target operating model case study

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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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Business intelligence platform.

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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How To Design A Target Operating Model (TOM) That Delivers

By   Julie Choo

Published: March 2, 2017

Last Update: September 2, 2023

TOPICS:   Capabilities , Gameplans & Roadmaps , Operating Model , Transformation

The concept of a Target Operating Model (TOM) encapsulates a strategic blueprint for an organization’s future operations, outlining the desired “how, where, and when” of its functioning. It serves as a bridge between strategic intent and operational execution, encompassing processes, data, people, and systems orchestrated to achieve overarching goals. A TOM guides transformative efforts by aligning capabilities with strategic vision, ensuring resilience and adaptability in the face of evolving market dynamics and internal shifts. As AI (artificial intelligence) continues to advance, the evolution of digital operating models and digital transformation agility will be pivotal in navigating the near future, enabling organizations to harness AI’s potential for enhanced efficiency and innovation.

Having worked with businesses using TOMs all around the world and having run so many, I’ve seen all possible outcomes. Some have succeeded in delivering very beneficial outcomes for their organizations. Some have failed to deliver anything. There can be many reasons for this; they couldn’t raise the budget, couldn’t get off the ground, they couldn’t get the buy-in needed from stakeholders, or they were based on the wrong motivations and outcomes to begin with. With this background in mind, I thought I’d explain and highlight:

What is the Operating Model?

What is a target operating model (tom).

• Different Types of Target Operating Models
• How an organization can really reap the benefits of a successful business transformation program, or project, that is designed to deliver a TOM?

AND I will also provide examples of why and how a strong TOM with business agility , is how a business will be able to pivot and reinvent its services in times of uncertainty and instability, such as the economic crisis caused by the COVID-19 pandemic.

The Operating Model mustn’t be confused with the Business Model, even though this is often the case in many organizations.

The Business Model delves into an organization’s customers and product offerings (or value chain propositions) and how to effectively commercialize the business. Its focus is on how to bring about profit through revenue streams from product offerings, while looking at some of the activities and resources that are required to deliver the product offerings, and service customers. The ‘Business Model Canvas’ by Alexander Osterwalder and Yves Pigneur is a great tool. It helps organizations big and small to evaluate if they have the right business model and pivot (if needed), especially when conditions change in the ecosystem surrounding the enterprise. At a high level, and with a 10,000 foot view from management, it describes WHAT an enterprise must do and WHAT it must change.

The Operating Model, on the other hand, is a lot less sexy because it is responsible for the HOW, WHERE and WHEN. It is part of the execution lifecycle of THE STRATEGY JOURNEY Framework , while the Business Model is part of design. Success comes from both the design of the best strategies and then the execution of these strategies to the right degree. So a business model without an Operating Model is lost, and unlikely to succeed in delivering the value that it promises to a business enterprise and its customers.

The Operating Model is HOW a business functions, including what capabilities – the processes, data, people and systems it has to keep itself running – which need to be applied at the right time (WHEN) and in the right place, in different locations (WHERE).

I like to use the car analogy to describe the Operating Model as the engine of an organization. In 2016, the fastest Formula One (F1) car, the Mercedes Silver Arrow, driven by Lewis Hamilton (arguably the fastest driver), did not win because of engine and reliability problems. Instead the World Championship was won by his teammate Nico Rosberg, who had a better functioning engine that was able to last the distance of a whole season.

Nico benefited from a slightly better operating model that year, and that’s what led to his overall win. Nico had the processes, data, systems and the people (including himself) – the complete capability package – to win that World Championship. The mechanical failures that Lewis suffered, mostly not through fault of his own, were a result of failures somewhere within his operating model, that year (since he went on to win more championships in the following years). At the time, it was clear Lewis also had some organizational problems within his management team, and we do not know what other issues lay behind the Mercedes garage or in Lewis’ own mind. Put simply, he lost because his operating model package was inferior to Nico’s. And in this subsequent years, he has learned from his experiences, improved and delivered even better results.

An Agile Operating Model, that is an Operating Model with business agility also provides the means for a business to pivot from disruption especially in times of economic crisis.

