Two customers can each generate $200,000 in annual revenue and look identical on a sales report.
But imagine that the first buys through the standard process, pays on standard terms and rarely needs intervention. The second requires a custom invoice, an additional approval on every order and a monthly reconciliation that somebody in finance prepares manually.
The revenue is the same. The economics probably are not.
That difference is easy to miss because companies are much better at measuring what they sell than the organizational effort required to sell and service it. Revenue attaches neatly to a customer or product. The small pieces of work surrounding that revenue are scattered across finance, operations, customer service and account management.
This is the part of complexity that interests me from an accounting and analytical perspective. Complexity does not always announce itself as a major new cost. More often, it arrives one reasonable exception at a time.
Follow the exceptions
As an accounting student at Baruch College’s Zicklin School of Business, I have become increasingly interested in the gap between what financial reporting captures cleanly and what managers still need to understand operationally. Through Baruch Business Brigades, I have also worked on a mock consulting project examining challenges facing Costuras De Mañana.
Experiences like that reinforce the value of looking beneath the headline number. A business problem that appears simple at summary level can look very different once the individual activities behind it are examined.
That is why I think exceptions are a useful place to start.
A large customer requests different payment terms. A salesperson promises a bespoke report. An invoice cannot be processed through the normal system, so finance creates a spreadsheet. A new approval is introduced after an error and remains in place long after the original problem has disappeared.
Each decision can make sense on its own.
The problem is accumulation.
Suppose a company processes 1,000 orders each month and 5% require some form of manual intervention. Employees are dealing with 50 exceptions.
A year later, monthly orders have grown 20% to 1,200. Good news. But assume the exception rate has also increased to 15%. Employees are now dealing with 180 exceptions each month.
Transaction volume has increased 20%. Exception volume has increased 260%.
The figures are illustrative, but the underlying issue is real: growth can make a business look healthier while quietly increasing the amount of human effort required to support each additional dollar of revenue.
Bain & Company has previously found that 70% of executives it surveyed believed complexity was increasing costs and hindering growth. McKinsey’s 2023 research involving more than 2,500 business leaders similarly found that roughly two-thirds viewed their organizations as overly complex and inefficient.
The useful question for finance is where that complexity actually shows up.
Revenue does not tell you cost-to-serve
Activity-based costing has dealt with this problem for decades.
Robin Cooper and Robert Kaplan argued that managers make better decisions when costs are connected to the activities that generate them instead of being spread too broadly across products, departments or customers.
That principle still matters.
Take the hypothetical $200,000 customer that requires extra handling. If its special requirements consume 10 additional staff hours each month at a loaded cost of $60 an hour, the annual cost is $7,200.
Viewed against revenue, 3.6% may not seem particularly alarming.
Suppose, however, that the account would otherwise generate a 10% operating margin, or $20,000. The same $7,200 now represents 36% of that profit.
Nothing about the revenue number changed. What changed was the denominator used to judge the cost.
This is why I would be cautious about assuming that the largest customers are automatically the most attractive customers. Billing changes, returns, support requests, manual reporting and unusual payment arrangements can produce significantly different cost-to-serve profiles between accounts with similar revenue.
That does not mean every demanding customer is unprofitable. Some deserve additional service. An exception may protect an important relationship, create access to a new market or support a price premium.
The point is to know when the company is making that tradeoff.
If additional service creates enough value to justify the additional cost, keep it. If nobody can explain why the work still exists, it deserves another look.
Look between the process steps
Some of the most expensive complexity is also difficult to see in a departmental budget because it occurs between teams.
Consider a transaction that moves from sales to operations, then to finance, before being returned to the account team because a piece of information is missing.
Nobody necessarily performed badly. Each team may have completed its part quickly. Yet the transaction itself may have spent days waiting, being checked, returned and re-entered.
McKinsey describes this kind of activity as a “coordination interface tax.” Its research estimates that activities including alignment, verification, reconciliation, waiting and handoffs can consume 35% to 60% of working time in knowledge-intensive organizations. In one industrial workflow it examined, actual processing across the stages took 12 to 24 hours; delays between those stages extended the process to between nine and 18 days.
For an executive, that suggests a different way to review operating data.
Rather than looking only at how long each team spends performing its task, look at how many times a transaction changes hands. Look at how often work is returned. Look at how long it waits for an approval and how frequently somebody has to re-enter information that already exists somewhere else.
Those are places where complexity becomes measurable.
Of course, not every additional step should be removed. A control that prevents fraud or a review that protects regulatory compliance has an obvious purpose. Speed is not the only objective.
The more useful test is whether the reason for a step is still worth the cost it creates.
Keep the complexity customers value
There is a risk in treating standardization as the answer to everything.
MIT Center for Information Systems Research examined this distinction in research involving 255 executives. Its work found that some product complexity can create value even as other forms of complexity make it harder for employees and customers to get things done.
Its study of mBank provides a practical example. The bank evaluated proposed features partly according to the value they offered customers and the complexity they introduced. It also relied on reusable platform components rather than developing a separate technical solution for every new service.
I think that is the more useful objective.
The goal is not to eliminate variation. It is to distinguish between variation somebody values and variation everybody has simply learned to live with.
A reporting requirement a customer is willing to pay for may deserve to stay. Three internally developed versions of effectively the same report probably deserve more scrutiny.
Finance is well placed to make that distinction because it can connect the operational choice back to its economic consequence.
Start with one process
A company does not need an enterprise-wide complexity program to find useful answers.
Choose one high-volume process this quarter: billing, order-to-cash, procurement or customer onboarding.
For 30 days, record the transactions that leave the normal path. Note what caused the exception, how many people became involved, where the transaction waited and whether the same problem appears repeatedly.
Then choose the recurring exception consuming the most effort.
There are only a handful of sensible outcomes. Remove it. Automate it. Change the underlying process. Price for the additional work. Or deliberately retain it because the value it creates is greater than its cost.
The decision matters more than the label attached to it.
For a CEO, the practical starting point this week is even simpler: ask for the exception rate on one core process.
If the business cannot produce it, that is useful information in itself. It points to a category of cost that the income statement may eventually capture, but probably will not explain.
That is where I would start looking.
About John Lambiris
John Lambiris writes about finance, business and analytical thinking, with an interest in how accounting and business analytics inform practical decisions. Read more on Substack, connect with John on LinkedIn or explore his profiles on HackerNoon and Product Hunt.
