This is Part 1 of 3 in the series: How to Build a Target Operating Model.
Rapid advances in technology and knowledge combined with expectations of digital-fluent customers raises the competitive stakes to transform your products and services, and as a leader of an organization (or the division of an organization), you have both the opportunity and the challenge to capture the value that these possibilities bring.
Your business model and your strategy define how your organization plans to succeed. Your operating model then reflects the next level of detail on how those goals will be realized using your unique set of capabilities.
Why You Need a New Operating Model
Below are a few examples of why you would need to evaluate your current operating model. What situations in your organization immediately come to mind that need strategic attention?
- Strategy Alignment: Are you aligned with your organization’s strategy goals and business model?
- Customers/Clients: Can you offer better, simpler, faster, more enjoyable, and/or more accurate products and services to your customers/clients? Do you need to serve new or different customers/clients? Do you want to leverage new innovations into your work or offerings? Are you an upstream provider to a client who has updated their own strategy, operating model, or SLAs?
- Key Stakeholders: Do you have new complex regulatory or audit requirements to comply with?
- Doing The Work: Are your people aligned (staffing level, skill mix, structure) with serving the groups above? Does work get done on time but with high levels of frustration/burnout? Do you need to update the location and operating hours of service? If you are a product development or project organization, would adopting and integrating some flavor of Agile improve your organization?
- Leadership and Culture: Do you have the right structure and information to effectively govern your organization? Does your culture proactively reflect your desired values and behaviors in your teams? Are roles and responsibilities for clearly defined and understood?
- Technology and Tools: Do you have the right mix of in-house solutions vs. leveraging SaaS/PaaS/IaaS (Software-, Platform-, Infrastructure-As-A-Service) cloud opportunities? How well integrated is your technology stack across your landscape–where are pain points with manual work that add complexity and time between you and your customers/clients? What other technologies should you consider leveraging?
- New Leadership Role: You are new to leading the organization and need a framework to help understand how the organization is currently functioning. Defining a new target state may come at a later stage.
Components of an Operating Model
Your Operating Model Is a System
Your operating model is a complex grouping of components which work together to reflect how you deliver value to your customers. We treat the model as a whole system; changes to one area impact the others. Being able to view your organization’s areas together allows you to view the cause-and-effect of your decisions and the dependencies that result. Below are descriptions of each of the components:
Your Beneficiaries–Who You Do The Work For
- Business model, Strategy, and Higher-level Operating Model: Your operating model serves the overall business goals and if you are working at a division level, you likely have a group-level operating model with mandates to serve.
- Customers/Clients and Key Stakeholders: The key beneficiaries of your activities. You may have direct inputs from your customers including wishes and complaints, or you may have identified new and/or improved offerings for them. Key stakeholders such as regulators, and auditors are not your customers, but you have an obligation to serve them accurately and timely, and in some cases legally.
Your Operating Model–The Work You Do and How You Get It Done
- Core Work/Processes: The collection of work that that ultimately benefits your customers, stakeholders, and overall strategy. This is normally captured in process diagrams, journey maps*, capability models, policies, etc. You may also wish to capture key projects that are in-flight and how, when operational, they will be reflected in your processes. (*Journey maps are highly recommended to capture human frustrations that do not show up on a process map)
- People: The number of people you have, how they are organized (e.g. traditional hierarchy, scrum teams, matrix, etc), their current and desired skills, seniority levels, career paths, and mix of internal and external staff.
- Technology and Tools: The technologies leveraged to perform activities for your customers’ products and services. Also internal tools used to keep your organization running.
- Facilities and Other Assets: Production locations, transport, physical offices, etc.
- Locations: On-site and remote locations for your people, technologies, partners/suppliers, facilities, and assets.
- Budget: Finances at your disposal to execute your core operations activities, partners/suppliers, and fund upcoming projects.
- Partners and Suppliers: The work done for your activities outside your area. Your operating model should explicitly choose the best mix of using internal vs. external resources based on expertise, cost, timeliness, and the unique competencies you want internally and fall within your responsibility.
- Culture: Explicit and implied values and beliefs that guide behavior of the people in the organization.
- Governance and Management Information: The decision-making structure and roles in place to ensure that your organization delivers as effectively as possible. Management Information (MI) includes all the data, analysis, and reporting to provide information for effective governance.
Step 1: Capture Your “As-Is” State
The Operating Model Canvas
Similar to an organization’s balance sheet, the view of your operating model on a canvas (shown below) represents a particular snapshot in time. One version of the canvas shows where you are today, and additional versions represent how your organization will look on December 31 this year, or several years in the future. We we will use this canvas to first look at where you are now.
To fully flush out your needs to change, you may need some understanding and data on where the organization is currently along with some historical perspective. We encourage you to first capture a high-level view at this stage in order to provide ideas to move forward. Later, you can do a deep dive into specific areas where needed.
Get the First People on Your Bus
In his book Good to Great, Jim Collins introduces the concept of getting the right people on your “bus” for the journey ahead, even if you do not yet know what you intend to build. You don’t need and don’t want to onboard the full list of stakeholders who will be delivering your operating model (and be impacted by your model), but you will need to involve a few key people now–sponsors, senior experts, and sparring partners who will capture the details and who will give you information and sound guidance while your operating model is still in the confidential stage. We will expand the stakeholder list later in the series.
Step 2: Identify Your Reasons to Evolve
The Drivers to Change Canvas
The next step towards your future operating model is to capture your reasons to evolve. The Drivers to Change Canvas shown below (downloadable here) is a tool to help you capture your unique situation.
The analysis that you will capture on the canvas is similar to a traditional SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis with a few action-oriented improvements:
- Mandatory Deliverables: You will have goals and deliverables which are “must-dos,” such as cost or headcount targets, in-flight programs, customer segments to target, or major regulatory deadlines.
- Strengths and Weaknesses: We recommend to get an initial consensus whether items internal to your organization will be prioritized for action or not. Strengths can be maintained or further developed. Weaknesses can be mitigated or you can choose to tolerate them for the time being based on priority.
- Opportunities and Threats: These external factors are often captured in a traditional SWOT analysis, then stagnate on a list without any further action; we recommend a more proactive approach. Opportunities can be assessed whether they should be seized in your future operating model or should just be monitored for later consideration; do you want to leverage a new technology/process or wait until a later date and re-assess if is right for you? Threats can be actual obstacles you need to eliminate or risks to manage; is there a burglar in the house or do you need to think about improving your home security?
The decisions you make on this canvas to take action or not are not concrete, but rather help to get a consensus for further planning–you can revise your positioning at any time.
Interviewing key individuals in your organization and beyond will give you a broader view on drivers toward your improved operating model. Stakeholders to be interviewed may include customers, sponsors, and key partners and suppliers. If resources are available, conducting experience labs with customers/clients will uncover valuable insights on wishes and pain points.
Continue with Part 2 to build your target operating model through a series of three strategic choices
If you have questions, please reach out to me at: firstname.lastname@example.org