target operating model case study

Case Study: Target Operating Model Transformation Program

• 18 April 2022
• Automotive & Transportation , Project Management Improvement

To support a wider shift to leveraging data for connected vehicles and autonomous driving purposes, our client, a luxury automotive manufacturer created a new department to develop and deploy digital service offerings to their customers. However, the newly formed department lacked clear roles and responsibilities, frequently experienced avoidable delays, and unstable service quality often resulted in severe overspends. MIGSO-PCUBED was engaged to provide Program Recovery services to get the program back on track.

The Background

While the initial engagement was initially focused on program recovery, the team prioritized not only getting to green but understanding the root cause of the issues at play. Through a program diagnostics, the team found that the department was not making good use of capabilities available in the wider organization. 

Business processes were broken, people did not have the right capabilities, and core governance was not strong enough. The team lacked the ability to use existing data to drive effective decision-making. To compound, the client did not have the time, nor the expertise to identify, consider solutions or deliver a new operating model and ways of working.

MIGSO-PCUBED (MP) pivoted to driving a Transformation Program, implementing a new target operating model (TOM) which embraced innovative technologies that facilitated enhanced decision making.  

Utilizing a highly tailored approach, the team designed a transformation program that utilized best practices from Managing Successful Programs, Lean Innovation, Business Agility, Data to Decisions, and core Change Management. 

The resulting target operating model addressed:

• people-focused capability enhancements and upskilling
• new and improved governance structures
• redefined operating processes
• enhanced technology solutions
• increased usage of data , data synthesis, and strategy focused insights, and
• reinvigorated partnering arrangements to foster increased knowledge sharing.

The Solution

The starting point for the transformational journey was to define the desired future state based on identified business requirements. To do so, the MP team ran targeted workshops over a period of 4 weeks, leveraging a mixture of the M |P Innovation Framework Tools . The approach was to first capture the Voice of the Customer and to analyze the As-Is state of the core business process, leading to the identification of 162 unique pain points. 

Read Also: How can Innovation Frameworks help you?

Deep diving into these pain points, the team identified the root causes and developed 42 value-adding improvement opportunities across the end-to-end process.  The opportunities spanned each of the 6 areas identified above, tackling ideas ranging from implementing a Business Intelligence solution and automated reporting, to; defining and deploying a new capacity and demand managemen t approach. In addition, a Data Monetization Strategy was developed, and wider partnerships were explored leading to a new approach to intra-team collaboration being established.

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As the whole point of the department was to leverage data for connected vehicles and autonomous driving, this was the first key priority area to improve upon . Previously, data was accumulated by a third-party supplier. This often resulted in additional costs, low visibility or access to the data, and inaccuracies affecting the quality of reporting. 

Using a low code option, MP designed, built, and delivered an improved reporting solution, integrating multiple reporting systems into a single visualization platform. This provided multiple interactive dashboards that enabled real-time data insights on key performance indicators, expediting and improving decision-making within the client team. 

One dashboard provided an overview of service usage data in customizable charts. This dashboard helped the team visually understand which services were most popular and the regions with the highest utilization rates. 

A second dashboard combined multiple reporting tools into a single status report providing a high-level overview of open issues across the team. The tool was reviewed with the key stakeholders and training packs were created for both users and owners of the dashboard. The training was accompanied by handover reviews to ensure the client team was able to adopt, utilize and become proficient with the dashboard tools. 

Finally, this solution also gave the client team access to additional data warehouses within the wider Group organization, contributing towards future data utilization.

Learn More about: Digital Dashboard Development Services

Capacity and Demand Management

A second key area addressed was around Resource Management . Historic systems were not trusted by the client, they were considered unreliable and convoluted. A capacity and demand management solution was required in order to achieve higher predictability of resource needs for present & future projects. 

The MP team developed a solution that provided improved clarity by harnessing real-time, accurate project information stored within Microsoft Project. As the tool was easily maintained it could now show the true workloads and activities carried out by the team. 

It not only gave the client a better understanding of the work that could be achieved each  week by their teams, but it also delivered long-term cost savings in the mid-6-figure range over the historic tool.

Data Usage and Monetisation

To help the client make the best use of their existing data, the team developed a Data Usage and Monetisation strategy. The strategy was designed to ensure key knowledge share and communication flow across the client’s partner and group organizations. It established a proposal for data management and governance hierarchy across connected car data lakes. 

The MP team advised on the latest industry trends, benchmarking, and best practices in connected car data use. The MP team also supported the strategy team in contact creation and in identifying wider group strategy implications.

In total, the Data Usage and Monetisation strategy proposed 10 short and 6 long-term data optimization solutions to target internal cost savings, additional value generation, and monetization strategies. It identified 6 new revenues streams, with the potential to unlock additional income up to £5-20m.

Collaboration and Cooperation

The MP team hosted and facilitated workshops dedicated to improving collaboration and cooperation between the departments. In parallel, the MP team conducted a gap analysis of the people, processes, and technology, namely the tools, templates, and capabilities of the client-side team. 

The workshops and gap analysis resulted in the implementation of a range of client-centric initiatives, aimed at increasing the efficiency of knowledge share and knowledge management within the team. Specific examples include the creation of an ever-green knowledge repository and tailored templates. The new central source of information and clear visual dashboard reduced the time normally spent manually gathering information. Finally, the team further improved Stakeholder engagement and governance through the establishment of new meeting cadences, encouraging and rewarding collaboration.

The Benefits

Over the course of the engagement MP delivered the new business strategies and business activities following Agile principles, in synergy with the best of the client’s “traditional” delivery methodology. Ultimately this allowed the client to realize the benefit of new solutions every 2 weeks.

Following the completion of the solutions set, the MP team focused on handover and upskilling the client teams to ensure maximum, adoption, utilization, and proficiency of the business model. This embedding and reinforcement phase enabled the teams to collaboratively identify and resolve operational snags.  Regular improvements were made during the scheduled demo and retrospective feedback sessions.

As a result, the project delivery improvements have been well received and considered a significant success. Additional client departments have approached the delivery team to access the various solutions and their support directly.

A quick summary of the target operating model transformation includes:

• Enabling £6-figure cost avoidance through the implementation of digital solutions
• 10% time reduction during the project mobilization phase due to a standardized and more robust project delivery approach, equivalent to 6-figure savings.
• A new data insight strategy identified 6 new revenues streams, with the potential to unlock additional income between £5-20m. 
• Implementation of a data lake that provided a single repository for all of the client data, removing dependency on 3 rd party data providers and enabling instant access to 120% more data values
• Development of automated analytical dashboards, enabling the client to develop the most impactful services for their customers
• The introduction of a novel low-code digital capacity management solution enabling improved resource utilization across delivery projects, and
• Significantly increased collaboration between sub-divisions.

This article was written by James Murray

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Related Expertise: Culture and Change Management , Business Strategy , Corporate Strategy

Five Case Studies of Transformation Excellence

November 03, 2014  By  Lars Fæste ,  Jim Hemerling ,  Perry Keenan , and  Martin Reeves

In a business environment characterized by greater volatility and more frequent disruptions, companies face a clear imperative: they must transform or fall behind. Yet most transformation efforts are highly complex initiatives that take years to implement. As a result, most fall short of their intended targets—in value, timing, or both. Based on client experience, The Boston Consulting Group has developed an approach to transformation that flips the odds in a company’s favor. What does that look like in the real world? Here are five company examples that show successful transformations, across a range of industries and locations.

VF’s Growth Transformation Creates Strong Value for Investors

Value creation is a powerful lens for identifying the initiatives that will have the greatest impact on a company’s transformation agenda and for understanding the potential value of the overall program for shareholders.

VF offers a compelling example of a company using a sharp focus on value creation to chart its transformation course. In the early 2000s, VF was a good company with strong management but limited organic growth. Its “jeanswear” and intimate-apparel businesses, although responsible for 80 percent of the company’s revenues, were mature, low-gross-margin segments. And the company’s cost-cutting initiatives were delivering diminishing returns. VF’s top line was essentially flat, at about $5 billion in annual revenues, with an unclear path to future growth. VF’s value creation had been driven by cost discipline and manufacturing efficiency, yet, to the frustration of management, VF had a lower valuation multiple than most of its peers.

With BCG’s help, VF assessed its options and identified key levers to drive stronger and more-sustainable value creation. The result was a multiyear transformation comprising four components:

• A Strong Commitment to Value Creation as the Company’s Focus. Initially, VF cut back its growth guidance to signal to investors that it would not pursue growth opportunities at the expense of profitability. And as a sign of management’s commitment to balanced value creation, the company increased its dividend by 90 percent.
• Relentless Cost Management. VF built on its long-known operational excellence to develop an operating model focused on leveraging scale and synergies across its businesses through initiatives in sourcing, supply chain processes, and offshoring.
• A Major Transformation of the Portfolio. To help fund its journey, VF divested product lines worth about $1 billion in revenues, including its namesake intimate-apparel business. It used those resources to acquire nearly $2 billion worth of higher-growth, higher-margin brands, such as Vans, Nautica, and Reef. Overall, this shifted the balance of its portfolio from 70 percent low-growth heritage brands to 65 percent higher-growth lifestyle brands.
• The Creation of a High-Performance Culture. VF has created an ownership mind-set in its management ranks. More than 200 managers across all key businesses and regions received training in the underlying principles of value creation, and the performance of every brand and business is assessed in terms of its value contribution. In addition, VF strengthened its management bench through a dedicated talent-management program and selective high-profile hires. (For an illustration of VF’s transformation roadmap, see the exhibit.)

The results of VF’s TSR-led transformation are apparent. 1 1 For a detailed description of the VF journey, see the 2013 Value Creators Report, Unlocking New Sources of Value Creation , BCG report, September 2013. Notes: 1 For a detailed description of the VF journey, see the 2013 Value Creators Report, Unlocking New Sources of Value Creation , BCG report, September 2013. The company’s revenues have grown from $7 billion in 2008 to more than $11 billion in 2013 (and revenues are projected to top $17 billion by 2017). At the same time, profitability has improved substantially, highlighted by a gross margin of 48 percent as of mid-2014. The company’s stock price quadrupled from $15 per share in 2005 to more than $65 per share in September 2014, while paying about 2 percent a year in dividends. As a result, the company has ranked in the top quintile of the S&P 500 in terms of TSR over the past ten years.

A Consumer-Packaged-Goods Company Uses Several Levers to Fund Its Transformation Journey

A leading consumer-packaged-goods (CPG) player was struggling to respond to challenging market dynamics, particularly in the value-based segments and at the price points where it was strongest. The near- and medium-term forecasts looked even worse, with likely contractions in sales volume and potentially even in revenues. A comprehensive transformation effort was needed.

To fund the journey, the company looked at several cost-reduction initiatives, including logistics. Previously, the company had worked with a large number of logistics providers, causing it to miss out on scale efficiencies.

To improve, it bundled all transportation spending, across the entire network (both inbound to production facilities and out-bound to its various distribution channels), and opened it to bidding through a request-for-proposal process. As a result, the company was able to save 10 percent on logistics in the first 12 months—a very fast gain for what is essentially a commodity service.

Similarly, the company addressed its marketing-agency spending. A benchmark analysis revealed that the company had been paying rates well above the market average and getting fewer hours per full-time equivalent each year than the market standard. By getting both rates and hours in line, the company managed to save more than 10 percent on its agency spending—and those savings were immediately reinvested to enable the launch of what became a highly successful brand.

Next, the company pivoted to growth mode in order to win in the medium term. The measure with the biggest impact was pricing. The company operates in a category that is highly segmented across product lines and highly localized. Products that sell well in one region often do poorly in a neighboring state. Accordingly, it sought to de-average its pricing approach across locations, brands, and pack sizes, driving a 2 percent increase in EBIT.

Similarly, it analyzed trade promotion effectiveness by gathering and compiling data on the roughly 150,000 promotions that the company had run across channels, locations, brands, and pack sizes. The result was a 2 terabyte database tracking the historical performance of all promotions.

Using that information, the company could make smarter decisions about which promotions should be scrapped, which should be tweaked, and which should merit a greater push. The result was another 2 percent increase in EBIT. Critically, this was a clear capability that the company built up internally, with the objective of continually strengthening its trade-promotion performance over time, and that has continued to pay annual dividends.

Finally, the company launched a significant initiative in targeted distribution. Before the transformation, the company’s distributors made decisions regarding product stocking in independent retail locations that were largely intuitive. To improve its distribution, the company leveraged big data to analyze historical sales performance for segments, brands, and individual SKUs within a roughly ten-mile radius of that retail location. On the basis of that analysis, the company was able to identify the five SKUs likely to sell best that were currently not in a particular store. The company put this tool on a mobile platform and is in the process of rolling it out to the distributor base. (Currently, approximately 60 percent of distributors, representing about 80 percent of sales volume, are rolling it out.) Without any changes to the product lineup, that measure has driven a 4 percent jump in gross sales.

Throughout the process, management had a strong change-management effort in place. For example, senior leaders communicated the goals of the transformation to employees through town hall meetings. Cognizant of how stressful transformations can be for employees—particularly during the early efforts to fund the journey, which often emphasize cost reductions—the company aggressively talked about how those savings were being reinvested into the business to drive growth (for example, investments into the most effective trade promotions and the brands that showed the greatest sales-growth potential).

In the aggregate, the transformation led to a much stronger EBIT performance, with increases of nearly $100 million in fiscal 2013 and far more anticipated in 2014 and 2015. The company’s premium products now make up a much bigger part of the portfolio. And the company is better positioned to compete in its market.

A Leading Bank Uses a Lean Approach to Transform Its Target Operating Model

A leading bank in Europe is in the process of a multiyear transformation of its operating model. Prior to this effort, a benchmarking analysis found that the bank was lagging behind its peers in several aspects. Branch employees handled fewer customers and sold fewer new products, and back-office processing times for new products were slow. Customer feedback was poor, and rework rates were high, especially at the interface between the front and back offices. Activities that could have been managed centrally were handled at local levels, increasing complexity and cost. Harmonization across borders—albeit a challenge given that the bank operates in many countries—was limited. However, the benchmark also highlighted many strengths that provided a basis for further improvement, such as common platforms and efficient product-administration processes.

To address the gaps, the company set the design principles for a target operating model for its operations and launched a lean program to get there. Using an end-to-end process approach, all the bank’s activities were broken down into roughly 250 processes, covering everything that a customer could potentially experience. Each process was then optimized from end to end using lean tools. This approach breaks down silos and increases collaboration and transparency across both functions and organization layers.