Because the Operating Model is comprised of all the business activities that make a business run, and keep it running, it is what will get your business through tough times as it gets disrupted both from our fast changing digital economy, as technologies involving robots and AI begin to replace what people do, and from economic crisis caused by shutdowns or lockdowns from a health pandemic like COVID-19.

An Operating Model focus on capabilities that allow it to ‘pivot’ its Business Models to change how it operates quickly, is what makes it agile, or to operate with business agility . This can make all the difference, as we have seen how Business Models can become disrupted, very quickly, and overnight in some cases.

Learn the 5 step process to build business agility your Target Operating Model including success story examples from our article on ‘How to shape your Business and Career with THE STRATEGY JOURNEY Framework’ .

The Target Operating Model (TOM) is a future state version of the Operating Model at a point in time.

A TOM doesn’t exist yet, and to achieve it, the Operating Model itself must change, requiring a large transformation effort in the form of a program of change. However, change itself isn’t good, unless it is for the right reason(s). So, what are these reason(s)?

If the point of the Operating Model is to execute how the Business Model needs to function, then as part of any transformational change program moving towards this new TOM, it would need to be aligned to changes required in the overall strategy of the business. This would cover any changes to the goals and objectives within its overall Mission and Vision, to its business model, and the new or increased value that the organization is set to deliver from the changes.

This is why I have described the whole strategy lifecycle as a journey, with the 5 stages of THE STRATEGY JOURNEY and the 5 models of THE STRATEGY JOURNEY Framework . A business enterprise is a living entity, that is constantly changing on its journey.

The TOM is simply a viewpoint of what that enterprise wants to change into, as it covers what all 5 models will look like at a time in the future.

Different Types of Target Operating Models (TOMs)

That future state TOM varies depending on what industry an enterprise is in, the level of innovation, and what needs to be achieved. This would be the outcomes that are sought through the strategies of that particular enterprise.

TOMs in Larger Organizations

Corporate strategy for Target Operating Models (TOMs) involves a meticulous evaluation of the current operating model’s effectiveness, employing key performance indicators (KPIs) to gauge its performance. This assessment, often facilitated by tools like the Operating Model Canvas, helps organizations identify areas for improvement and optimization. By aligning the TOM with strategic objectives, companies can ensure operational excellence and agility, positioning themselves for sustainable growth and success in a dynamic business landscape.

Within established organizations, the pace of change and innovation is often sluggish. These companies typically allocate 3-5 years for strategic transformation, especially when reevaluating specific business lines and models. Occasionally, Target Operating Model (TOM) adjustments occur within 1-2 years, driven by short-term cost-cutting goals rather than comprehensive TOM initiatives focused on long-term value.

However, when cost reduction is the primary objective, TOM projects can inadvertently trigger to their management system and organizational shifts leading layoffs, offshoring, remote service strategies and changes to adapting more stringent policies. Yet, implementing these changes without considering the need for fundamental Business Model shifts or the implications for the ‘ Value Model ‘ risks achieving only short-term balance sheet adjustments. The ‘ Value Model ‘ signifies the value perceived by customers and stakeholders, both within departments and externally. Presently, evolving customer behaviors shape their own Value Models, driving service preferences and interactions with providers.

Amazon exemplifies value-centricity by meticulously analyzing customer behaviors and leveraging a sophisticated technology infrastructure through services like AWS and Alexa Voice. Ignoring strategic groundwork in favor of quick solutions can result in misalignment, missing out on holistic benefits and potentially yielding long-term complications. This reinforces the importance of a well-structured strategy and game plan in transformation efforts, paving the way for enduring success.

There is a full case study of HOW the Amazon ecosystem works around its Alexa Voice Service in THE STRATEGY JOURNEY book .

TOMs in Government Organizations

In government organizations that are looking at societal changes, the TOM can be a 25 year plan. This is the case with Singapore, who have a Vision that they want to achieve for 2050, and who has invested heavily to build its TOM .

In contrast, the UK faced uncertainty in 2020 regarding Brexit’s TOM implementation and repercussions even 4 years post the ‘leave’ vote. The COVID-19 pandemic redirected the UK’s attention, leading to a chaotic transition post-Brexit. In such scenarios, agile TOMs prove invaluable, offering scalability through their flexible framework.

