Complexity Outline V1.1

“Running a company based on just the financials is like driving a car
by only looking at the rear view mirror!”
Dr Jacek Marczyk, Founder & CTO of Ontonix s.r.l.

What is “Complexity management”?
Ontonix Complexity management solutions are based upon a practical and rational means of
measuring complexity. Our analysis combines the equivalent of risk management and corporate
strategy into a single unified scheme and is based upon a quantitative and holistic view of the state
and dynamics of a corporation as it interacts with its environment.

Complexity is the quantitative measure of the amount of structured information in a system.

Some facts about Complexity from Ontonix:

 The amount of fitness of a system is proportional to its complexity – higher complexity
implies higher fitness

 The amount of functionality of a system is proportional to complexity – more complex
system can perform more functions

 Each system can only reach a specific maximum value of complexity

 Close to the upper limit the system is fragile – it is unwise to operate close to this limit

 High complexity = difficulty in management – highly complex systems are able to perform
more functions but at a price: they are not easy to manage

 When a system is very complex and becomes difficult to manage, it is necessary to
restructure it, add new structure or to remove excess entropy

 More components don’t necessarily imply more complexity – systems with few components
can be more complex than systems with many components

 When presented with two equivalent options, for example in terms of performance, risk or
profit, select the one with the lower complexity – it will be easier to manage

 Spasms or dramatic changes in dynamical systems are always accompanied by sudden
changes in complexity

 In nature, systems tend toward states of higher complexity, but only until they reach the
corresponding maximum. This poses limits to growth and evolution

 Systems with high complexity can behave in a multitude of ways (modes)

 Systems with high complexity are more difficult to manage and control because of the
need to compromise

 A system with a given complexity will be more difficult to manage if it is made to operate
in a more uncertain environment

 "High complexity is incompatible with high precision" – this is known as L. Zadeh’s
Principle of Incompatibility. In essence, you can’t make precise statements about a highly
complex system

 The amount of sustainable development a given system has is proportional to the
difference between its critical complexity and current value of complexity

 A fundamental characteristic of highly complex systems: they are robust yet fragile!

How do You Rate the Structure of a Business?

Conventional ratings, such as those issued by rating agencies, focus on the financial aspects of a
business. While this is important, it is not sufficient to provide a global idea of the overall state of health
of a corporation.

Complexity-based ratings offered by Ontonix are stratified into five levels. This is in accordance with the
Principle of Incompatibility - highly complex systems cannot be described precisely. Examples are
illustrated above. Complexity-based ratings focus entirely on structural aspects of a business
not on its financials or financial performance. Excessive complexity of a business is a fundamental
source of its risk exposure as it points to a structure that is easily altered, both via endogenous as well
exogenous sources. Since excessive complexity is a “disease” which is invisible to conventional
techniques, the idea of a complexity rating is to establish a marker which can expose it. Moreover, high
complexity is undesirable because it may lead to surprises and unexpected behaviour.

The interpretation of complexity ratings is as follows:

1-Star: The business is globally close to its critical complexity. Its structure is weak. The business is
unsustainable and very fragile. Exposure is very high and the business is highly inefficient and very
difficult to manage. It is impossible to make forecasts and define realistic goals.

2-Star: The business is highly complex and difficult to manage and control. Exposure is high as well as
inefficiency. The structure of the business if fragile, hence vulnerable. It is difficult to make forecasts.

3-Star: Business complexity is moderately high but its structure is fairly robust. Predictability is
acceptable. Exposure is moderate.

4-Star: Low complexity points to a robust business structure. Predictability is high, exposure is low.
Business sustainability is quite high. The same may be said of efficiency.

5-Star: Very low complexity indicates a very strong business structure as well as very low exposure.
The business is manageable and it is possible to make credible forecasts. The business is potentially
highly sustainable and efficient.

In the case of businesses with 1 to 3 star ratings complexity reduction is a must. In those cases,
Complexity Profiling is the tool to adopt. It helps identify the sources of high complexity and points to
potential solutions.

For 4 and 5 star businesses, Complexity Profiling should be used from a monitoring perspective in order
to keep the business at a safe distance from critical complexity.

An example of the structure of a business is illustrated below:

Ontonix is a privately held software and services firm which has been founded by a group of experts from the
aerospace, nuclear and civil engineering industries. The team collectively holds over sixty man-years of
experience in unconventional risk and complexity management and has developed in the past award-winning
software tools. Ontonix is headquartered in Como, Italy. Originally established in the USA, Ontonix develops
OntoSpace™, the World’s first system which allows one to actually measure and manage the complexity
of a business or a dynamic process. OntoSpace™ is an unusual and first-of-a-kind system which helps view
business strategy and management from a radically innovative perspective. Our technology not only shows
how excessive complexity is the source of risk, it has enabled us to devise a new theory of risk.

Tracking Complexity with OntoSpace™

OntoSpace™ 2009 sets new standards as far as Advanced BI-CPM and Diagnosis are concerned. What
managers and decision makers have lacked in the past was a single indicator that would reflect the state of
health of a business or an organization in a holistic fashion. Today, complexity provides such an index. The
power of OntoSpace™ lies in its ability to unveil non-intuitive behaviour of systems. As the complexity of a
system increases, the system can behave in an increasingly large number of unexpected ways, leading to
higher risk exposure.

This is precisely why complexity management establishes a radically innovative way to look at risk.

When can OntoSpace™ help?

 Advanced Risk Management
 Risk rating (credit, financial operating)
 Business Intelligence and Corporate Performance Management (BI-CPM)
 Financial & forensic audits
 Asset management
 Portfolio diversification
 Stock market monitoring and diagnosis
 Medicine, patient monitoring & diagnosis
 Social and political studies
 Industrial process monitoring
 Defence, Homeland Security
 Conflict and crisis anticipation, identification of failing states
 IT & comm's system monitoring
 Air traffic monitoring & diagnosis

 Engineering

OntoDyn™ is a specific product for customer-retention analysis at banks or insurance companies. It processes
batches of customers and measures their stability, signalling those that may be at risk of being lost. The
driving idea behind OntoDyn™ is to provide an early-warning system on a weekly/monthly basis. The kind of
analysis that OntoDyn™ performs is unique in that it measures the stability of each client over a given
period of time. Clients with a low value of stability are indicated as those at risk of being lost.

Ontonix also offers an innovative on-line self-rating capability, OntoNet™, which allows one to perform a
near real-time check of the state-of-health of a given business process. The on-line service is easy to use
and produces intuitive Complexity & Risk Maps™ which help pinpoint the sources of complexity and fragility for
virtually any kind of business. The solution breaks new grounds and allows corporations to go beyond VAR,
conventional risk assessment, rating and management. With the Internet as the backbone of this global
service, our goal is to deliver complexity management to every corner of the economy, helping our customers
cope better with our turbulent times.

Ontonix is strongly committed to innovation and inter-disciplinary R&D. The company's underlying philosophy
is to research and identify the dynamic patterns occurring in Nature which manifest themselves in diverse and
often disjointed fields. This is done without resorting to traditional mathematical modelling techniques and
using the concept of complexity as a bridge between disciplines. As a result, we are able to quickly transfer
knowledge from one discipline to another without distortion and with a remarkable multiplier effect.

Complexity Outline V1.1

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Complexity Outline V1.1