Employees from different functions took an active role in the process improvements, participating in employee workshops in which they analyzed processes from the perspective of the customer. For a mortgage, the process was broken down into discrete steps, from the moment the customer walks into a branch or goes to the company website, until the house has changed owners. In the front office, the system was improved to strengthen management, including clear performance targets, preparation of branch managers for coaching roles, and training in root-cause problem solving. This new way of working and approaching problems has directly boosted both productivity and morale.

The bank is making sizable gains in performance as the program rolls through the organization. For example, front-office processing time for a mortgage has decreased by 33 percent and the bank can get a final answer to customers 36 percent faster. The call centers had a significant increase in first-call resolution. Even more important, customer satisfaction scores are increasing, and rework rates have been halved. For each process the bank revamps, it achieves a consistent 15 to 25 percent increase in productivity.

And the bank isn’t done yet. It is focusing on permanently embedding a change mind-set into the organization so that continuous improvement becomes the norm. This change capability will be essential as the bank continues on its transformation journey.

A German Health Insurer Transforms Itself to Better Serve Customers

Barmer GEK, Germany’s largest public health insurer, has a successful history spanning 130 years and has been named one of the top 100 brands in Germany. When its new CEO, Dr. Christoph Straub, took office in 2011, he quickly realized the need for action despite the company’s relatively good financial health. The company was still dealing with the postmerger integration of Barmer and GEK in 2010 and needed to adapt to a fast-changing and increasingly competitive market. It was losing ground to competitors in both market share and key financial benchmarks. Barmer GEK was suffering from overhead structures that kept it from delivering market-leading customer service and being cost efficient, even as competitors were improving their service offerings in a market where prices are fixed. Facing this fundamental challenge, Barmer GEK decided to launch a major transformation effort.

The goal of the transformation was to fundamentally improve the customer experience, with customer satisfaction as a benchmark of success. At the same time, Barmer GEK needed to improve its cost position and make tough choices to align its operations to better meet customer needs. As part of the first step in the transformation, the company launched a delayering program that streamlined management layers, leading to significant savings and notable side benefits including enhanced accountability, better decision making, and an increased customer focus. Delayering laid the path to win in the medium term through fundamental changes to the company’s business and operating model in order to set up the company for long-term success.

The company launched ambitious efforts to change the way things were traditionally done:

• A Better Client-Service Model. Barmer GEK is reducing the number of its branches by 50 percent, while transitioning to larger and more attractive service centers throughout Germany. More than 90 percent of customers will still be able to reach a service center within 20 minutes. To reach rural areas, mobile branches that can visit homes were created.
• Improved Customer Access. Because Barmer GEK wanted to make it easier for customers to access the company, it invested significantly in online services and full-service call centers. This led to a direct reduction in the number of customers who need to visit branches while maintaining high levels of customer satisfaction.
• Organization Simplification. A pillar of Barmer GEK’s transformation is the centralization and specialization of claim processing. By moving from 80 regional hubs to 40 specialized processing centers, the company is now using specialized administrators—who are more effective and efficient than under the old staffing model—and increased sharing of best practices.

Although Barmer GEK has strategically reduced its workforce in some areas—through proven concepts such as specialization and centralization of core processes—it has invested heavily in areas that are aligned with delivering value to the customer, increasing the number of customer-facing employees across the board. These changes have made Barmer GEK competitive on cost, with expected annual savings exceeding €300 million, as the company continues on its journey to deliver exceptional value to customers. Beyond being described in the German press as a “bold move,” the transformation has laid the groundwork for the successful future of the company.

Nokia’s Leader-Driven Transformation Reinvents the Company (Again)

We all remember Nokia as the company that once dominated the mobile-phone industry but subsequently had to exit that business. What is easily forgotten is that Nokia has radically and successfully reinvented itself several times in its 150-year history. This makes Nokia a prime example of a “serial transformer.”

In 2014, Nokia embarked on perhaps the most radical transformation in its history. During that year, Nokia had to make a radical choice: continue massively investing in its mobile-device business (its largest) or reinvent itself. The device business had been moving toward a difficult stalemate, generating dissatisfactory results and requiring increasing amounts of capital, which Nokia no longer had. At the same time, the company was in a 50-50 joint venture with Siemens—called Nokia Siemens Networks (NSN)—that sold networking equipment. NSN had been undergoing a massive turnaround and cost-reduction program, steadily improving its results.

When Microsoft expressed interest in taking over Nokia’s device business, Nokia chairman Risto Siilasmaa took the initiative. Over the course of six months, he and the executive team evaluated several alternatives and shaped a deal that would radically change Nokia’s trajectory: selling the mobile business to Microsoft. In parallel, Nokia CFO Timo Ihamuotila orchestrated another deal to buy out Siemens from the NSN joint venture, giving Nokia 100 percent control over the unit and forming the cash-generating core of the new Nokia. These deals have proved essential for Nokia to fund the journey. They were well-timed, well-executed moves at the right terms.

Right after these radical announcements, Nokia embarked on a strategy-led design period to win in the medium term with new people and a new organization, with Risto Siilasmaa as chairman and interim CEO. Nokia set up a new portfolio strategy, corporate structure, capital structure, robust business plans, and management team with president and CEO Rajeev Suri in charge. Nokia focused on delivering excellent operational results across its portfolio of three businesses while planning its next move: a leading position in technologies for a world in which everyone and everything will be connected.

Nokia’s share price has steadily climbed. Its enterprise value has grown 12-fold since bottoming out in July 2012. The company has returned billions of dollars of cash to its shareholders and is once again the most valuable company in Finland. The next few years will demonstrate how this chapter in Nokia’s 150-year history of serial transformation will again reinvent the company.

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Target Operating Model – A Complete Guide

A Comprehensive Roundup of Target Operating Modelling

A Target Operating Model (TOM) is a conceptual representation of an organisation’s capabilities, ways of working and structures that support it to deliver its vision and strategy. TOMs operate at a high-level as a representation of how a company can best be organised to deliver and execute on its desired strategy efficiently and effectively.

TOMs provide a holistic understanding by providing a coherent visualisation of a variety of perspectives across the value chain, as all key components are considered when devising a TOM. People, processes, technology, and customers are all key facets of astute TOM modelling and are critical to ensure successful TOM implementation.

Components of a Target Operating Model

There are three distinct and key objectives to developing a TOM and realising cost effective measures:

• Transform the current/’As-Is’ state due to changing business objectives, new direction/appetite or profit/cost measures; transform the Current Operating Model (COM) into the TOM.
• Enhance the business change operation within the organisation to enable more fluid and malleable changes to take place without loss of productivity, mass personnel changes or other negative impacts.
• Develop an organisations stategic planning capability so its TOM can reverberate on a departmental level in order to monitor annual plans, enable regular reviews to monitor progress and to ensure alignment and consistency amongst different teams within the single organisation.

TOMs can represent a multi-layered concept of an organisation’s end-to-end functions and capabilities. Here are 12 categories a typical TOM could be applied to:

• ‍ Core decisions and processes – Key decisions required to direct the business as well as key processes that affect ownership and governance, policies, and operational efficiencies
• ‍ Organisation structures and headcount – The explicit structure of the organisation including roles, responsibilities, headcount, sizing, reporting lines, spans, and layers
• ‍ Fiscal corporate structures – Legality, taxation, corporate and staffing structures, workflows including capital efficiency, brand licencing, VAT, tax compliance and so on.
• ‍ Operational footprint – End-to-end location and sourcing strategy including activity delivery model(s), sourcing model(s) i.e., on/offshore outsourcing, service centres, cost, and service level drivers
• ‍ Technology – Core IT systems and processes, corporate/infrastructure architecture, IT core processes
• ‍ Risk and governance – Key business risks identification, mitigating factors and control framework
• ‍ Information and analytics – Quality, governance, and frequency of information. Effectiveness and efficiency of delivery of information to the business and information to support decision making
• ‍ Data management - Quality of data inputs, processes and outputs, governance of data ownership
• ‍ Talent and capabilities – Required employee profile to deliver new Operating Model. Skills, capabilities, development needs and training. Strategy to retain and engage key talent
• ‍ Performance KPIs – Key performance metrics used to measure, track and reward performance of the new business (financial, operational and people metrics)
• ‍ Rewards and incentives – Impact of new Operating Model on employee reward, linked to Operating Model KPIs
• ‍ Culture – Enabling culture (behaviours, values, and norms) required to successfully deliver the new model.

Now we’ve seen the major areas a TOM is used in we should look at a use case where a TOM could be used.

Case Study: Insurance Company

Insurance companies cover risk in the event of an insured person suffering some form of loss. Covering that loss incurs a premium. The potential loss is insured to a pre-agreed amount, i.e., the ‘Sums Insured.’

‘Carsure Insurance Ltd.’

Vision: Insure electric cars and e-scooters.

Strategy: Compete with favourable prices and good add-ons (i.e., breakdown cover)

Core Capabilities: Car insurance, breakdown cover, multi-car insurance

Processes: Risk submission, risk rating, quote generation, quote-to-policy processes, document generation, Mid-Term-Adjustments (MTAs), Policy renewals, Claims, Payments (incoming and outgoing), MI Reporting.

Current Operating Model (COM): The insurance company currently only insures risks via a third party, i.e., through a broker. They now wish to go direct-to-customer and close their broker business.

According to Deloitte a COM is:

is an operational framework that represents how an organisation is configured today. However, the Target Operating Model (TOM) shows a future state that the organisation should be moving towards in order to achieve its strategy.

The preliminary steps taken above highlight a simple yet powerful way to look at the proposed state of where a business or team would like to go. When it comes to business processes, process design and process modelling it always makes sense to start high and add detail once the basics have been firmly understood.

Moreover, a good TOM will start from a bird’s eye view and slowly and methodically dive in with certain models and tools to capture the detail.

Target Operating Model Characteristics

Whilst devising a TOM taking the following list into consideration will ensure you’ve covered the wider business and industry context, so the implementation of the TOM has a good chance of yielding great results.

• ‍ External Drivers: What exactly should be considered outside of the organisation? What could affect this transformation from an external perspective? A clear understanding of the broadrer trends in the economy, the geo-political landscape and other related matters count. Using a PESTLE (Political, Economic, Social, Technological, Legal, Environmental) Analysis is a simple and effective tool that can help set the scene for a TOM led transformation.
• ‍ Internal Factors: Without internal stakeholder buy-in there’s little to no chance of TOM success. If morale is low and stakeholders don’t care much the project will die. Using a simple SWOT (Strengths, Weaknesses, Opporunties and Threats) Analysis can make a big difference as you’ll know how to position yourself and how best to move.
• ‍ Competitive Dynamics: ‘Competition ensures efficiency…’ Blockbuster didn’t take Netflix seriously and paid the price. Not knowing your competitors is folly and can cost market shrare. Using a Market Context model you can explicitly state your competitors traits, the regulatory environment and other implications of TOM implementation
• . Culture and Core Values: An increasingly important consideration in terms of ESG, espcially when it comes to Gen-X and below. The emergence of Diveristy & Inclusion is an example of cultural and core values permeating standard workplace operations.

A good TOM will look at the current state and if applicalbe set about making changes to reflect a more desired outomce.

• ‍ Vision and Mission: The premise of a TOM is to reach a target, if this is predicated on a mission then it could help you and your team stay focused in all applicable areas of the TOM.  
• ‍ Strategy and Plan: At the crux of a TOM model is the strategy. Elaborating on what is required for success, new capabiltiies and what capabilities are currently available is at the heart of TOM; define how your firm will get to the POA (Point of Arrival).
• ‍ Capability Analysis: Elaborate on what new capabilities are necessary, what current capabilities need to evolve, and which capabilities may require phasing out.
• ‍ Strategic Levers: What strategic levers will help you achieve success in the future state?
• ‍ Tactical or Operational Levers: How will the future state operations and processes shift or evolve? How does a TOM help ‘futureproof’ a company, department or team? Are we flexible enough to incorporate change.
• ‍ Transformation Roadmap: A transformation roadmap is an incremental and sequential evolution to the target state as it elaborates and details a higher-level perspective, the old “devil in the detail...” comes into play here.
• ‍ Initiatives, programs, and projects:  Define what types of actions, programs, and plans are necessary to get to the target state.
• ‍ Governance Structure: How will you govern future state operations? While you will never know what the future holds exactly, it is an attempt to provide a framework for rule-setting and enforcement.
• Key Performance Indicators (KPIs): What does success mean and how do you measure?

TOM and Strategy: The Differences

A business strategy must and usually is flexible and pragmatic as the ability to be nimble and respond to market, industrial and customer change is needed. Therefore, it makes sense for a business to accommodate changes into its ethos so it can better serve its clientele and remain competitive.

A TOM on the other hand provides a more robust and foundational approach that isn’t designed to change frequently. A strategy helps a TOM to be achieved and realised and in turn the TOM influences a firm’s strategies.

In the diagram above, we can see distinct phases:

These phases all represent different aspects of business change and or digital transformation as they highlight the full specturm of end-to-end transformation and continuinty.

In this phase we see where the TOM would be devised and it is from Roadmap and beyond we see how the TOM influences the other phases. Note that strategy preceeds as this is where the high-level/macro concepts are articulated. Once agreed, then a mid-level set of strategies, methods and techniques are articulated by way of a TOM design that will then influence and shape the rest of the business change model.

A cohesive and fluid operating model will inevitably fuse different technologies and digital solutions. For large enterprises for example, having 10 different systems all perfomring the same tasks represents waste.

In this example an organisation might conduct a TOM to harmonise all the similar/ duplicate systems so there is consistency, simplification and efficiencies reverberating throughout the archtecture of the company. Tasks might include:

• Requirements management
• Solution architecting
• In-depth implementation planning
• SWOT analysis
• Gap analysis

By now the team have devised a roadmap and articulated a design. Implementation is just that, the act of translating what has been suggested into motion. Typically, a team would decide if the change would be business change led or technology/digital transformative led. Deciding on this changes the narrative and methodology.

Technological change is usually agile driven due to the benefits agile methodologies have when it comes to dealing with inevitable change. Business change is more focused on organisational restructuring, team, and department balancing, eliminating waste, resource utilisation and so on.

What has been articulated and designed in the previous steps is now put into motion when we implement.

