Too Big to Fail — Or Too Complicated to Succeed?

Have you ever wondered how companies got into the position of being “too big to fail”? For the past year, we’ve been told that certain firms are so big, important, and globally interconnected that their bankruptcy or closure would send devastating shockwaves throughout the worldwide economic system. And to prevent this kind of seismic effect, we’ve accepted the fact that the government (meaning us taxpayers) needs to rescue these companies either through bailouts or forced mergers.

But the odd thing about this premise is that our entire economic incentive system is based on getting “big.” Investors expect the managers of their companies to pursue growth strategies — to drive revenues and profits continually larger and larger. In fact, most firms are judged by how much they have grown in the current quarter compared to the previous quarter and compared to the same quarter of the previous year. Bonuses, stock prices, and analyst ratings are all based on growth. So on the one hand we encourage — even insist — that companies keep growing and growing; and then we get angry and frustrated at managers who did exactly what we asked them to do and created companies that are now deemed “too big to fail.”

To resolve this seeming contradiction, perhaps we need to focus not on growth per se, but on the effective control of growth. The managers of companies such as Citibank, AIG, and General Motors did a great job of growing — buying companies, developing new products, introducing new brands, expanding into new geographies, and (at least for a while) winning new customers. But with this sprawl came incredible complexity, which managers did very little to rein in. In fact, as the companies became larger and larger the executives of these mega-firms tacitly or explicitly encouraged even more complexity by allowing managers in far flung places to operate in their own ways, with their own processes. And because of this complexity, the senior managers back at headquarters lost track of what was being done in the various corners of their kingdoms, and the risks associated with those actions.

Really effective executives understand that growth is not a one-way street. While adding new products, services and acquisitions, they also are pruning old products, streamlining processes to make them less complex, and looking for opportunities to make things simpler for their managers, employees and customers. Without the hard work of pruning, simplifying and continually reshaping the firm, unbridled growth gets out of control — like a garden overrun with weeds.

Schneider Electric, a Paris-based firm with over 100,000 people, is a good example of what it takes to make sure that growth doesn’t get out of control. Over the past five years the firm has made over 80 acquisitions around the world, while also growing organically by introducing new products and services. To manage this growth, senior management has made simplicity a strategic imperative such that managers are constantly looking for simplification opportunities through consolidation of country and regional operations, standardization of processes, and reduction of SKUs. These company-wide efforts have been a major source of bottom-line impact during this toughest of economic downturns: At mid-year the company reported over $450 million (310 million Euros) in savings from simplification efforts and adaptation to lower activity.

We all agree that growth is an imperative. But uncontrolled growth without continual pruning and streamlining is a potential recipe for disaster. So take a look at your own company. Are you in danger of getting “too big to fail” — or at least too big to succeed?

Ron Ashkenas is a managing partner of Robert H. Schaffer & Associates, a Stamford, Connecticut consulting firm and the author of the forthcoming book Simply Effective: How to Cut Through Complexity in Your Organization and Get Things Done (December 2009).