When less is much more

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If you want to score a table at Terroni's original Queen Street West location, get there early. The casual Toronto restaurant doesn't take reservations and customers are often lined up out the door during lunch and dinner.

Terroni is equally inflexible about its old-school Southern Italian menu, which gives diners dozens of choices but no freedom to play chef. Don't bother asking for grilled chicken instead of Calabrese salami on the Natalina pizza, or for pungent Parmigiano cheese with the tagliolini in canna a mare, a delicate seafood pasta dish. As the menu warns – and your waiter will politely explain – allowing such modifications would compromise Terroni's food and service.

If this all sounds a bit precious, or even arrogant, Terroni part-owner and general manager Vince Mammoliti says it's a matter of staying true to tradition. Sticking with the menu is also a good business decision for Terroni, which launched in 1992 and now has four restaurants – three in Toronto and one in Los Angeles. With no wacky orders to throw it off, the kitchen runs like a machine because the cooks prepare dishes the same way every time.

"It allows us to make a more consistent product," Mr. Mammoliti says. "That has been one of the key elements for us to building a loyal clientele."

Terroni's policy also takes the guesswork out of ordering supplies, which keeps food costs down. "You know what to get and how much of it to get, and you're much more accurate in doing so," Mr. Mammoliti says.

When Mark Satov looks at Terroni, the Toronto-based management consultant sees a small business that knows how to deal with complexity. It may create many different products, but it does so with focus and control. The no-modifications rule boosts Terroni's efficiency and guards its brand identity, says Mr. Satov, who is founder of Satov Consultants. "They don't want their brand to be sullied by a consumer making a poor choice of putting things together that don't go together, and saying they had a crap meal."

Mr. Satov aims to help companies run better by addressing what makes them complex. Complexity comes in many forms, from products to pricing to manufacturing. For marketers, it can be an invitation to laziness, Mr. Satov says. Rather than try to give people everything, he argues, a good marketing department figures out what they crave. "I don't think [consumers]really want choice as much as some marketers think they do."

This might appear to open a window for smaller firms that do a few things really well. But like their larger counterparts, Mr. Satov says, small- and medium-sized businesses can sabotage themselves by introducing new offerings in an attempt to please customers. "Small businesses are less likely to be disciplined about that sort of stuff, because they just see growth and growth is good."

For many companies, complexity happens by accident, says Toronto management consultant John Thorburn. "People don't want to recognize that they're building complexity, so the complexity comes out of the woodwork and gets them in the back," he explains. "Before you know it, you'll have a whole range of products you never strategically intended to have."

Complexity management is hardly a newfangled idea. All of the big consulting firms have tackled it, including Bain & Company, at whose Toronto office Mr. Satov worked before opening his own shop in 2002. But he says the recent recession forced businesses to confront the problem head on. "Complexity is a tough decision, because you're always worried about cutting out something that a customer could want."

Mr. Satov stresses that managing complexity doesn't have to mean shrinking it – slashing stock-keeping units (SKUs) or zapping entire product lines. Nor does uniformity always trump customization, because the latter is what sets some firms apart. Sure, most companies suffer from too much complexity, largely thanks to sales forces who won't own up to underperforming products. And great brands such as Coca-Cola and McDonald's rose to power by combining a slender offering with laserlike research and development and marketing, Mr. Satov says. But in his opinion, complexity itself is neither good nor bad.

As a consultant, Mr. Satov favours a holistic approach to complexity that looks across the entire company. "In some businesses, the goal is to reduce it – to get rid of the choice because it's too expensive," he says. "In other businesses, it's to figure out how to provide [choice]in a way that doesn't kill your costs and confuse the customer."

Often, shedding complexity is a good thing. Among manufacturing companies, the rule of thumb is that 80 per cent of sales come from 20 per cent of SKUs. But Mr. Satov points out that the 80 per cent of SKUs accounting for the other 20 per cent of sales tend to make up 40 per cent of inventory.

How so? If a company makes, say, 10 varieties of flip-flops as opposed to just one, it's harder to predict how each will sell. Therefore, the company must stock extra inventory just in case. "The more SKUs you have, the more you split the demand pool and the more your inventory goes up," Mr. Satov says.