At this stage we have finished and implemented the TOM and are consciously transiting into a steady state in which the TOM will enventually assimilate into ‘Business As Usual’ (BAU).

In the monitor stage we describe and carry out the maintenance of the TOM, whether that is a digital TOM or business focused TOM, we map out, document, and monitor the transitory aspects of the changes we have proposed and implemented.

Other Considerations

At every stage of the TOM initiative, we must always consider three key aspects:

• Behavioural changes amongst staff
• Program design and governance
• And Program, product, and project management

All three are to be consciously considered when designing and implementing a TOM because they tend to focus on the personnel and behavioural aspects of business change rather than the theoretical, modelling and business side; without stakeholders on side, you have no chance of success.

Overall, a TOM fits into the strategic operations of a business but is a distinct discipline, set of tasks and approach from explicit business strategy. TOMs traditionally fit the ‘Roadmap’ component of business strategy as a standalone and disparate part.

Benefits of a TOM

TOMs have some good benefits, including:

• Provides and displays a holistic picture of what the future steady state should look like across business and technology
• Highlights how a business unit or organisation can potentially deliver value and their main value drivers
• TOMs can clarify system/business architectures, which can result in cost-reduction, duplication removal and all-round efficiency gains
• TOMs focus on soft and hard skills, i.e., systems, org structures, staffing, culture, style, and shared values

TOM Framework – McKinsey 7S Model

With all this information it might be a little confusing, especially when you think of where you should start. Devising and implementing TOMs are certainly team/departmental activities but there are famous frameworks that are popular.

One such framework is the McKinsey 7 S framework which is a great way for you to think then start to plot your TOM.

• ‍ Structure: this is how your company is organised and teams are structured, including who reports to whom).
• ‍ Systems: the daily activities and procedures that staff use to get the job done.
• ‍ Shared Values: these are the core values of the organization and reflect its general work ethic. They were called "superordinate goals" when the model was first developed.
• ‍ Style: the style of leadership adopted.
• ‍ Staff: the employees and their general capabilities.
• ‍ Strategy: this is your organization's plan for building and maintaining a competitive advantage over its competitors.

Whilst there’s plenty more to speak about concerning TOMs, we’ve discussed the following:

• What a TOM is
• When a TOM is used
• Aspects of a TOM
• Differences between a TOM and business strategy
• TOM framework (McKinsey’s 7S model)

With all of this you should now be aware of the essential aspects of Target Operating Modelling and why it is important in any business across any industry. You could even suggest that TOMs operate like a focal point that keeps a team/department/organisation fluid, focused and ready to adapt to changing markets, competition, or a willingness to stay ahead of the curve.

If you need any further advice on TOMs or any operational matter, you face in your business then please feel free to send an email to [email protected] with your query.

Target Operating Model: Definition, Design, and Example

A Target Operating Model (TOM) describes the desired state of an organization’s operational capabilities and functions. It provides a vision for the future state of a business, explaining how the company needs to operate to deliver its strategy and achieve its business goals efficiently.

Creating a TOM is part of strategic planning and is typically carried out by senior management. It is a tool that helps align the organization’s strategy, business model, and operational capabilities. It can also serve as a roadmap for implementing organizational change and transformation. A TOM’s specific content and focus can vary greatly depending on the organization’s specific needs and context.

The Target Operating Model typically includes the following elements:

Organizational structure.

The organizational structure is critical to a Target Operating Model (TOM). It provides a detailed depiction of the company’s future design regarding its structure, roles, responsibilities, and reporting relationships. The organizational structure aligns with the strategic objectives and ensures that the organization achieves its goals efficiently and effectively.

Here’s a more detailed breakdown of what the organizational structure component might include in a TOM:

• Hierarchical Structure:  This includes details about the structure of the organization, including how many layers of management there will be (e.g., flat vs. hierarchical), which departments or teams will exist, and how they will interact.
• Roles and Responsibilities:  Each role within the organization needs to be clearly defined. This includes both the responsibilities that each role carries and the skills and qualifications required to fulfill these roles. These should align with the strategic objectives of the organization.
• Reporting Relationships:  Clear reporting relationships should be defined, detailing who reports to whom. This can include the creation of an organizational chart to represent these relationships visually.
• Decision-making Processes:  The decision-making process within the organization should be clear. This includes identifying who has decision-making authority and how decisions are communicated within the organization.
• Communication Channels:  Clear communication is critical to the smooth functioning of any organization. The TOM should therefore define formal and informal communication channels, such as meetings, reporting lines, emails, and collaboration tools.
• Collaboration Mechanisms:  How different teams and departments collaborate to achieve organizational goals should also be defined. This could be through cross-functional teams, project teams, or regular inter-departmental meetings.
• Geographic Distribution:  If the company has multiple locations, the TOM should describe how roles and responsibilities are distributed across different geographical locations. This also includes how remote and on-site workers collaborate.

Designing the organizational structure in the TOM is not a one-size-fits-all process. It needs to consider the unique context of the organization, its culture, strategic objectives, and the market environment. Also, while designing the TOM, one should consider the impact of any proposed changes on employees and plan for effective change management and communication strategies to ensure a smooth transition.

Processes and Operations

The Processes and Operations element of a Target Operating Model (TOM) focuses on how an organization will deliver its products or services to achieve its strategic objectives. It outlines how work gets done, the flow of activities, and how these activities will be transformed in the future state to enhance efficiency, effectiveness, and customer satisfaction.

Here’s a more detailed breakdown of what the Processes and Operations component might include in a TOM:

• Core Processes:  These are the primary activities that an organization performs to deliver value to its customers. They could include product development, marketing and sales, manufacturing, service delivery, and customer support. The TOM should describe how these processes will be designed or transformed to meet strategic objectives.
• Supporting Processes:  These activities support the core processes, such as human resources, IT, finance, procurement, and administrative functions. The TOM should outline how these supporting processes will be optimized to enhance the efficiency of core processes.
• Process Flow:  This involves mapping out the flow of activities, showing how tasks move from one stage to the next, and identifying potential bottlenecks or inefficiencies. The TOM should outline how process flow will be improved in the future state.
• Process Standardization:  The TOM should indicate where processes will be standardized to reduce variability, increase efficiency, and ensure consistent output quality.
• Technology Integration:  The TOM should describe how technology will be integrated into processes to automate tasks, reduce errors, and increase efficiency. This could involve using enterprise resource planning (ERP) systems, customer relationship management (CRM) systems, or artificial intelligence and machine learning tools.
• Performance Measurement:  The TOM should define how process performance will be measured, including key performance indicators (KPIs), benchmarks, and targets. This can help monitor process efficiency and effectiveness, identify areas for improvement, and track progress toward strategic objectives.
• Continuous Improvement:  The TOM should include mechanisms for continuously improving processes based on performance data, customer feedback, and innovations in the market or industry.

When designing Processes and Operations in the TOM, it’s important to involve people directly involved in these processes, as they have firsthand knowledge of the tasks, challenges, and opportunities for improvement. In addition, the design should be customer-centric, focusing on improving the customer experience and delivering value to the customer.

Technology and Infrastructure

The Technology and Infrastructure component of a Target Operating Model (TOM) refers to the technological resources and assets that an organization plans to use to achieve its strategic objectives. This includes hardware, software, networks, data centers, and other technological infrastructure.

Here’s a more detailed breakdown of what the Technology and Infrastructure component might include in a TOM:

• Systems and Applications:  This includes the various software systems and applications the organization plans to use. This could range from customer relationship management (CRM) systems, enterprise resource planning (ERP) systems, human resources systems, financial systems, data analysis tools, and more. The TOM should outline how these systems support the organization’s processes and operations.
• Data Management:  Data is a critical resource for modern organizations. The TOM should outline how data will be collected, stored, managed, and used to support decision-making and create value. This includes considerations around data quality, integration, privacy, and security.
• Infrastructure:  This covers the physical and virtual resources that support the operation and use of the organization’s systems and applications. This includes servers, networks, data centers, cloud services, and other infrastructure elements.
• Cybersecurity:  As organizations become more dependent on technology, protecting against cyber threats becomes increasingly important. The TOM should outline how the organization will protect its technology and data assets, including firewalls, encryption, intrusion detection systems, and other cybersecurity measures.
• Technology Governance:  The TOM should outline how technology resources will be governed, including decision-making processes around technology investments, technology standards, technology lifecycle management, and the roles and responsibilities of different stakeholders in managing technology resources.
• Integration:  The TOM should also outline how different systems and applications will be integrated for seamless data flow and process automation. This includes the use of APIs, middleware, and other integration technologies.
• Technology Skills and Capabilities:  As part of technology and infrastructure, the TOM should consider the skills and capabilities the organization needs to use and manage its technology resources effectively. This could include data analysis, software development, project management, and cybersecurity skills.

When designing the Technology and Infrastructure in the TOM, it’s important to consider the organization’s strategic objectives, the needs of its users (both internal and external), and the trends and developments in the technology landscape. A well-designed Technology and Infrastructure component can enable the organization to deliver its services more efficiently and effectively, support innovation, and gain a competitive edge.

People and Skills

The People and Skills component of a Target Operating Model (TOM) refers to the human resources the organization will need to realize its strategic objectives. This encompasses everything from the organization’s staffing needs to the competencies and skills required for various roles.

Here’s a more detailed breakdown of what the People and Skills component might include in a TOM:

• Staffing Levels and Roles:  This includes the number of people the organization needs and the roles they will fill. The TOM should outline how these roles contribute to the organization’s strategic objectives and the type of tasks and responsibilities they will encompass.
• Skills and Competencies:  Each role in the organization requires certain skills and competencies. The TOM should define these for each role and how they contribute to the organization’s strategic objectives. This could include technical skills, industry-specific knowledge, soft skills, leadership abilities, etc.
• Recruitment and Retention:  The TOM should outline how the organization plans to recruit people with the necessary skills and competencies, and strategies for retaining talent. This could include details about recruitment processes, career development opportunities, employee benefits, and workplace culture.
• Training and Development:  Given the rapid pace of change in many industries, continuous learning and development are crucial. The TOM should outline how the organization plans to provide training and development opportunities to equip its people with the necessary skills and knowledge.
• Performance Management:  This refers to how the organization will manage and evaluate the performance of its people. The TOM should outline performance evaluation methods, feedback mechanisms, and how performance is linked to rewards and recognition.
• Culture and Values:  The TOM should define the culture the organization aims to create to support its strategic objectives. This includes the organization’s values, behaviors, and attitudes contributing to the social and psychological environment.
• Change Management:  Any significant changes in an organization’s operating model will likely affect its people. The TOM should therefore include strategies for managing change, including communication strategies, support for affected individuals, and measures to overcome resistance to change.

Remember, people are at the heart of any organization, and any changes you propose in your TOM will impact them. Therefore, it’s important to consider the human aspect when designing the TOM, involving relevant stakeholders in the process, and planning for effective change management.

Culture and Behavior

The Culture and Behavior component of a Target Operating Model (TOM) is a fundamental aspect that underpins all other areas. It’s about the shared values, beliefs, attitudes, and norms that characterize an organization and guide the behavior of its people.

Here’s a more detailed breakdown of what the Culture and Behavior component might include in a TOM:

• Values and Beliefs:  These core principles guide an organization’s actions and decisions. They form the basis of the organization’s culture and should align with its strategic objectives. The TOM should define the organization’s desired values and beliefs, such as integrity, innovation, customer centricity, collaboration, etc.
• Behaviors:  These are the actions and attitudes that are encouraged and rewarded within the organization. They are a manifestation of the organization’s values and beliefs. The TOM should outline the behaviors that are expected from employees at all levels to achieve the organization’s strategic objectives.
• Norms:  These are the unwritten rules that guide behavior within the organization. They influence how people interact with each other, make decisions, and approach their work. The TOM should define the norms supporting the desired culture and behaviors.
• Leadership Style:  Leadership plays a crucial role in shaping the organization’s culture. The TOM should outline the desired leadership style that will support the organization’s culture and behaviors, such as transformational leadership, servant leadership, or democratic leadership.
• Work Environment:  The physical and psychological environment can significantly impact culture and behavior. The TOM should outline how the work environment will be designed to support the desired culture and behaviors. This could include workspace design, flexible working arrangements, and wellness initiatives.
• Recognition and Rewards:  How the organization recognizes and rewards its employees can significantly influence culture and behavior. The TOM should define a recognition and rewards system that reinforces the desired behaviors and values.
• Change Management:  Culture change can be challenging and may face resistance. The TOM should include change management strategies to help transition to the desired culture, including communication strategies, training and development, and leadership engagement.

When designing the Culture and Behavior in the TOM, involving people from across the organization is important to ensure buy-in and ownership. It’s also important to remember that culture change takes time and requires a consistent and sustained effort from all levels of the organization.

Governance and Performance Metrics 

The Governance and Performance Metrics component of a Target Operating Model (TOM) outlines how an organization will make decisions, assign responsibilities, measure success, and keep track of its progress toward its strategic objectives.

Here’s a more detailed breakdown of what the Governance and Performance Metrics component might include in a TOM:

• Decision-making Processes:  This includes identifying who has the authority to make decisions at various levels of the organization, the process for making those decisions, and how they are communicated and implemented.
• Roles and Responsibilities:  Clearly defined roles and responsibilities are crucial for effective governance. The TOM should outline who is responsible for what, ensuring accountability and clarity in the organization’s management.
• Policies and Procedures:  These provide guidelines for action and behavior within the organization. The TOM should outline key policies and procedures that will govern the organization’s operations, ensuring consistency and alignment with the organization’s strategic objectives.
• Compliance:  With laws and regulations impacting various aspects of an organization’s operations, the TOM should outline how the organization will ensure compliance. This includes mechanisms for monitoring changes in relevant laws and regulations and procedures for achieving and maintaining compliance.
• Performance Metrics:  These are measures used to evaluate and track the performance of the organization, its teams, and individuals. They provide a way to gauge whether the organization is on track to achieve its strategic objectives. The TOM should outline key performance indicators (KPIs) that align with the organization’s strategic objectives and procedures for monitoring and reporting on these KPIs.
• Risk Management:  The TOM should outline how the organization identifies, assesses, and manages risks. This includes operational risks (such as processes, systems, and people) and strategic risks (such as market changes, competition, and strategy execution).
• Reviews and Audits:  Regular reviews and audits provide a mechanism for assessing the organization’s performance, identifying areas for improvement, and ensuring accountability. The TOM should outline the frequency and scope of these reviews and audits and how their findings will be reported and acted upon.