For instance, an agile TOM would have been apt for managing the societal shift caused by COVID-19, enabling rapid adjustments to healthcare and public service operations in response to evolving circumstances. We can further expand on value of using agile TOMs in this situation where COVID was a new virus which had uncertain elements to what it could have evolved into justifying the need to use an agile approach to adapt to this situation.

Responses to the pandemic showcase strengths and weaknesses in Operating Models, evident in countries like New Zealand, South Korea, Taiwan, and Germany. Notably, the UK’s COVID vaccination effort demonstrates the National Health Service’s (NHS) operating model strength, vaccinating over 20 million citizens by February. While the vaccination program succeeded, testing and tracking services remain weak, revealing an operating model deficiency.

The evidence is in the data as illustrated below in the UK daily summary taken from 6th March 2022

The big multi-billion dollar question is: The challenge is whether the UK can replicate its vaccination program success across diverse sectors and services during economic recovery. Victory in one service model doesn’t guarantee triumph in all, as complexities differ. Updates will be shared through the year, presenting case studies of service models worldwide for insights and awareness.

I’ll be posting updates during the year including new case study examples of ‘Service Operating Models’ from the UK and across the world, in this blog and via our social media feeds (on Instagram , Linkedin and Twitter ) so subscribe to stay updated.

Start-up TOMs

In the high-stakes environment of startups, the focus on survival often limits future planning to a mere 1 to 18 months. Rapid and unpredictable changes seem to discourage the establishment of a comprehensive Target Operating Model (TOM). However, securing investor funding demands a TOM that maps the startup’s strategic journey, aligning Mission and Vision with exit goals. The five models within THE STRATEGY JOURNEY Framework , encompassing the TOM, are essential components of a Business Plan, instilling investor confidence and support.

Essentially, a startup requires a TOM to steer its efforts. Without it, valuable resources—time and money—are squandered on misguided pursuits, hindering progress. A versatile TOM, adaptable to the volatile startup ecosystem, should be structured in short, logical phases spanning a few months, summing up to 18 months.

Consider Google’s early days from 1998 to 2003, contrasting with Yahoo’s dominance. Google’s strategic focus on perfecting its Operating Model empowered exponential scaling, ultimately outpacing Yahoo, which grappled with unsustainable investments, neglecting security. Similarly, Netflix’s success against Blockbuster’s downfall exemplifies how distinct Value Models shaped their Operating Models, steering one towards prosperity and the other towards ruin.

For deeper insights into these scenarios, explore our article delving into the divergent paths of Google and Yahoo, as well as  the downfall of Blockbuster vs Netflix , and how their choices regarding Value Models influenced the success or deterioration of their businesses.

TOMs in High-Performance Sports & Gaming Organizations

Formula One (F1) serves as an innovation hub due to its rapid changes. Regulations shift frequently, prompting architects like Adrian Newey and engineers to design new cars and engines annually. Tracks’ variations necessitate diverse setups for optimal race speed. Changing weather conditions can affect car balance mid-race, demanding adaptable strategies. In F1, a Target Operating Model (TOM), if present, endures about a year, adapting continually due to its agile nature.

In sports, such as football, TOMs align with yearly seasons or multi-year cycles like the Olympics or World Cup. Athlete injuries may affect performance, highlighting the need for flexible, agile Operating Models. France’s 2018 World Cup triumph was propelled by a data-driven strategy hinged on Target Operating Models (TOMs). Their streamlined approach optimized player positioning, ball distribution, and cohesive teamwork, all orchestrated within a TOM framework. . This method facilitated quick adjustments, enhancing their adaptability to their opponents and ultimately leading to their championship victory.

During the COVID-19 lockdown situation, sports organizations and management companies are hit hard of course even if some of them might have big cash reserves, but customers are turning to the gaming industry, to fulfill their need for sports entertainment from home.

The gaming industry gained traction as a substitute for live sports entertainment. In F1, teams transitioned online, hosting Virtual Grand Prix events to sustain fan engagement and driver activity, anticipating revived demand post-crisis. The gaming sector flourished during the pandemic, with companies like ESPORT witnessing surges in signups .