This complexity hikes costs throughout the organization, from warehousing to manufacturing to marketing materials. It also takes much longer to launch new products because R&D efforts are stretched over so many SKUs.

Research from Bain makes a strong case for reducing complexity. Examining 110 companies in 17 industries, the consultancy found that those with the least complexity grew 40 per cent to 50 per cent faster than their average competitors. And in some 490 complexity-reduction projects that Bain undertook for clients, revenues climbed 5 per cent to 40 per cent while costs fell 10 per cent to 35 per cent.

In a 2005 global survey of 424 CEOs by Dallas-based consulting firm the George Group and the Wharton School of the University of Pennsylvania, about half of respondents said that product or service complexity is bad for cost competitiveness and lead time. Another finding: Companies that do profit from complexity tend to be highly disciplined about what they offer.

Excess complexity is always wrong, Mr. Satov says. But to get it right, businesses must weigh the costs and benefits of complexity. Mr. Satov says Coca-Cola did that when it added Diet Coke. "Don't tell me that there's value in reducing complexity and saying, 'You know what? Some people are on a diet and some people aren't, so let's just give them Coke and get most of the business.' "

Part of Mr. Satov's take on complexity is that it matters where you put it. On the coffee side, Starbucks is far more complex than Tim Hortons, promising customers whatever they want. But it manages that complexity cost effectively by preparing coffees at time of delivery – from the same handful of raw ingredients. Starbucks also stocks a small selection of pre-made items so it can predict demand with reasonable accuracy.

Meanwhile, Tim Hortons sells a huge assortment of pre-made doughnuts that it tosses out regularly to honour its freshness pledge. This complex offering eats away at profitability, Mr. Satov says. "You could say Tim Hortons doesn't make a great decision from a complexity standpoint, because they've put the complexity into things that expire."

But what if, like Starbucks, Tims has that angle covered? "I'd imagine they'll be getting pretty good at forecasting the mix, and I'll bet you that throwing-out routine is getting less," Mr. Thorburn says.

For Mr. Satov, the master of complexity is Dell, which became famous for having no inventory on its balance sheet. The U.S. computer maker lets buyers choose from many configurations, but its pull-based supply chain delays customization by building each machine to order. "They found a way to give infinite choice without actually sitting with inventory," Mr. Satov says.

As an example of poor complexity management – at least at first glance – he points to the impenetrable pricing of packages by Canadian cellphone providers. On the other hand, Air Canada has reduced pricing complexity by boiling its offerings down to just four fares. Mr. Satov guesses the telcos are deliberately sowing confusion. "The ill will that it creates from a lack of understanding is probably not as important as the incremental profit they get from fooling consumers on a few aspects of the pricing."

Elsewhere in the phone world, it may look like Apple has an advantage over RIM in complexity management. There's only one iPhone, while BlackBerries come in many shapes and sizes. But down the line, Apple faces its own complexity challenges. Where the BlackBerry treads lightly by using RIM's servers, the bandwidth-sucking iPhone clogs third-party networks. "They're driving the intermediaries crazy," Mr. Thorburn says of Apple.

When he works with companies, Mr. Satov frequently encounters what he calls the complexity stalemate. The operations folks blame falling profits on a surfeit of products. In response, the sales team complains that cutting products will make customers unhappy.

Within reason, both arguments are right, Mr. Satov says. The only way to break this impasse is to gather cost and revenue data. Mr. Satov says it's also important to make the final decision impartial, something Procter & Gamble accomplishes by using product managers to oversee profit and loss.

According to Mr. Satov, the best managers look at both sides – and prove there are revenue and cost benefits to a more focused product offering. For instance, they'll look at how marketing budgets are spent. "If you spread them over fewer products, then those products get better play," Mr. Satov says.

And don't be fooled into thinking that a business is too complex simply because it makes lots of different stuff. Like Terroni, it may have found the right level. "Really understand how complexity hits you – don't just cut it recklessly," Mr. Satov says. "Cutting it recklessly is as bad as creating it recklessly."

Special to The Globe and Mail