The TOM’s Governance and Performance Metrics component provides a foundation for managing the organization effectively, accountable, and transparently. It should support the organization’s strategic objectives while ensuring compliance with legal and regulatory requirements.

What are Performance Management Strategies?

How to design a target operating model

Designing a Target Operating Model (TOM) involves a step-by-step process that helps a business define its strategic objectives, envision its future state, and map out the necessary changes in its operational capabilities. The following are some of the steps involved in designing a TOM:

• Define the Vision and Strategic Objectives:  Begin by articulating the organization’s future vision and strategic objectives. These will guide the design of the TOM and ensure it aligns with the overarching business strategy.
• Assess the Current Operating Model:  Conduct a detailed analysis of the current operating model. Identify what is working well and what isn’t. Understand the gaps between the current state and the desired state. This could include an analysis of processes, organizational structure, technology, and skills.
• Identify the Desired Future State:  Based on your strategic objectives, define the future operating model. This should cover all aspects of the operating model, including people, processes, technology, and organizational structure.
• Design the New Operating Model:  Design the TOM by laying out the changes that need to be made to achieve the desired future state. This might involve creating new processes, restructuring the organization, implementing new technology, or redefining roles and responsibilities.
• Develop the Implementation Roadmap:  Create a detailed plan outlining how to implement the changes. This should include timelines, resources required, potential risks, and mitigation strategies. It’s important to consider the impact of the changes on staff and stakeholders and to plan for change management.
• Implement, Monitor, and Adjust:  Begin implementing the changes according to your roadmap. Monitor progress against the defined objectives and key performance indicators (KPIs). Be prepared to adjust the plan based on feedback and performance data.

Throughout this process, involving key stakeholders and maintaining clear and transparent communication is crucial. Change can be challenging for an organization, and people are more likely to support the process if they understand the reasons behind the changes and their role in implementing them.

Remember that a TOM is not a static document. It should be reviewed and updated regularly to align with the organization’s strategic objectives and external environment.

Example of a target operating model

Sure, I’ll provide an example of a hypothetical company and its target operating model. Let’s take a traditional banking institution that is looking to transform into a digital bank:

Vision and Strategic Objectives:  To become a leading digital bank providing customers with seamless online and mobile banking experiences worldwide. The strategic objectives include increasing customer satisfaction, reducing operational costs, and improving the speed and efficiency of service delivery.

Current Operating Model Assessment:  The bank operates through a network of physical branches with limited online services. Customer satisfaction is low due to long wait times, and operational costs are high due to the maintenance of physical infrastructure.

Desired Future State:  The bank envisions a future where most services are delivered digitally. The number of physical branches is significantly reduced, and the primary customer interaction channels are online and mobile platforms.

New Operating Model:

• Organizational Structure:  The bank plans to establish a new digital banking department and hire a Chief Digital Officer (CDO). The roles and responsibilities within the bank will shift toward digital operations, data analysis, and cybersecurity.
• Processes and Operations:  All banking services, such as account opening, money transfers, and loan applications, will be digitized. Customers can access these services anytime, anywhere, through the bank’s website or mobile app.
• Technology and Infrastructure:  The bank will invest in developing a robust digital banking platform, integrating artificial intelligence for customer service (chatbots), and leveraging big data analytics for personalized offerings.
• People and Skills:  The bank must upskill its workforce to manage digital operations and data analysis. It will also need to recruit new employees with cybersecurity, data science, and digital customer experience skills.
• Culture and Behavior:  The bank will foster a culture of innovation, agility, and customer-centricity, encouraging employees to embrace digital transformation and adapt to the changes.
• Governance and Performance Metrics:  New KPIs will be introduced, focusing on digital customer engagement, speed and efficiency of service delivery, and digital innovation.

Implementation Roadmap:  The bank plans to achieve this transformation over five years, with specific milestones set for each year. The plan includes investment in technology, recruitment, staff training, and gradual phasing out physical branches.

This example showcases how the bank’s target operating model aligns with its strategic objectives, providing a clear path for transformation into a digital banking institution. Remember that creating a TOM is a complex process that requires a deep understanding of the business, market trends, and change management. It’s also a dynamic process that requires regular revision and adaptation as the business and market environment evolve.

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How To Setup A Resilient Agile Target Operating Model For Transformation Success (5 Actionable Tips)

By   Julie Choo

Published: December 20, 2021

Last Update: September 12, 2023

TOPICS:   Capabilities , Culture & Careers , Operating Model , Service Design , Transformation

The success of every business and your business, comes down to its Operating Model. Get it wrong and you’ll go out of business. Get it right like Amazon, Apple and some of the latest innovators… and you’ll reap the rewards! So how do you build a Business Operating Model to achieve this success? The answer lies in having a Resilient Agile Operating Model for transformation success. And you must make it your mission and vision to achieve this as your Target Operating Model (TOM) to drive your business forward.

BUT Don’t we need a solid Business Model first?

The problem with relying on Business Models is that they don’t last…

The COVID-19 Pandemic has showed us how stupid this question really is. Business Models are of course important to have… as they are the means by which the business survives commercially to gain an income and revenue. This revenue is fuel for growth.

Unfortunately, Business Models aren’t resilient or agile… to weather the storms from the continuous disruption that businesses and our careers face in the digital economy.

The commerce of a specific business model can disappear overnight if there are no customers to buy the business’s products and services.

We have seen how some businesses have lost all their commerce overnight during the COVID-19 pandemic and today they seize to exist – with many closures and shutdowns.

This includes one’s career as a business. If you no longer have relevant skills needed by enterprises, then you’ll be made redundant.

Similarly, pre-pandemic… many jobs have already become redundant from the wave of automation and new technologies that have rolled out over the past 2 decades in the digital economy – with manual jobs being replaced by machines, most of which don’t even have artificial intelligence (AI).

Many companies, also sort the use of low cost operations as a method to reduced costs by moving jobs and roles from more expensive labour markets to cheaper lower cost locations… and in doing so they have already sort to change their Operating Models. This was particularly popular amongst many banks for over a decade between 2008 post the Global Financial Crisis (GFC) and 2018… with much of this activity still continuing today.

In the banking industry, we have witnessed how these poor methods of Operating Model transformation are neither agile or do they make a company resilient, since existing problems and inefficiencies that have been hidden or mitigated by a skilled labour force are no longer masked, while new problems and inefficiencies also emerge in the new low cost centers where the cheaper labour force may not even have been trained properly. The end result is a lowering in customer service, while customers also face higher fees for financial services. This kind of Operating Model transformation, was the opportunity that the Fintech startups needed to enter the market and disrupt the banking and financial services industry.

With Business Models disrupted from all angles, can you even make a Business Model solid, and robust? Especially, if the means to survival is in how the business is able to pivot to operate with a new Business Model, based on changing customer expectations from their changing customer journeys, where they have to undergo new journeys to solve problems with new needs and wants – with and without a global pandemic at play.

What about new Platform Business Models, like the ones served by Amazon, Google, Apple…? These Platform Business Models are also disrupting traditional pipe business models… that follow the traditional sales funnel.

Doesn’t it take many years and decades to amass the scale in the Operating Model that is then capable of supporting a Platform Business Model? This is why, it’s necessary to build a Resilient Agile Operating Model and to ‘start’ immediately, whether you’re an existing larger business or even a conglomerate of multiple business lines, where is possibly a lot of complexity in your Operating Model that could do with simplification to make it more effective and agile, to operate with Business Agility…

Or you’re a fresh startup, about to raise your Series A or B and/or ready to spend your Series A or B funding as the business model scales and diversifies.

Why build a Resilient Agile Operating Model?

A Resilient Agile Operating Model is what gives an enterprise this ability to PIVOT its business models to not only survive disruptive market forces… but to achieve business growth.

It’s about playing the ‘long game’ as Google did when it first entered the market in 1998 as a startup to usurp the mighty Yahoo, our market leader in the 1990s. Google focused its efforts between 2004 and 2007 and invested heavily to build a resilient Agile Operating Model that will allow it to continuously offer new innovative services… or in some cases catch up with competitors quickly, while also working through product flops quickly as well. It was building out the infrastructure and internal capabilities that would support the delivery of many services, including new ones, end-to-end and for many possible customer and user journeys, and not just ‘Search Engine’ services.

During this time… Yahoo invested heavily in capabilities and partnerships to increase sales hiring many people to manually expand its ‘Search Engine’ service… to build a library of results, which is but one front-end capability only in its value chain and on one value stream… It did not invest in other capabilities in its Operating Model that would give it a robust, resilient and agile set of value streams and hence internal business services that would support its overall end-to-end Operating Model. This lack of attention and investment in other important business services that makeup a resilient Agile Operating Model, was probably why they had the biggest security breach ever recorded in 2013 with over 3 billion accounts affected – as the company underinvested in its security services value stream.

Some Case Studies you can learn from …

A full breakdown of the Google vs Yahoo strategy journey comparison can be found in THE STRATEGY JOURNEY (2020) book.

Other Agile Operating Model related journey examples in the book include:

→ The journey taken by Apple when Tim Cook took over as Head of Operations and then COO under Steve Jobs is also covered in detailed in the book.

→ The Operating Model of Amazon and all the services in this Omnichannel Marketplace business model and the role of its Alexa Voice Assistant Service in Amazon’s business agility

And there are many more case studies including Tesla, Vitality Healthcare, Harvard Business School, Udacity, Commonwealth Bank of Australia (CBA), DBS bank, the SMART CITY project by the Singapore Government… covering other aspects of the business lifecycle… as described by the end-to-end process that is THE STRATEGY JOURNEY process .

Before getting into the 5 actionable tips to get you started on building the foundations for a resilient Agile Operating Model, it’s important to clarify and define…

What is the OPERATING MODEL? What is the TARGET OPERATING MODEL?

The Operating Model is what runs your business comprising:

• WHO drives it and keeps things going, and who is it supporting or serving, so who are the customers, users, partners, staff, any connected parties…
• WHAT assets & activities including systems and infrastructure makeup this business, what projects does it contain, what things, solutions and outcomes is it creating, producing and delivering…
• HOW the business functions or performs… is it effective, agile, resourceful, resilient, efficient, costly…?
• WHERE & WHEN do things happen… which location or geographic, is it virtual or physical or digital? How does it all join up and work together?

This definition of the Operating Model , as outlined in THE STRATEGY JOURNEY (2020) book tells us what actually needs to be build or nurtured in the enterprise, and hence what the enterprise should be investing in… in order to build its Resilient Agile Operating Model .

If any of these people, processes, data, technology systems in the Operating Model in different locations , are just not right, sub-optimal or breaking down, this is clearly why the business and its performance might suffer.

When the Operating Model is working at its best, that’s when you’ll create, produce and delivery the most value to stimulate growth.

The Operating Model is like the engine that keeps everything running and the heart of the business, so it makes sense to invest in it if you want the business to flourish now and in the future. Julie Choo – THE STRATEGY JOURNEY (2020)

This is what makes it a science… the transformation of the Operating Model of a business.

Business and digital transformation is all about changing the Operating Model of a business from how it operates and runs itself today… in the CURRENT STATE with it Current Operating Model (COM) to how it needs to operate and run itself at a point in time in the future in the TARGET STATE with its Target Operating Model (TOM) .

The Target Operating Model (TOM) is how the business should operate at a future point in time, that could be 2 years or 5 years or more. eg. THE STRATEGY JOURNEY (2020) book, highlights Telsa’s journey and its TOM devised from Elon Musk’s Part Deux strategy.

Checkout this article on How to design a Target Operating Model that delivers for more detail on different types of TOMS.

What is a resilient agile operating model.

Having a resilient Agile Operating Model means having an Operating Model that is capable of transforming itself effectively and continuously as part of its DNA.

This resilient Agile Operating Model has the maturity in its capabilities to support this ongoing continuously self-transformation… where its people, processes, data and technology systems across all locations are actively making changes and adjusting either subtly or more drastically how they operate in order to solve problems, serve customers, users and stakeholders, while adding value.

Watch THE STRATEGY JOURNEY Process video tutorial to learn more about how to operate with the three strategy journey principles… to be Problem-specific, Service-Led and Value-driven .

When supported by the latest digital technologies including strong data science and Artificial Intelligence capabilities… this Digital Operating Model will have the intelligence to keep self-transforming, to supporting all the necessary business models that the enterprise and its innovators might like to PIVOT into.

How to build a Resilient Agile Operating Model?

This Level 5 maturity state that makes an Operating Model resilient and agile… will take time to build and implement depending on where the point of departure is… in the maturity state of the Current Operating Model (COM). Many interim Target Operating Models (TOMS) with improvements in the maturity state of specific Operating Model capabilities across people, processes, data, technology systems… as well as the enterprises ability to co-create with its customers, users and partners may be required. The bigger the gap, the more challenging and expensive the cost of the transformation journey.

No matter the size of the effort, time is of the essence and it really is never too late to get started and to build momentum… This first step is part of every transformation journey to build a resilient Agile Operating Model… that will stand the test of times.

Here are 5 Actionable Tips we’ve compiled at the Stratability Academy, taught in detailed and practically through case studies in our training and coaching programs, that will help you get started on building a resilient Agile Operating Model:

✅ Operating Model Top Tip #1: Invest in your people, people are assets …

The loss of important key personnel and great people who are responsible for much of an enterprise’s intellectual property (IP)… all that knowledge about how things work, what works and what doesn’t, what customers need and want…and how best to serve them… that is, all that makes it unique or special, can heavily impact its Operations and even its share price.

When creative director of Mulberry Emma Hill announced her departure in 2013, the company’s share price dropped immediate by 8% (a lost of $40million) and the new direction that Mulberry took in its product development and branding in the following years, as the company tried to change from a young luxury brand to a high-end luxury brand to compete with the likes of Hermes, only served to alienate its once loyal but younger customers and fans… with Mulberry’s products priced out of their reach.

The cost of attrition when good people who provide invaluable services in an organization is often much higher than their salary would indicate, as the IP and skills in execution held within this person’s role and the activities they perform is also loss, and often difficult to replace or improved upon, without a lot of time in training and coaching the new recruit and replacement.

People are key assets in an enterprise… with both a cost as well as opportunity cost… so it makes sense to account for people, especially good people, by understanding what their roles are… what value they provide or capture and produce for the organization… and support them where necessary through training and coaching, to keep them motivated, as well as to produce even more value through their IP.

