Key takeaways
- Industry incumbents face growing pressure to deliver faster and at scale, but complexity is slowing execution and hindering modernization efforts.
- Companies need to understand the full costs of accumulated complexity and distinguish where it creates value from where it drains resources.
- By choosing where to simplify and aligning the organization, defense contractors can improve performance and sustain gains as they scale.
Legacy defense contractors are under tremendous pressure to transform how they do business. Demand for munitions and advanced defense capabilities is surging even as companies operate at capacity, stretching supply chains and testing workforces. Meanwhile, the Department of War is demanding faster production through acquisition reforms and disruptive entrants are raising expectations for how quickly new capabilities can be delivered.
Across the industry, incumbents continue to invest heavily in their operations to meet these growing demands: modernizing ERP systems, scaling up manufacturing, insourcing critical components, and integrating previously separate operating platforms. But they are making those investments within enterprises already burdened by complexity. Cumbersome processes and heavily customized systems consume resources and slow execution, making it harder to achieve the greater speed and scale those investments are intended to deliver.
Some of this complexity is inherent to the business. Defense contractors develop highly engineered systems under demanding technical and regulatory requirements. The problem is the complexity that accumulates beyond those requirements as new processes are layered on top of old ones, systems are customized around individual business unit needs, and organizational structures evolve to meet immediate priorities without simplifying what came before. Unlike legacy contractors, new market entrants don’t carry this burden.
In this environment, it becomes easier for different parts of the business to optimize for their own needs, with the resulting costs spread across the enterprise. The benefits of individual decisions may be visible, but their broader costs are harder to see. Even simple things become problems: missing low-tech components hold up delivery of sophisticated weapon systems; delays in issuing purchase orders compound supply chain challenges; cumbersome administrative requirements slow employee onboarding amid labor shortages.
Managing complexity requires looking across the business to understand the connections and costs that individual problems can obscure. Four imperatives can help leaders improve execution at speed and scale.
Managing complexity to improve performance
1. See complexity as a systemic issue.
Companies often underestimate how pervasive complexity is, focusing on individual inefficiencies and bottlenecks rather than the linkages across the organization. They might streamline a process without considering the organizational changes needed to support it or reorganize without addressing the underlying work tasks.
To build a system-wide view, organizations should look beyond individual processes, tracing how resources such as people, equipment, and technology connect. Understanding how these are shared across processes, and how performance in one affects others, can reveal critical interdependencies and divided responsibilities, helping leaders identify where linkages are breaking down.
The U.S. Army faced this challenge as it developed a strategy for modernizing its enterprise business systems. Many of the more than 500 systems it had accumulated over decades were monolithic, domain-specific solutions that lacked effective integration and relied on outdated technologies. Critical ERPs were massive, highly customized, and approaching end-of-life, adding urgency to an already fragile environment.
Mapping the environment as a system revealed operational risks and structural barriers to modernization, as well as significant total costs. Programs had separate databases, management, and funding streams while departments operated in silos. The system-wide assessment gave the Army a basis for evaluating where it could standardize business systems and where its requirements demanded a specialized solution.
2. Distinguish complexity that creates value from complexity that destroys it.
Not all complexity is bad. Some supports products, services, and capabilities that create value. The challenge is distinguishing that complexity from the kind that simply consumes resources and drives up costs. As complexity grows, traditional costing methods often fail to capture the full costs of individual products and services, obscuring where a company is making money. Tracing those costs back to the products or services that create them reveals where complexity generates value and where it destroys it.
A large industrial manufacturer had expanded its product line with new tiers and configurations to serve a broader range of customers. Each addition seemed justified on its own, with more options and larger addressable market. But EBITDA stagnated as revenue grew, and efforts to rationalize the portfolio failed to produce expected savings. Because leaders evaluated profitability at the gross margin level, nearly every product appeared worthwhile.
Tracing the full cost of that variety back to individual products revealed that roughly 80% of them were actually destroying value, consuming a disproportionate share of operational resources while contributing little to the bottom line. Rationalizing SKUs by 30% not only increased operating profits by 10% but also improved time-to-market and freed 20% of engineering capacity, ultimately growing the business.
3. Choose where complexity is worth carrying.
Organizations have a limit to how much complexity they can effectively carry. As complexity accumulates, its costs rise until the organization begins to bog down, a threshold we call its “complexity budget.” A company with a broad product portfolio, for example, has less room for complex processes and systems. Leaders must decide where to spend their limited complexity budget.
The Army confronted this choice as it moved from assessing the complexity of its business-system environment to deciding how to modernize it. Leaders initially considered replacing the existing environment with a single off-the-shelf ERP platform. But no commercial system could provide all the functionality the Army needed, in part because its financial management and logistics functions had different requirements. Some customization was unavoidable.
Rather than eliminate complexity everywhere, the Army chose where to carry it. Standard commercial software could support functions such as financial management, while mission-specific logistics requirements warranted specialized capabilities. The resulting architecture would concentrate customization where it created mission value instead of allowing it to proliferate across the enterprise.
4. Align the organization so complexity doesn’t reappear.
Sustaining improvements requires achieving coherence by getting different parts of a large, complex organization pulling in the same direction. Without it, progress made in one area creates unintended consequences elsewhere, and complexity reemerges faster than it can be managed. Organizations that mistake activity for alignment often find themselves adding more structure, more processes, and more oversight to compensate, accelerating the very cycle they are trying to break and undermining performance.
Building coherence means connecting strategy to how the organization actually operates. Strategic objectives have to translate into how work actually gets done and how decisions are made across the business. This also requires understanding how process performance and organizational performance affect one another, rather than improving one at the expense of the other.
An Army Command responsible for munitions operations had struggled for years to sustain improvement across its facilities. Productivity targets had stagnated, and frequent rotation of leadership compounded the challenge. Efforts to change the culture had also made little progress, with surveys showing widespread skepticism that meaningful change was possible.
Senior leaders established common cultural and operational expectations, which employees translated into role-specific behaviors reinforced through performance evaluation and hiring. Performance tools and metrics were aligned with those behaviors to sustain improvement. Within two years, operating costs fell by $85 million, productivity improved by 9% to 61% across multiple munitions lines, and more than two-thirds of employees reported increased accountability.
The challenge for legacy defense contractors is clear. The industry is demanding greater speed and scale from organizations already operating at capacity. Leaders know many of the constraints holding them back. What is harder to see is how complexity across the enterprise contributes to those constraints, compounding their impact and making them difficult to transform.
Developing a comprehensive view of complexity is crucial for incumbents. It allows leaders to see where complexity is creating value and where it is consuming resources, revealing the connections that make persistent problems so difficult to solve. With that understanding, leaders can address what is holding back performance and build an organization better equipped to meet the demands ahead.