Target Operating Models (TOMs) That Deliver

A TOM will deliver whatever you ask it to do, and we have highlighted what are the 4 priority capabilities to build , so it comes down to ‘what is the game plan ?’ The most important step to developing a good TOM is to ensure it is being formulated for the right outcomes, based on the right context or problems, and to deliver the best possible services. The problems and outcomes need to clearly state, both what the root causes and the goals are, and how, when and where they will occur and be achieved. If the mission, goals and objectives are compromised to begin with, and not properly aligned to the strategy of your organization, then naturally, the output of the TOM will reap the benefits as well as consequences of that compromise. In Big Data the saying goes: Rubbish in, Rubbish out.

When the TOM is designed to deliver in phases, with a good flexible roadmap that sets out the gameplay in steps, and is aligned across all THE STRATEGY JOURNEY stages, with the 5 strategy journey models: Mission Model, Business Model, Value Model, Operating Model (the existing one), and Transformation Model in sync to deliver the right outcomes, with a plan to execute those phases, in the right place at the right time, while having the business agility to cater to unforeseen changes, such as those caused by disruption including health pandemics, then an enterprise is in the position to successfully navigate its journey to deliver the outcomes in the TOM and the benefits sought.

This is how a business or enterprise of any shape or size can utilize TOMs to manage its transformation journey , comprising its transformation programs, to give it the best possible chances of fighting, overcoming and even thriving from disruption, such as the digital transformation of AI .

SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis and PESTLE (Political, Economic, Social, Technological, Legal, Environmental) analysis are powerful tools for comprehensively assessing a company’s macro and micro business model.

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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Target Operating Model: The Ultimate Guide

The following is a comprehensive and in-depth guide to the Enterprise Target Operating Model covering foundational concepts, design constructs, and implementation techniques.

Brief Overview of the Concept of Target Operating Models (TOM)

A Target Operating Model (TOM) serves as a strategic framework that defines how an organization will execute its vision and mission, thereby meeting its business objectives. It outlines how various elements like processes, technology, governance, and people should interconnect and interact to deliver value. Specifically, a TOM aims to provide a transparent and comprehensive blueprint for translating strategic objectives into operational capabilities, ensuring alignment across the organization’s ecosystem.

Target Operating Model in Today’s Business Landscape

In an era marked by unprecedented changes—be it technological advancements, globalization, or market volatility—a static operating model no longer suffices. According to a report by McKinsey & Company, about 80% of executives believe that their current business models are at risk due to emerging digital innovations. Furthermore, Deloitte’s Global Human Capital Trends survey indicates that nearly 92% of companies are redesigning their organizational structure to adapt to the rapidly evolving business landscape.

A well-designed TOM enables organizations to navigate these complex dynamics effectively. It fosters agility, facilitates quick decision-making, and ensures resilience against market shocks. Companies with a clear TOM are better positioned to take advantage of opportunities and mitigate risks. For example, during the COVID-19 pandemic, organizations with adaptable operating models were 3.2 times more likely to increase market share compared to their less agile competitors, as per a survey by Boston Consulting Group.

Objectives and Structure of the ETOM Guide

• Educational : To equip you with the essential knowledge, methodologies, and tools required to understand and implement a TOM.
• Practical : To provide actionable insights,  case studies, templates, and best practices that can be directly applied to your unique organizational context.

The guide is structured to cover the journey of TOM development comprehensively, starting from foundational concepts, continuing through to the planning and analysis phases, and finally discussing execution and continuous improvement. It will also include chapters on risk management, technology’s role in TOM, and future trends, punctuated by interviews with industry experts and lessons from successful transformations.

By the end of this guide, you should possess a well-rounded understanding of what a Target Operating Model entails, why it’s crucial for modern enterprises, and how to go about defining and implementing it effectively.

Understanding Target Operating Models

Definition and core components.