In THE STRATEGY JOURNEY (2020) book, we highlight how to use S.M.A.R.T. objectives to direct the activities of an enterprise and this applies to the directives that are given to its people assets too… as this is what helps them to perform at their best.. when they have clarity on the valued contributions that they make in their specific roles. Whenever a manager comes up with a new KPI or SLA, they should also provide a support package with the relevant investment, that will empower the employee or sub-ordinate to achieve that target.

An increase in salary isn’t what keeps an employee in a job. A increase in value to an asset, with employees and staff being this asset, is what makes this asset capable of producing more value in the future. So it’s important to workout what value the enterprise can bring to the asset, and then make that investment in the asset… so that it can multiply in the value that it creates and produces for the company.

✅ Operating Model Top Tip #2: C reate an open mindset culture first …

I have worked in several organizations when an incumbent colleague who has been there for circa 5 to 10 years, would start by telling me “This is how we do things here at COMPANY X.”

If you’ve watched THE STRATEGY JOURNEY Process video tutorial then you’ll know that I am speaking from my experience having managed transformation budgets for Operating Model changes in the many 10s or 100s of millions and more…

This type of comment or engagement tells us what to expect in the company’s culture… In most cases, such a statement is often a sign of a closed culture, based on a fixed mindset, and indicates an organization that is struggling to transform its Operating Model despite what others might consider to be humongous transformation budgets in the many 10s or 100s of millions.

Where there are colleagues who still have this fixed mindset… the challenges lies in how to change this to a growth mindset where they are open to learning new things and new ways of working, including how to innovate new services for customers and users in an ever changing environment that is the new digital economy. If people are naturally resistant to change… then there is no way they will be listening to customers and users, and adapt the company’s operations to support these changing needs of the customers and users, thus potentially rendering the organization’s service offerings possibly irrelevant for the buying or purchasing customer and consumer of the product or service.

When an organization is dominated by a fixed mindset culture, then many of these symptoms of poor transformation (see image of Pages 43-44 of THE STRATEGY JOURNEY book below) manifest, to challenge even the best transformation agents including designer and consultant.

There is no getting around the fact that change is disruptive and jobs will be loss. This is part of every company and organizations evolution and growth as described by THE STRATEGY JOURNEY process . Resistance to change, by its staff and employees can set an organization back many decades in the transformation journey, when there are competitors who can operate at the highest level of maturity in their Digital Operating Models that change every day, every hour, every second… to continuously innovate new services for customers as part of its Operating Model and why of being.

This is why a change in culture is actually the first and most important step to the future success of an enterprise’s transformation efforts and in helping it to build a resilient Agile Operating Model. Resilience lies in the enterprise’s overall ability to adapt how it operates to disruptive forces, while agility is how quickly an enterprise can change.

A growth mindset is necessary to foster a growth culture and so an organization must look within and develop a plan to change its culture. This plan should include specific training and coaching of key personnel to foster their personal career growth alongside the growth journey of the enterprise, as well as bringing in new assets with that growth mindset and that ‘fresh perspective’ to direct new operational activities, while replacing and making redundant those who are unable to embrace the change or who are clearly working against it.

✅ Operating Model Top Tip #3: Optimise your value streams first. Not process re-engineering …

In a world where change is happening so fast, it’s important to be practical when applying changes to business operations, that is changes to processes in the Operating Model. Obviously changes to processes have dependencies with the data that needs to be managed by the process and the people and systems responsible for executing the process, and all along the value streams which the process might be supporting.

There is simply no time to waste if the most value from making changes to specific processes comes from the speed of execution and speed to market, for if changes take too long to implement because there is analysis paralysis, then the opportunities to capture the value, such as increase in revenue from an increase in market share are lost. This is why spending time documenting and mapping current processes can often be a waste of time for the purpose of finding small gains through process reengineering. Current processes should only be outlined for training purposes and to instil quality in the execution of the process, via a Service Operating Procedure (SOP), including presentation to clients of the service or when conducting gap analysis.

When it comes to achieving fast effective transformation, analysis time is better spent on defining a target service via its value stream. This means outlining what capabilities and high level processes are required to deliver the value proposition in the new or improved service, including defining the necessary inputs and outputs of the value stream.

The Service Design process should be conducted to develop a new and improved sticky Value Stream for a target service. A target service is an end-to-end service that delivers a specific value proposition to the customer or user, including any physical products. For example, products like the iPhone are only successful when backed by associated end-to-end services such as customer care after sales, but also the software that works with the new iPhone from the IOS app marketplace.

As highlight through the iPhone example, this service needs to be informed by all necessary data possible from the customer and/or user journey about how the customer and user will think, act or behave when they are solving their personal lifestyle or business problem. It is this data which should be captured through co-creation that should inform the design of the new target services such as new features and apps in the next IOS release. The new service features then inform the organization with Apple being our example, of what changes need to be made in the Target Operating Model (TOM) in order to support the service delivery.

In THE STRATEGY JOURNEY (2020) book, there are several customer journey examples using a Customer Journey Map canvas , including the customer journey associated with the Amazon Alexa Virtual Assistant service… to showcase what data is being captured on how potential customers may think, act and behave. More detailed and step by step analysis techniques on Service Design for the purpose of Operating Model transformation are taught in Stratability Academy’s Data-Driven Transformation Service Design course, which covers how you would design of a new and improved service via its value stream and the customer and user journeys through the bundling of services in a 5 stage stage process.

✅ Operating Model Top Tip #4: Take an MVP approach with co-creation to transform …

There is simply no point spending valuable resources, in a world where good resources in people and systems (i.e. the enterprises assets) are scarce and expensive… to build a product and/or service that customers and users might not need or want and hence adopt into their customer and user journeys, where they experience their problems.

In recent conversation with an Innovation Lead at the World Bank, I was told that the organization had a lot of projects where the solutions they have built through MVP were not being used or adopted by its intended customers or users. They had product owners who where struggling to sell their solutions or embed these innovated services ‘into the wild’. What I struggled to understand when having this conversation, was their concept of what is an MVP… and how this MVP was not co-created with users ‘in the wild’. There are of course many similar projects and innovations that expensive the same or similar strategy journey.

All new and improved products and services are best delivered through co-creation using Human-Centered Design , from MVP to ongoing upgrades in the Innovation Adoption Lifecycle .

This engagement where the customers and users as well as the staff and stakeholders are working together to solve the problem is what delivers the most value, as there is ownership of the problem and the solution provided by the product or service. This is how products and services meet and even exceed expectations as well as becoming an embedded through adoption.

An MVP approach means iterative development of the product or service, through co-creation. Co-creation must be part of the innovation process, if the new innovation is to become successful in ‘crossing the chasm’ in the Innovation Adoption Lifecycle to stick with customers and users and extend Customer Lifetime Value (CLV).

Of course, this MVP approach may not work in all situations such as big movie or series productions, and we see this in the many big flops like Kevin Costner’s Waterworld. In the development of services such as TikTok, in its evolution and growth, you can clearly see co-creation in play.

✅ Operating Model Top Tip #5: Have a Target Operating Model (TOM) future plan and vision to bring it all together …

Following the design of a new Target Service, the next stage is to define the new Target Operating Model (TOM) to support this service, that is, the Service Operating Model (SOM) .

Analysis of the Service Operating Model (SOM) can be conducted along with co-creation of the new target service to deliver the most value-add from the Transformation Design process . With a baseline Target State of the Service Operating Model (SOM) outlining all the key component resources , in people, process, data, systems by location plus new digital dimensions such as Networks and Regulations, as well as interdependent services, all the players required and involved in delivering the value stream are identified, allowing for gap analysis against the Current Operating Model (COM). It is during this gap analysis when it makes sense to revisit existing processes, and to document them should they not already exist amongst the organizations repository of Service Operating Procedures (SOPs) as we outlined in Top Tip #3.

The gap analysis should focus on exploring the difference in maturity states of specific capabilities across their resource components, including any missing capabilities and components and this is what gives the requirement for transformation execution to achieve the Target Operating Model (TOM).

The bigger or wider the gaps through the difference in maturity stages, such as moving from operating with ‘silos’ into operating as an ‘intelligent and predictive’ Digital Operating Model , then the more complex the transformation project or program, with more transition stages or more interim Target Operating Models (TOMS) required to achieve the ultimate Target Service state. As the organization improves the maturity states of its capabilities, then it also improves its level of business agility, that is its own ability to transform and changing, as it transitions closer to being able to operate with a Digital Operating Model.

Of course, when conducting Operating Model Transformation Design , a strong relationship is required with stakeholders and especially the Product or Service designer through the end-to-end co-creation process as all parties navigate the 5 stages of THE STRATEGY JOURNEY (ie. buiness lifecycle) together to deliver the transformation. This is how you apply Human-centered Design , through identifying a problem-solving sweetspot, between the value proposition or service, the customers and users of the service and the staff and systems responsible for delivering the service – is part of the Operating Model Transformation Design process.

In THE STRATEGY JOURNEY (2020) book, we introduce a Service Operating Model canvas for you to conduct this Target Operating Model (TOM) design and gap analysis using design thinking combined with operational excellence, to help you save time. A more detailed process with step by step analysis techniques is taught in Stratability Academy’s Operating Model Transformation Design course, which follows the design of a new and improved service via its value stream from an MVP as well as subsequent service upgrades. Both the book and the course also cover what is as well as what it takes to run a Digital Operating Model .

Conclusion & Summary

Through application of the 5 Actionable Tips recommend above, you will kickstart the journey to building a Resilient Agile Target Operating Model for any business… be it the company that you serve, a client organization that you support, and even yourself and your career, in your business, whether you see yourself as an entrepreneur or not.

While a fully fledge Digital Operating Model may be in the future for this enterprise or business that you’re leading given the time and effort involved… the important thing is to get started, as there no time to waste…

With many competitors already undergoing their transformation journeys… its best not to be left behind and out of touch for that is the beginning of the end, as that is how you can guarantee disruption to your business.

About the author

Julie Choo is lead author of THE STRATEGY JOURNEY book and the founder of STRATABILITY ACADEMY. She speaks regularly at numerous tech, careers and entrepreneur events globally. Julie continues to consult at large Fortune 500 companies, Global Banks and tech start-ups. As a lover of all things strategic, she is a keen Formula One fan who named her dog, Kimi (after Raikkonnen), and follows football - favourite club changes based on where she calls home.

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How the operating model can unlock the full power of customer experience

Key takeaways.

• An effective redesign of the customer experience (CX) organization and operating model is a crucial success factor for every CX transformation.
• Such a redesign requires seamless cross-functional collaboration, new ways of working, clear design principles, processes, and target setting in line with defined CX ambitions.
• The right CX organizational structure and operating model setup will vary by industry and company, but there is a set of applicable archetypes.

Transforming the customer experience (CX) isn’t about playing hard and fast. To succeed in the long game, companies need to manage it systematically. Doing it well is a game changer, which is why more than 70 percent of senior executives rank CX as a top priority for the coming years. Indeed, companies that effectively organize and manage customer experience can realize a 20 percent improvement in customer satisfaction, a 15 percent increase in sales conversion, a 30 percent lower cost-to-serve, and a 30 percent increase in employee engagement.

In working with hundreds of clients across industries and geographies, we have found that companies that lead successful CX transformations take action in three areas : building aspiration and purpose, transforming the business, and enabling the transformation. One of the most crucial enablers for an effective CX transformation—and one of the biggest roadblocks to greater CX impact if not addressed properly—is integrating customer experience into the organization and operating model.

Of course, organizing the business and operating model around customer experience is easier said than done, and there’s no one-size-fits-all way to go about it. But by establishing clear design principles for a customer-centric organization, creating a CX-organization blueprint, and redefining the operating model with customer journeys at its core, companies can get on track to unlock the full value potential of superior customer experience.

Common pitfalls to avoid

On the journey toward CX excellence, there are pitfalls that prevent many customer-centric organizational transformations from succeeding as planned. Here’s how to avoid the most common:

• Define your ambition clearly: Structure follows strategy. CX leaders must first clearly define their North Star, link it to actionable initiatives and targets, align all stakeholders behind it, and then translate it into implications for the organization and its operating model. Failure to create a strategy without clearly defined goals could make it difficult or even impossible to seamlessly tackle customer experience improvements across functions and journeys.
• Focus on new ways of working, not on ‘boxes and lines’: A customer-centric organization has agile cross-functional collaboration in its DNA. Designing these cross-functional processes, and training people for new ways of working, is more important than reshaping formal reporting lines.
• Establish decision-making criteria: Reshaping the CX organization and its operating model to be customer centric involves making trade-offs and choosing among countless potential courses of action. CX leaders need to decide on clear principles for the organizational redesign, based on criteria that are in line with their customer experience ambitions.
• Take a holistic approach: Trying to solve only selective organizational issues, such as who owns the website or redesigns journeys, can result in only incremental improvements instead of a comprehensive redesign of the organization for greater customer-centricity. Due to its broad implications, CX is by nature a top-management task, and it requires an operating model that defines CX roles and responsibilities up to the board level.
• Minimize functional silos: Customer experience is inherently cross-functional and top down. Keeping functional silos as dominant decision-making units may lead to the optimization of individual processes and customer touchpoints but not of the end-to-end customer journey. The risk is making ineffective improvements that don’t fully solve underlying customer pain points.

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Aspire, architect, act: three steps to making cx core to the organization and its operating model.

This three-step plan can help companies effectively integrate customer experience in the commercial organization and operating model: by formulating clear design principles and capabilities in line with CX ambitions (aspire), translating these design principles into an actionable CX blueprint (architect), and bringing the redesigned organization to life through systematic change management and an effective day-to-day operating model (act).

Aspire: establish clear design principles

Sample systematic assessment questions.

To determine their organization’s current CX maturity, leaders should ask themselves a number of key questions:

• How do we make cross-functional decisions around CX today?
• Are responsibilities for CX and customer-journey improvement clearly assigned, and are the respective journey owners equipped with decision authority and resources?
• Are defined CX priorities consequently driven toward implementation?
• How are crucial CX capabilities, such as customer-journey design, journey analytics, and CX measurement, represented in the organization’s current CX framework?

Let’s assume a company has successfully formulated a concise CX vision and ambition—for example, to be an industry leader across customer satisfaction, reliability, and convenience. Translating this foundation into implications for the organization and operating model starts with a systematic assessment of the current CX maturity (see sidebar, “Sample systematic assessment questions”).

