Associates, a Stamford, Conn., consulting firm and the author of the forthcoming book “Simply Effective: How to Cut Through Complexity in Your Organization and Get Things Done” (Harvard Business Press, December 2009). He can be reached at ron@rhsa.com.