A Target Operating Model (TOM) functions as a strategic blueprint that provides a holistic view of how an organization should operate to deliver maximum value to its stakeholders. It encompasses multiple dimensions, each critical for effective organizational functioning. These core components usually include:

• Processes : The operational and management workflows that day-to-day functions.
• Technology : The digital and IT infrastructure supporting the business processes.
• Organization Structure : The hierarchical relationships and roles that define authority, responsibility, and lines of communication.
• People and Skills : The capabilities and competencies that employees need to execute the processes efficiently.
• Governance and Decision-making : The rules, policies, and mechanisms that govern how decisions are made.
• Culture and Leadership : The collective values, beliefs, and leadership styles that shape organizational behavior.
• Customer Experience : How the model translates into customer engagement, satisfaction, and value proposition.

Historical Context

Though the concept of an operating model isn’t new, the formalized idea of a “Target Operating Model” gained traction in the early 21st century. Companies recognized that as markets became more competitive and volatile, operational efficiency alone couldn’t sustain long-term success. According to a historical review by Harvard Business Review, organizations that prioritized agile and adaptable operating models saw an average revenue growth of 37% more than their less agile counterparts over a decade. This signifies the evolution from static, siloed operating models to dynamic, integrated TOMs that could align with overarching business strategies.

Examples of TOM Applications

• Amazon : Amazon’s TOM prioritizes customer-centricity, innovation, and scalability. Leveraging advanced technology for inventory management, data analytics, and customer service, Amazon maintains its competitive edge. Its decentralized decision-making allows teams to be agile and responsive to market changes.
• Southwest Airlines : Known for its cost-efficient operating model, Southwest transformed its target operating model to focus on customer experience. The company integrated technology to streamline check-in processes and adopted a point-to-point flight system, differing from the traditional hub-and-spoke model. This led to an increase in on-time arrivals by 12% in just one year, according to company reports.
• General Electric (GE) : GE shifted from a diversified conglomerate to a more focused entity centered around its core competency: industrial manufacturing. By restructuring its business units and governance model, GE aimed to make its various units more accountable and agile. According to its annual report, this TOM redesign contributed to a 16% improvement in industrial profit margin within two years.

By dissecting these applications, we can glean insights into the versatility and strategic importance of TOMs in modern business landscapes. Whether you operate in the technology sector or oversee a manufacturing conglomerate, a well-articulated Target Operating Model serves as a cornerstone for organizational success.

Why Target Operating Models Are Essential

Fostering purpose.

In the labyrinth of modern corporate structures, a well-defined Target Operating Model (TOM) serves as a lighthouse, guiding every action toward a single, unified purpose. It crystallizes the organization’s raison d’être into actionable strategies, ensuring that each cog in the corporate machine understands its role in the grander vision. According to Deloitte’s 2020 Global Human Capital Trends Report, organizations with a strong sense of purpose had an employee engagement rate that was nearly 14% higher than those without one. A TOM lays the groundwork for ingraining this purpose into every aspect of the organization.

Strategic Alignment

TOMs go beyond mere operational planning; they align intricate details with strategic objectives. Businesses often suffer from strategic drift, a divergence between what they plan and what they do. A TOM minimizes this drift by establishing a framework that ties departmental efforts and initiatives directly to organizational goals. According to a study by PMI, 41% of projects failed to reach their initial goals due to a lack of alignment with corporate strategy. Therefore, TOM serves as the missing bridge that aligns organizational function with strategic intent.

Operational Efficiency

Operational efficiency isn’t just about cutting costs; it’s about optimizing resources for maximum value creation. A TOM helps organizations understand how best to configure their resources, from human capital to technological assets. By streamlining processes, eliminating redundancies, and fostering a culture of continuous improvement, businesses can achieve superior results. For example, Toyota’s renowned Production System, a precursor to modern TOMs, increased productivity by 10% annually for several decades, setting a benchmark in operational excellence.

Agility and Responsiveness

In an age where market conditions can pivot overnight, agility is a survival skill. A TOM fosters a nimble organizational structure that can quickly adapt to changes without derailing from its core objectives. According to McKinsey, agile organizations are 1.7 times more likely to be in the top quartile of organizational health, the best indicator of long-term performance. TOMs allow for rapid course corrections and adaptive strategy implementation, thereby ensuring sustainability and competitiveness.