Based on the assessment, leaders can establish a set of clear, actionable design principles that facilitate the following:

• integration of CX with the business: This means embedding customer-centricity in the daily decision making of those who have profit-and-loss (P&L) accountability, as opposed to outsourcing it to a standalone function. This principle also has implications for whether a company needs a chief customer-experience officer; the answer is, only if this role has P&L authority, budgets, and accountability for outcomes.
• cross-functional and agile decision making: While the line organization may continue as the disciplinary home for functional experts, this principle ensures key business decisions are made in cross-functional teams and decision circles, ideally designed around customer journeys and supported by targets and incentives that promote cross-functional collaboration.
• fact-based and data-driven decision making: This enables an end-to-end CX measurement system that continuously tracks all relevant customer signals around customer journeys, from solicited customer feedback to operational process KPIs.

Architect: translate the design principles into the organization’s CX blueprint

Once a clear CX ambition and actionable design principles are in place, leaders are equipped to design the CX target organization and operating model in a way that will allow the company to achieve its unique goals. This design effort can be structured around two considerations: the nature of the dedicated CX function the organization needs, and how to set up the broader organization for customer-centricity. The answers to these questions are company specific and depend on the company’s current CX maturity, complexity, and business archetype (interactive).

Six customer experience pitfalls to avoid

Creating a dedicated cx function.

For most companies that want to make a step-change in customer-centricity, a dedicated customer experience function is likely to be at least temporarily beneficial. Complex organizations with multiple business units and markets may want one team overseeing the CX effort across groups to ensure everyone adheres to best practices in such areas as CX journey design and CX measurement. A dedicated team will also have an integrated view of which customer experience initiatives to prioritize based on their impact across the organization. Furthermore, world-class customer experience requires distinctive capabilities in design, digital, and analytics that are in great demand. Leaders may also want to pool scarce CX talent instead of dispersing it across units, particularly if customer experience is a new endeavor for their organization.

Finally, a centralized function could be the right fit for organizations that want to create real change in a short amount of time. In the long run, customer-centricity requires continuous improvement; it’s not just a box to check off when it’s done. But companies that want to make significant progress over 12 to 18 months—in launching the transformation effort, tackling redesign, and fielding a handful of high-impact CX initiatives, for example—may need a dedicated team to lead the effort.

Two common archetypes of dedicated global customer experience functions are a CX center of excellence (CoE) and a CX factory. The main distinction between these approaches is the role the CX function plays.

• CX center of excellence: The CoE typically focuses on owning key CX methodologies, such as customer-journey definitions, owning the CX measurement approach across journeys, building CX capabilities across the organization, and broadly, managing the CX program including key global change initiatives. The CX CoE typically serves as a support function under the chief marketing officer, chief operating officer, or chief customer officer and should ideally report to a board member to ensure sufficient authority from the top. The size of the CoE can range from around ten to 50 full-time team members, depending on the complexity of the organization’s network of business units and its geographic reach.
• CX factory: The factory brings together representatives from different countries and business units who, with the help of a standing team of customer- and user-experience (UX) designers, redesign journeys and work to optimize customer experience approaches at scale across the organization. This approach can consolidate customer insights and translate customer pain points into tangible blueprints and prototypes for the optimal customer journey, which is typically cocreated with the local representatives to ensure that solutions fit a variety of market needs and are adopted and embraced at the local level.

One European insurance company used a CX factory as part of its overall transformation strategy. To enable customer-centricity, it conducted in-depth customer research and redesigned a critical customer journey. Based on these inputs, the CX team piloted more than 30 ideas and created and tested minimum viable products for 11. The company developed intensive capabilities in customer experience, agile, and management and institutionalized the factory with full-time employees. As a result, the insurer increased customer satisfaction and helped board members and employees across departments adopt a customer-centric mindset.

Enabling customer-centricity

In addition to effectively designing a dedicated CX function, companies also need to set up the broader organization and its operating model for customer-centricity. The ideal approach will depend on a company’s business archetype:

• contract-based B2C and B2B businesses: A customer journey-based organization has proven to be an effective setup for companies that regularly interact with clearly identified customers in a contractual relationship—an arrangement that creates substantial opportunities to harness analytics to optimize the journey. In this approach, the entire commercial organization is built around the customer journey lifecycle, from sales and activation (joining) to operations excellence (paying, using) to retention (leaving). It is supported by a CX CoE and cross-cutting IT and data and resources. Dedicated journey owners take end-to-end responsibility for their respective journeys and manage cross-functional teams to continuously ensure CX excellence and improvements. Journey-based organization is particularly common in the telco industry. Other contract-based industries, such as energy and insurance, are catching on.
• transaction-based B2C and B2B2C businesses: For companies that don’t have a contractual relationship with their customers but rather individual transactions with often unidentified customers (for example, a typical retailer), a focus on omnichannel may be the most fitting. Channel managers ensure customer excellence in their respective online and offline channels and are united by a clear omnichannel governance that promotes seamless linkages between channels in line with today’s customer expectations. A CX CoE or CX factory can also play a key role in this setup to support omnichannel collaboration and customer-centric decision making across individual channels.
• B2B enterprises: For a B2B company, losing a customer tends to be more costly than it is for a B2C. Given this reality, CX excellence in B2B requires bringing classical sales, CRM, and account management to the next level with journey thinking and data and analytics to drive tailored decision making along the B2B customer journey.

Act: bring the CX organization to life through the operating model

Once the guardrails for a customer-centric organization are set, companies can bring the CX transformation to life through systematic change management and an effective day-to-day operating model. To define their target operating model, leaders will need to align on objectives and decide on a rhythm for day-to-day work. With these key building blocks defined, they can manage the change to ensure the entire organization is on board.

Align on objectives

Key stakeholders and owners should consider holding quarterly meetings to align on qualitative CX targets, KPIs, and end products. These targets should align with the strategy and economic plan—for example, prioritizing an uptick in P&L, customer retention, reduction of churn—and provide the basis for determining daily operations.

Some companies have found success by specifying and prioritizing concrete, measurable CX end products on a quarterly basis across the board, N-1 and N-2 levels, and top executives directly feeding into the value levers. They can measure progress toward strategic goals by tracking a clearly defined set of CX KPIs, ranging from financial performance to customer and employee satisfaction.

Establish ground rules

The ground rules relate to the physical or digital work environment, standard work and meeting rhythms, and the overall culture. What does the office space look like? Will the team operate out of a central location? Is there a dedicated workspace for cross-functional work? Leaders will want to embed regular meetings and establish a daily, weekly, and monthly cadence for various tasks and check-ins.

Manage the transition

Almost equally important as defining the new operating model is managing the transition to it. How should the company manage the change and communicate with teams? How should leaders support the redesigned organization? Capability building will not only help develop skill sets, it will help to create and sustain a customer-centric culture. Leaders will likely want to empower the CX team to monitor progress against targeted milestones and metrics, manage talent attraction and retention, ensure business continuity, and make sure employees feel supported and that their concerns are being addressed. Companies that focus on building a customer-centric organization and adopt new ways of working could unlock stacked wins.

Reshaping the commercial organization and operating model with a customer focus is no easy task, but those that do it well stand to reap the rewards. By embedding CX within the entire organization and creating a clear operating model for bringing the vision to life, leaders can get on track to provide superior customer experience and realize tangible CX business impact.

Oliver Ehrlich is a partner in McKinsey’s Düsseldorf office, Harald Fanderl is a senior partner in the Munich office, David Malfara is an associate partner in the Miami office and Divya Mittagunta is a manager of capabilities in the Gurgaon office.

The authors would like to thank Kevin Neher for his contributions to this article.

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Operations Pain Points Solved: Establish a Target Operating Model

This blog is part of a series about the operations pain points that many organizations face as they tackle digital transformation and change management. Our experts provide insights and recommendations based on their decades of hands-on experience and tackle some of the most pressing business and technology pain points.

In digital transformations, goals for improvements, efficiencies, and optimizations are a given. So far in this series, we’ve discussed several critical transformation topics:  people ,  planning ,  business disruptions ,  future-forward transformation , and  customer experience .

Establishing a target operating model is another vital step to ensuring long-term success and encouraging continued innovation. Developing and communicating target states in every area of the business can not only support end goals, but also helps pave the way for decision-making along the transformation journey.

Although continuous evolution is important to every business and “transforming” as an organization is never really finished, defining a steady-state target allows for better implementation and adherence of long-lasting value drivers regardless of future organizational and operations changes.

What is a target operating model?

A target operating model describes the desired state of operations within an entire organization or from a specific transformation effort. Most organizations develop a target operating model that integrates the aspects of people, process, and technology and clearly defines the current “as is” model and the desired “to be” future model.

The target operating model should include a high-level representation of the desired state in different areas of the organization and deliver enough detail that stakeholders in every area can easily interpret and visualize the path to the target state.

What areas should be included in a target operating model?

An example of areas to include for an organization-wide target operating model are:

• Defining principles, vision, and strategy : Agreement on exactly what an organization stands for and wants to be known for is essential to alignment of goals in every other business area
• Customer experience : What customers think, feel, and do when interacting with the business 
• Employee experience : What employees think, feel, and do while employed 
• Service and product excellence : How these rate against competitor offerings based on value and differentiators
• Operational design and optimization : How people, process, and technology in an organization work together to meet profit targets as well as industry leadership and reputation goals
• Governance and reporting : The effectiveness and efficiency when meeting requirements and defining arrangements and automations
• Security : The state of security and risk management of all control points and access to every part of the IT ecosystem

Within each of these areas, the current and future states of people, process, and technology should be documented along with key performance indicators (KPIs) to measure improvements.

What are some key performance indicators (KPIs) to include in a target operating model?

It’s important to establish key performance indicators (KPIs) to define success and that align directly with the organization’s strategy and vision for their operations. KPIs can be different for every organization, and the following is an example of KPIs used for a specific type of transformation.

A frozen food company was all but forgotten in the public eye and sales were suffering year over year. They felt they had a good line of products but were not growing their customer base. This company decided to transform their public image and started a social media program, which included engaging replies to famous brands and people on Twitter. It wasn’t fast, but after two years they published a post that went viral and found their true social voice. They continued to grow their following (and sales) thanks to regular entertaining posts.

Not only did they grow their social presence, but they also more than quadrupled visits to the company website. In this case, the goal for meeting all their KPIs for reputational transformation was met when they gained and continued to maintain a following of potential new customers from a previously untapped source.

Whether an organization needs a complete operations overhaul or focuses transformation on a particular area, KPIs should be specific, measurable, and sustainable over time. When developing KPIs, remember to customize them to the task at hand from migration to the cloud, integrating automation, or raising brand awareness and reputation to streamlining and optimizing operations.

Are there other factors that affect a target operating model?

In addition to making sure to consider all internal factors and external drivers, some additional areas to consider are core business capabilities, operational levers, and information resources.

When developing a target operating model, core business capabilities may be considered as what a company does now—current state—and how it can better execute these capabilities—future state. But what about considering a different future state? For example, automotive companies long relied on gasoline-powered vehicle development despite the knowledge that they could also manufacture and sell electric-powered vehicles. Now, many of these companies have pivoted to include electric-powered vehicles as part of their profit-generating operations models and continue to work on developing alternatives to gasoline-powered vehicles. They have changed their expectations of what their core business capabilities will be in a future state.

Another consideration is operational levers. What happens if processes shift or evolve from what is true today and how can this be applied to a target operating model? For example, will a newer technology such as  5G, AI, or blockchain  be an integral part of the organization’s ability to sustain their business, compete in their industry, or grow? While we can’t tell the future, considering possible implications of developing processes and technologies in your industry is a smart way to stay ahead of your competition when developing a target operating model.

One more factor to contemplate is the ability of an organization to harness information resources. While leaders are often charged with creating a target operating model, they may not be fully aware of or understand all the processes that work or don’t work across business groups or processes that may happen in silos. It’s imperative to  create mechanisms  for bottom-up transparency of issues that need to be solved if a transformation is to be truly successful.

Start your transformation journey

If you’re wondering where to start, our  strategy and roadmap services  or  professional services for transformation governance  can help. For more operations and digital transformation support, read the other blogs in this series:

• Operations Pain Points Solved: People
• Operations Pain Points Solved: Digital Transformation Planning
• Operations Pain Points Solved: Business Disruptions
• Operations Pain Points Solved: Transformation for the Future
• Operations Pain Points Solved: Optimizing the Customer Experience

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Operations strategy case studies

Customer operations.

A leading US non-profit health insurer focused on service as a key differentiator. It wanted to gain insight into current operational performance, and develop customer-centric capabilities like self-service and digital competency. PwC's Strategy& was engaged to evaluate and address gaps in customer and member engagement.

Leveraging our health insurance expertise, proprietary market research databases, and best practices to help the client develop its differentiated customer-centric capabilities, we identified quick wins included outsourcing of manual activities, automation of macros/scripting, and standardization of call center work-from-home policies. We delivered a plan to enhance workforce management, consolidate provider data claim, and move to pre-pay policy. Additional recommendations addressed network rationalization, timely issuance of ID cards, and reducing SG&A expenses.

The project identified $25M investment in provider engagement, flexible network design, personalized member service, and real-time enrollment to achieve the desired differentiating capabilities.

Innovation and product development

A global chemicals specialty company with multiple business units and several existing embedded R&D teams was challenged by stagnating growth in difficult market conditions and the client was seeking to reinvigorate the portfolio. The client sought to consolidate R&D capabilities and establish a corporate innovation function to coordinate and drive its long-term R&D agenda and drive growth.

Strategy& was asked to design the innovation operating model, define the collaboration with business units, and develop a concept for R&D partnerships and venturing to drive growth.

We established a target operating model, refocused product innovation into clusters and developed a venturing approach. The client experienced a significant upswing in R&D productivity, new record numbers of patents filed, and breakthroughs innovations in a number of focus areas. Overall, improved R&D coherence led to 13% direct top line growth and 15% EBITDA improvement.

Strategic supply management

A global lighting company with over $5B sales revenue across more than 130 countries was faced with tremendous market disruptions resulting from the transition from traditional lighting to LED. To successfully play in this significantly different market, the company sold off its traditional business and refocused on the technically driven, fast-cycled LED business. To enable this, the client had to adopt new business models. Within this context, the procurement function had to undergo a major transition towards strategic supply management to effectively support the businesses going forward.

Strategy& supported the client in identifying the new requirements resulting from the changed business models, developing the procurement transformation program based on prioritized 4-6 focus areas (e.g. SRM, Supplier and Innovation Scouting), including appropriate KPIs, and designing a comprehensive change management concept and roadmap to ensure engagement and buy-in from the client team.

The transformation delivered significantly improved service levels for the BUs based on nine key strategic supply management capabilities and an adapted operating model with an improved split of roles and responsibilities between corporate headquarters and business units.

Competitive manufacturing

A global product company with $10B sales revenue across more than 130 countries was suffering from a highly complex manufacturing footprint which was not aligned with the client’s main markets. The client was losing sales and profitability due to high order fulfillment cycle times, high manufacturing costs, and low productivity performance in its key operations.

Strategy& designed the global manufacturing footprint strategy based on clearly defined customer and market requirements. As a consequence, the team agreed to realign the operations footprint from 23 to 15 operations by implementing a more balanced global footprint closer to key customers and/or distribution centers.

The transformation delivered shorter order fulfillment cycle times while simultaneously reducing manufacturing costs by up to 10% and improving overall productivity and flexibility. These results led to a gross margin improvement by 5%.

Capital assets

A leading oil field services and equipment company’s financial performance was lagging its peers, and the company had committed to a 3% improvement in North American net margin. Management believed there was an opportunity to improve the effectiveness of their >$1B equipment maintenance spend, but was unclear on where and how to achieve savings.

Strategy& helped the client pinpoint inefficiencies in their maintenance operating model, shifting from a highly reactive and siloed operation to an integrated team using advanced techniques to deliver maintenance when and where needed based on data. The changes were substantial as the client reorganized to break down functional barriers and create a maintenance process focused on customer performance.

Results were impressive — the maintenance transformation program was implemented at the top 80% of locations by revenue, resulting in a ~2% boost to net margins. It also drove a 20% reduction in maintenance cost, 50% reduction in maintenance related downtime, and improved customer service.

General and administrative (G&A) operations

The securities servicing division of a global banking group sought to address business challenges like reduced productivity, sub-optimal operating model for its Center of Excellence (CoE), lack of process standardization, cost escalation, process fragmentation, and duplication. Strategy& was asked to help in accelerating execution and benefits delivery through process optimization, offshoring and redesign of operating model.

Strategy& developed initial hypothesis through a detailed current state analysis, using both quantitative and qualitative tools, and conducted workshops to identify quick win opportunities. We proposed a redesigned operating model for the CoEs, and suggested in-depth implementation plan to drive the changes.

The project identified potential cost saving of $10M per annum and recommended lean FTE allocation across locations. The project also identified opportunities to achieve process efficiency and provided detailed target state structure of the CoE, including team size, shift patterns, and processes performed.

Enterprise-wide operational excellence

A leading tier-1 automotive supplier for the production and processing of rubber, plastics and metal with $680MM. sales revenue faced significant growth rates, but structures, process efficiency and financial performance did not follow accordingly and significant refinancing/cash flow complications evolved.

Strategy& was tasked with reshaping the company starting from product-market-strategy, developing the organizational structure and optimizing the entire process and operations landscape. An overall restructuring concept based on two pillars was developed: 1) Urgent short-term actions focusing on firefighting to ensure customer satisfaction and 2) sustainable long-term measures facilitating the optimization of the company’s footprint, product creation process, sales initiatives as well as lean production initiatives and the definition of an overall production system.

Continued success of these measures was ensured through the implementation of a common reporting structure and escalation process to track progress and define counter measures in case of deviations. The highly successful project identified cost saving initiatives worth more than $135MM. and had the client achieving EBIT margins of 6-8% during the project.

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Introduction

Outsourcing requires changes in governance, outsourcing as a necessity for a new tom for it, 1. demand management per business domain and/or generic use, 2. supply management aligned to service/technology domain and/or generic use, 3. internal delivery combined with supply management, 4. combine demand management and supply management, 5. strategic management processes per business domain and/or generic use (enterprise level), design the management organization timely, allow for the optimal sizing of demand-supply management organization, a well-designed target operating model is essential for successful outsourcing.

Toward a successful Target Operating Model

Application of demand-supply concepts in the design of a target operating model for it outsourcing.

The quality of the internal organization is becoming progressively crucial to the existence and eventual success of an enterprise. At the same time, the organization must have the potential to own or develop capacities, knowledge and dynamic competencies to become a distinctively outstanding organization and to be able to maintain a sustainable competitive advantage. Modern organizations need sophisticated leadership and entrepreneurship to steer the organization and to maintain its course. A balanced and well-designed flexible governance, also called an operating model, is essential for such organizations. A governance model is a compass that not only supports the steering but also enhances decision-making that is required for proper steering. This article portrays various possible forms for a Target Operating Model for an IT organization in an outsourcing situation, as seen from the demand-supply management perspective. A variety of designs are elaborated, based on different fundamental starting points.

Organizations today operate in interesting, fast paced, but also uncertain times. A few examples are globalization, shifts within and between markets, horizontal and vertical integration of operations in value chains, declining customer loyalty and the changing nature of competition. There are countless variables in the continuously changing and shifting playing field. Organizations are constantly working on increasing internal efficiency, improving external effectiveness and lowering costs. The concept of sourcing plays an important role in the optimization, rationalization and innovation of value chains within and between organizations. In this context, we examine services, processes and business functions and focus on how to achieve sustainable competitive advantages. In addition, we examine whether there is added-value in taking a different perspective concerning quality, time, and costs, or, to reorganize or outsource part(s) of the value chain. Examples are concentration-deconcentration, centralization-decentralization, and insourcing-outsourcing. The risks with outsourcing are diverse, but usually are related to overspending or even unpredictability of costs, service degradation and loss of critical knowledge and expertise. Governance plays an important role in the repositioning or rearranging of activities within the value chain.

In recent decades, organizations have undergone changes from both a social and an organizational structure perspective. In some cases, this has been accompanied by a transformation where the organization has undergone a true metamorphosis both internally and externally. Such internal changes or transformations to organizations require adjustments in governance. However, such adjustments do not always occur. If governance, operations, organizational structure and objectives are not aligned then this leads to suboptimal results, even in the most favorable situation. Companies that outsource IT have exactly the same problem ( [Beul10] ).

The annual vendor performance study carried out by KPMG EquaTerra showed that 63 percent of the outsourcing IT organizations in the Netherlands characterized the quality of management as weak or average ( [KPMG11] ).

Figure 1. The quality of governance for IT organizations in the Netherlands in 2011.

One aspect of the Pulse study in 2010 by KPMG EquaTerra ( [KPMG10] ) focused on the question of how organizations perform their sourcing transition. This study revealed that the realigning and redesigning of the retained IT organization, needed for an adequate connection between business demand and IT supply, often seems an undervalued element of a sourcing transition.

Figure 2. Changing the own (retained) IT organization is not dealt with sufficiently during the transition.

The role of the business itself as well as well-applied demand management and supply management concepts are both crucial. When organizations choose to outsource, the internal management of organizations is often not adequately co-developed and adjusted. The internal governance structures often remain unchanged and traditional, fragmented and not very goal oriented. In an outsourcing situation, this hinders effective cooperation between parties in the demand and supply chain and leads to a partial or complete failure to meet sourcing and company objectives. The question arises as to what a modern governance model should look like, that can be flexibly utilized and is easy to adapt for a certain arbitrary outsourcing situation.

The role of a Target Operating Model

In the case of a reorganization, a design is (usually) drawn up for the future organization model. Previously, the development of a organogram was deemed adequate. Today, companies are analyzed, developed and optimized from an added-value perspective. Accordingly, rationalizing from the perspective of the value chain(s) upon which the organization is built, added-value activities are to be bundled into logical units. Elaboration of added-value units makes it possible to outline a Target Operating Model, creating a clear picture of how a company or organization wants to serve its markets, what services will be offered and how to make use of the available subcontractors market. The Target Operating Model serves as the foundation on which further detailed designs can be elaborated for processes, workflow, organizational structure, roles, responsibilities and so on (see also Figure 3).

Figure 3. Using the TOM to go from strategy to detail design.

A Target Operating Model will thus show the most distinctive strategic design choices that an organization makes to achieve its objectives. It shows the relationships between components in the value chain and the organizational units and business functions and corresponding governance structures. A Target Operating Model allows senior management to explain what the organization looks like and how it should function. The nature of a Target Operating Model also makes it a powerful communication tool for reorganizations.

In recent decades, it has become clear that the use of economies of scale and a focus on core competencies can lead to large cost savings and that external service providers play an important supporting role. Providers work on a larger scale and allow the customer to focus on other important issues. However, the success or failure of outsourcing is largely determined by a close cooperation between customer and supplier. Many external IT outsourcing suppliers are large multinational companies that must have clearly formulated requirements about new or upgraded IT facilities to be optimally effective. This allows the management of such supplier organizations to be successful and become an added-value activity. Also, creating well-organized connections between business demand and IT supply is deemed a value-adding activity and hence deserves to be placed in the Target Operating Model (see Figure 4).

Figure 4. Sourcing strategy as a factor influencing the Target Operating Model of the IT value chain.

Designing a Target Operating Model

When constructing a Target Operating Model for an IT organization within a full outsourcing context, two main building blocks are important:

• the first building block, demand management, is focused on the formulation of needs (the what). Demand management is customer-facing, ensures that the demand is well-defined and that the supply conforms with the demand. The value strategy is Customer Intimacy.
• the second building block, supply management, is focused on attaining the right services for these requirements (the how). Supply management is supplier-facing (internal/external) and ensures that the required services are provided. The value strategy is Operational Excellence.

The third building block, delivery, is focused on the actual delivery of the service(s). This building block may be internal (within the organization) or external (a supplier). The delivery building block deals with the development of IT solutions (project oriented) and the management of the solutions (management oriented). Management includes IT infrastructure, application management and database management. Figure 5 illustrates this structure.

Figure 5. The building blocks of a Target Operating Model for IT.

As a result of distinguishing between

• demand management
• supply management, and
• internal and/or external delivery

a clear demarcation of responsibilities becomes visible, in such a way that everyone knows which part they should play in the demand-supply value chain.

Playing with building blocks

“Playing” with the various building blocks reveals the first outline of the desired value chain for the IT services for an organization and thus with the Target Operating Model. The choices made here are mainly concerned with:

• products and services delivered by the organization
• the complexity and specificity of the application landscape
• the chosen sourcing strategy

The above building blocks can be used to derive strategic design possibilities for a future Operating Model. In our experience, the following options are possible:

• demand management per business domain and/or generic use
• supply management aligned to service/technology domain and/or generic use
• internal delivery combined with supply management
• combine demand management and supply management
• strategic management processes per business domain and/or generic use (enterprise level)

Each option is briefly described below.

Demand management focuses on the customer. Organizations that have very dissimilar business units, each with their own strategy, will benefit from demand management that directly supports each business domain. Organizations that are focused on global and straightforward processes and products will benefit from a central/generic demand management organization. See Figure 6.

Figure 6. Generic demand management (enterprise wide) and/or by business domain.

Supply management can govern many dissimilar services. The nature of these services can be so different that we need to make a distinction between the possible types of supply management. In practice, it is categorized into the following three IT service delivery domains: 1) development, 2) application, and 3) infrastructure management. See Figure 7.

Figure 7. Supply management per service or several services together.

When the provision of IT services is outsourced, it becomes necessary to identify the components of supply management. For internal delivery, it is somewhat less clear-cut. It is quite possible to combine the responsibilities for supply management and IT delivery. See Figure 8.

Figure 8. Internal or separate delivery with supply management.

For specific business domains and application services, it can in some cases be advantageous to combine demand and supply management. For example, it is convenient in business domains that use their own specific application suite. See Figure 9.

Figure 9. Demand and supply management separate or together.

Fulfilling this option is the result of identifying three levels of management which can lead to further refining of the Target Operating Model for IT organizations:

• The strategic processes determine the path of the enterprise in the middle and long term and also define the scope. It is necessary to consider strategy and policy, compliance, portfolio management, architecture and annual budgeting processes.
• The tactical processes concern the acquiring and maintaining and allocating of assets (money, people, means of production and support services) so that business objectives can be met. This may include project portfolio management, financial management, contract management and so on.
• The operational processes actually make use of the business assets for realizing the services, where one part can be performed by the organization itself and the other part can be performed by the supplier.

Strategy and policy, compliance, portfolio management, architecture and the annual budgeting cycle can be set up for each business domain or for the whole company (and sometimes at both levels). This choice is largely determined by the prevailing business governance. See Figure 10.

Figure 10. The different types of strategic management layers.

In Figure 11 we show an example of the Target Operating Model for an IT organization, that has a number of different delivery units that deliver IT services that are business unit specific.

Figure 11. Demand and supply management units located in the IT value chain.

• The demand management (business information management) is organized within each business unit.
• The business application teams are application oriented and identifiably aligned with the business: each group focuses on an application landscape that either supports an enterprise domain or a business domain.
• The business application teams focus especially on supply management (management, specifications and testing) and manage application suppliers.
• There are three infrastructure service teams: the own service desk, supply management for hosting and networking, and supply management for workplaces and telephony. The actual management of this infrastructure is outsourced.

Lessons learned from designing a TOM for IT

During the outsourcing process, it is often the case that insufficient attention is given to managing IT demand and it is then often reflected in the design of the demand & supply management model: the design of the demand-supply management organization turns out to be insufficient. This leads to the business case and keenly negotiated contract being undermined by ill-defined management of demand and ill-defined specification of IT services that the supplier should deliver. This leads not only to frustration for the customer, but also for the supplier. In addition, the combination of an unbalanced governance model with an immature demand-supply management organization makes the outsourcing an extremely risky proposition from a business perspective. As a result, the business benefits calculated in the original business case will not materialize and this will cause irritations and escalations that will jeopardize the collaborative relationship.

There is an optimum size for demand and supply management activities. An organization that is too small often leads to ill-defined specification of services and this may lead to uncontrollable throughput. This is characterized by a large number of small contracts and unmanageable hourly rates. A demand-supply management organization that is too large leads to overly divided responsibilities and thus to superfluous internal discussions, that impede momentum and sink productivity. This means that problems in governance and management cannot be solved by simply hiring additional people. Benchmark based research shows that governance and management of demand and supply after outsourcing of processes and/or services is extremely dependent on the type of work that is outsourced. For example, for outsourcing in the IT domain, this lies between 12 and 24 percent of the total IT expenditure (contract value plus management costs).

Organizations that rely heavily on IT with respect to their service or product cannot be effective when the IT value chain is not set up effectively. This is especially true with respect to governing demand and supply in IT outsourcing situations. When internal governance is not in order, it endangers the creation of added-value, the achievement of the outsourcing objectives and the service performance itself. If the value chain and Target Operating Model are not clear, it is senseless to have discussions with suppliers about the effectiveness of the collaboration. Thus, it is extremely important to have an effective Target Operating Model for IT. This TOM must include a clear new results-oriented governance structure with corresponding processes, responsibilities, roles, jobs, competencies and an appropriate organizational sizing. The precise design of the TOM is determined, among other things, by the business strategy and the sourcing strategy. A good TOM ensures that the demand is driven by the business in consultation with the suppliers and safeguards the collaboration at all levels in the IT value chain. A successful outsourcing engagement ensures that designing the demand-supply management structure is already taking place when starting the outsourcing selection process. So when outsourcing must be managed (more) effectively, it is an important precondition that sufficient attention is given to applying demand-supply concepts.

[Beul10] Erik Beulen, et al., Managing IT outsourcing , Routledge, 2010.

[KPMG10] KPMG EquaTerra Pulse Q3-2010.

[KPMG11] Dutch Strategic Outsourcing Study 2011, KPMG EquaTerra, 2011.

[Wije10] Gerard Wijers, Oscar Halfhide and Erik Cazemier, De regieorganisatie op maat (bespoke management), Outsource Magazine, June 2010.

Target Operating Models (TOM) Design: Why TOM is Critical for Legal Departments

“Design is not just what it looks like and feels like. Design is how it works” - Steve Jobs.

Over the last 25 years in the legal industry, I have worked for great companies in private practice, in-house and for alternative legal service providers (“ALSP”) in the US, UK and China. Within that time, much has changed, particularly regarding technological advancements, but much has remained the same. Some persistent aspects of legal services are valuable and enduring – such as a relentless focus on quality and client service. Others are not – such as inefficient processes and lack of formal operating models. These challenges lead to higher costs, reduced work quality and delays. Technology alone cannot resolve these issues and never will. [1]

A holistic view of the entire legal operating model is necessary, including maturing critical capabilities such as training, process, staffing and technology. This multi-dimensional approach is far superior to a tech-first strategy and helps avoid the rampant technology implementation failures of recent years. This article will provide an overview of a 360-degree view considering seven critical attributes of a target operating model (the “7 Attributes”). We will follow this article with subsequent articles for each of the 7 Attributes.

Background of Operations Management

Operations management (“OM”) is a professional discipline focused on enhancing the provision of products and services. [2] It involves the systematic direction of processes in sourcing, production and delivery. OM takes a holistic view, emphasizing cost management and assuming that technical aspects are handled by specialists. [3] OM applies to the complete chain of activities in producing and delivering products and services. Though it originated in manufacturing, it now applies to non-manufacturing industries like marketing, finance, IT, healthcare, utilities, distribution, retail and hospitality. Operations disciplines first entered the legal industry as “legal operations” between the 1990s and mid-2000s. [4]

Delivering legal services involves interconnected processes transforming tacit knowledge into customer value. OM principles coordinate these processes, including operating model design. [5] An operating model is the integration and standardization necessary for delivering goods and services to customers. [6] In Operating Model Canvas , Andrew Campbell defines a target operating model (“TOM”) as the integration and standardization of "business processes, organizational structure and information systems…to realize [a] strategic vision and [associated] operational capabilities." [7] TOM represents the ideal state of operations, leveraging best practices and process automation to enhance efficiency, quality and consistency. Integration and interoperability between attributes determine success.

The 7 Attributes

Based on decades of combined legal operations experience, my colleagues and I identified seven critical attributes for legal services TOM that drive value and performance. These 7 Attributes represent best practices in legal service operations and apply to any legal operations area, including contract management, litigation and compliance.

The 7 Attributes are:

• Scope and Remit : Clear scope, roles, and responsibilities for legal departments and business stakeholders requesting legal support.
• Staffing Model : A well-designed staffing model to ensure legal department resources spend most of their time at their highest and best utility.
• Artifacts : Effective and well-maintained documentation for organizational memory and accountability.
• Training Program : Robust training to empower and enhance an organization’s most valuable assets – its people.
• Process Life-cycle : Refined process life-cycles to encourage operational excellence.
• KPIs and Reporting : Transparent and effective KPIs and status reporting to support strategic decision-making.
• Technology : Effective use of technology to enable human capital.

Each Attribute has multiple sub-components and capabilities that must be matured to improve operations.

Applying the 7 Attributes. Applying the 7 Attributes is intuitive. Here are key activities for applying the 7 Attributes:

• Express Each Attribute : The 7 Attributes describe “what good looks like” across each dimension. Each Attribute can be expressed as a present state, goal or desired end state. For example, applying Attribute No. 1 would read, “scope and remit are clearly understood by service delivery personnel and requestors, with a documented process for any changes in scope and remit.” Immaturity in this area leads to misalignment, delays, low-quality outputs and personnel attrition.
• Conduct Maturity Assessment : Start TOM design with a current state assessment against the 7 Attributes to determine gaps. This process measures current operational capabilities, identifies areas for improvement and establishes KPIs. Practitioners should assess each individual Attribute for maturity and then aggregate those scores to determine overall maturity, typically categorized into three stages:
• Early : Capabilities are underdeveloped or missing, leading to inefficient, manual service delivery. Resources are under or over-utilized, untrained and not contributing their highest use.
• Intermediate : Operations are moderately mature across some Attributes, with many opportunities for enhancement.
• Advanced : All necessary Attribute sub-components are fully implemented. The resource model is optimized, ensuring resources are well-utilized, with senior members focused on strategic initiatives.
• Through maturity assessment, we gain insight into operational strengths and weaknesses, guiding TOM design decisions and the roadmap to achieve them.
• Conduct Impact Analysis : Maturity assessments identify constraints or failures that must be resolved to achieve TOM. For example, one of our clients suffered from resource attrition due to issues with scope and remit (Attribute No. 1), lack of artifacts (Attribute No. 3) and lack of training (Attribute No. 4). Low maturity in those areas allowed contract managers to be overwhelmed by support requests, leading to high-volume escalations, extended cycle-times and internal client dissatisfaction.
• Develop Key Performance Indicators (“KPIs”) : KPIs measure progress towards overcoming constraints discovered during maturity assessment and impact analysis. For instance, low maturity in Attributes 1, 3 and 4 lead to extended cycle-times. Accordingly, a target cycle-time or cycle-time improvement would be an appropriate KPI. Other KPIs include customer satisfaction, employee retention, engagement, cost, quality, risk exposure, and resource utilization.

TOM Case Study: A Holistic Approach Led to Holistic Improvements

A publicly traded global biotechnology company with nearly 4,000 employees and a greater than $40 billion market cap was experiencing growth in product pipeline and clinical trials but lacked a scalable study start-up legal operating model.

After an assessment, we found low maturity across all 7 Attributes. There were scope and remit breakdowns between the legal and clinical development departments. Resources were responsible for multiple tasks critical to clinical trial set-up but were not properly staffed or trained to manage each task. Lack of real-time reporting led to conflict regarding matter status.

We helped the client develop and deploy a scalable TOM to increase site-start-up velocity including region-specific artifacts, augmented staffing to allow each team member to focus on their highest utility, formal training to enhance contract negotiation capabilities, better technology integration for automated workflows and real-time reporting.

Outcomes : By maturing all 7 Attributes, we aligned the legal and clinical development departments and reduced contracting cycle-times by 70 percent.

Case Study Insights :

• Staffing model, training and artifacts can either inhibit or enable resources. Operational challenges typically arise from integrations and interdependencies between operating model elements. It is critical to understand and coordinate the dynamics between operating model elements. For example, clinical development teams responsible for negotiating clinical contracts had little contracting experience, an ineffective staffing model and no training or artifacts to guide their efforts. This not only impacted operational performance but also reduced employee engagement.
• Low maturity in scope and remit can cause strife between departments. There was consistent friction between the legal and clinical operations departments regarding scope of responsibilities. This caused excess escalations to the legal department which eroded trust between the groups and reduced operational effectiveness.
• Mature KPIs and reporting can align interdependent departments. Clinical contracting cycle-times were critical. Once the legal and clinical development departments had reliable reporting and KPIs, they could see each other’s impact on cycle-times which reduced questions on accountability for any delays. That clarity helped reduce tension between the groups and increased productivity.

The Bottom Line : As Andrew Campbell wrote, “things work better when everything works together, on purpose.” [8] Operational effectiveness hinges not only on individual operational capabilities but how those capabilities work together. This is especially true for legal operating models where, unlike manufacturing environments, quality is subjective, variability is persistent and human skills, knowledge and interactions drive customer value.

The 7 Attributes model helps identify and improve critical operational capabilities in an integrated way that enhances operating model performance. We will next publish on Attribute No. 1: Scope and Remit, with practice tips to improve this Attribute in your environment.

[1] See Casey Flaherty, "Tech-First Failures – Value Storytelling (#6)," LexBlog , December 13, 2021. Available at: https://www.lexblog.com/2021/12/13/tech-first-failures-value-storytelling-6/ .

[2] Karmarkar, Uday S. Operations Management in the Information Economy: Information Products, Processes, and Chains . Springer, 2004.

[3] APICS. APICS Operations Management Body of Knowledge Framework . 3rd ed., APICS, 2011. https://www.apics.org/docs/default-source/industry-content/apics-ombok-framework.pdf?sfvrsn=c5fce1ba_2 .

[4] Corporate Legal Operations Consortium (CLOC). (2019, October). What is Legal Operations? Retrieved from https://cloc.org/wp-content/uploads/2019/10/What-is-Legal-Ops_Oct2019-FINAL.pdf

[5] See OMBOK Section 1.1.3.

[6] Ross, J. W., Weill, P., & Robertson, D. C. (2006). Enterprise Architecture As Strategy: Creating a Foundation for Business Execution. Harvard Business Review Press.

[7] Campbell, A., Gutierrez, M., & Lancelott, M. (2017). Operating Model Canvas. Van Haren Publishing.

[8] Campbell, Andrew. "Operating Model Work is Simple." Ashridge on Operating Models , 27 November 2021, https://ashridgeonoperatingmodels.com/2021/11/27/operating-model-work-is-simple/ .

Michael Callier

Global Head of Consulting Factor Law

Michael  is a corporate lawyer and legal operations expert with over 20 years of experience. He is the Global Head of Consulting for  Factor Law  where his multi-disciplinary team designs and enables target operating models for clients in multiple industries including life science/healthcare, financial services, manufacturing, consumer staples and technology. Michael has held general counsel and other legal leadership roles with top tier international law firms, legal departments and alternative legal service providers. He has supported hundreds of engagements and transactions across more than sixty countries.

Michael belongs to the State Bar Associations of both Washington and Oregon. With a J.D. from the University of Oregon School of Law and a Master of Science in Information Management from the University of Washington, Michael also has certifications in Lean Six Sigma, Information Privacy and Adaptive Leadership, alongside proficiency in Mandarin Chinese.

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About this Case Study:

• How did we use HOBA® to develop, design and get agreed the Target Operating Model (TOM) and roadmap to implementation in 4-months?
• Learn how we used HOBA® to assess the Current Operating Model of not one, but two businesses, identify the people, process and capabilities of the existing business, into the new business.
• Learn how the target transfer date was set, but the legislation governing the responsibilities and powers wasn’t, that the TOM and Roadmap not only had to be agreed, but ready to mobilise in order for the transfer to the new business model operational on or before transfer date.
• Learn the one-thing we did that enabled the programme to gain momentum so the programme and business was in agreement of the process and risks at hand, and to take to ensure the transfer happened on time, without a hitch.

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Target Operating Model

Delivering the value your clients expect relies on having an effective operating model. Every element of your business should be contributing towards providing a high level of service as efficiently as possible. We’ll make sure your organisation is set up to do this and achieve its long-term goals.

We will assess whether the systems you have in place are capable of meeting your current business needs. We’ll also make sure you have the skills, processes and technology to take advantage of opportunities coming around the corner.

Our services

Through one-to-one interviews with key people in your business, group workshops and a thorough review of client policies, processes and procedures, we will assess if your operating model is fit for purpose.

We will identify where there are gaps, blind spots and inefficiencies in how your business functions. We can then define what needs to be done to overcome them and how to encourage colleagues to embrace this change.

Development

Based on those definitions we will develop an operating model that delivers an exceptional service for your clients. As your business grows and becomes more complex it’s critical all its processes are transparent, work smoothly together and are agile enough to adapt to changing demand.

Driving change at a leading fintech provider

A multi-national client that provides tech solutions to the financial sector was frustrated by its below par productivity. Its processes and data gathering were inconsistent across different locations and the professional services automation (PSA) it had introduced 18 months before wasn’t being used effectively.

We assessed the existing operating model against industry best practice, identifying areas and actions for improvement. This included defining a new target operating model and creating a business case to replace their existing PSA with one better suited to their needs and goals.

They supported our recommendations. We then used the knowledge we had gathered during our assessment process to drive the configuration and testing of the new PSA, and support a successful global roll out.

Is your operating model struggling to keep up with your growing business? Or is it simply not functioning as effectively as you’d like? Get in touch to find out how we can help.

Creating efficiencies by driving consistency across a bank’s African operations

By partnering with BSG, a leading South African retail bank could significantly enhance their customer experience by establishing a single-view target operating model (TOM) for their home loans business across Africa.

• Consistent and improved efficiencies across their African home loans business, to assist in driving the strategy to unify global operations
• A single-view TOM to integrate and transform current operations for home loans across Africa
• A partner to define, develop and execute the TOM

• Standardise processes, products and channels to drive an enhanced customer experience
• Develop a single-view regional TOM to allow for functional alignment between the bank’s African operations and its global head office
• Rationalise and collapse management spans and layers (where necessary), while pursuing right-shoring and consolidation opportunities

• Standardisation of processes, products and channels leading to improved turnaround times and increased transactional volumes
• Reduction of waste from unnecessary management spans and layers
• Improved governance and controls resulting in reduced losses associated with fraud

Improving customer experience through the creation of a single-view TOM for the African home loans operations of a South African retail bank.

Do you need help optimising your business's operating model design?

Our expert IT Strategy consultants have experience developing operating models across a broad variety of industries and sectors.

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