Target Operating Model Case Studies: Success and Failure

• Netflix : Netflix’s TOM evolved from a DVD rental service to a streaming giant and then into a content creator. This level of transformational agility kept Netflix ahead of industry shifts, accumulating over 208 million subscribers worldwide as of 2021.
• Kodak : In contrast, Kodak failed to adjust its TOM to digital photography trends, sticking to its film-based model for too long. Despite inventing the first digital camera, Kodak filed for bankruptcy in 2012, becoming a cautionary tale for lack of agility and foresight in maintaining an effective TOM.
• Unilever : Unilever underwent a major transformation, focusing on sustainability as a core business strategy. By integrating this into their TOM, they not only minimized their environmental footprint but also increased their market share by 3% in segments that focused on sustainability, according to their 2020 annual report.
• Sears : The retail giant Sears serves as another example of failure due to an outdated TOM. Sticking to large physical stores and broad inventory without investing in e-commerce capabilities, Sears filed for bankruptcy in 2018, overtaken by nimbler competitors like Amazon and Walmart.

Target Operating Models stand as indispensable tools in the corporate toolkit, driving purpose, ensuring strategic alignment, elevating operational efficiency, and guaranteeing organizational agility. Companies that have mastered their TOMs lead the pack, while those neglecting this strategic instrument risk irrelevance or, worse, extinction.

Laying the Groundwork

Role of leadership and governance.

Leadership sets the tone for any transformation, and establishing an effective Target Operating Model (TOM) is no exception. The top echelons of management must exhibit unwavering commitment to the TOM initiative, providing not just resources but also valuable guidance and strategic oversight. Research from the Project Management Institute (PMI) reveals that executive sponsorship is the top driver of project success, accounting for 40% of successfully implemented initiatives. Governance, on the other hand, sets the rules of engagement. A well-defined governance structure ensures that the TOM initiative remains on track, maintains its alignment with corporate strategy, and meets defined metrics for success. Google, for example, attributes its rapid growth and market dominance to a balanced and structured governance model that feeds into its overarching TOM.

The Importance of Stakeholder Buy-in

Stakeholder buy-in is not a luxury; it’s a requirement for successful TOM implementation. According to Gallup, projects fail 50% less often when they engage their stakeholders thoroughly. A TOM transformation affects everyone—from board members to front-line employees—and thus, getting a collective agreement is crucial for effective implementation. Companies like Salesforce have perfected this by creating an internal stakeholder map and engaging each group through tailored communication plans, enabling successful, company-wide CRM implementation that aligns perfectly with their TOM.

Initial Planning and Scope Definition

Setting a clear scope and initial plan for a TOM initiative eliminates ambiguity and ensures all stakeholders share a unified vision. In the planning phase, the organization needs to identify the key components that will undergo transformation, be it organizational structures, processes, technologies, or human resources. Accurate scoping at the start decreases the chances of ‘scope creep,’ a phenomenon where the project’s goals expand while it is in progress, causing delays and potential failure. A Harvard Business Review study found that one in six projects experiences a budget overrun of 200%, with the average overrun being 27%—and improper scope definition is often a leading cause. Apple Inc. managed to avert such pitfalls when transitioning from a computer manufacturer to an ecosystem provider; it is precise initial scoping that targeted consumer experience and integration across multiple platforms became a cornerstone of its TOM and market success.

By paying close attention to leadership, governance, stakeholder buy-in, and precise initial planning, organizations can set a strong foundation for a TOM that not only resonates with corporate strategy but also achieves the intended transformational outcomes. It’s akin to laying the cornerstone of a building; get it right, and the structure will stand strong for years to come.

Conducting a Current State Assessment

Tools and methodologies.

A rigorous current state assessment is the starting point for devising an effective Target Operating Model (TOM). Several diagnostic tools can serve this purpose, including SWOT (Strengths, Weaknesses, Opportunities, Threats) and PESTLE (Political, Economic, Social, Technological, Legal, Environmental) analyses. According to a report by Boston Consulting Group, companies that used such frameworks improved their organizational efficiency by an average of 25%. For example, Coca-Cola used PESTLE analysis to understand market dynamics and SWOT analysis to assess internal capabilities, which informed its global operating model.

Data Gathering Techniques

Data stands at the core of a current state assessment. Techniques for data gathering can range from internal audits to market research and analytics. High-performing companies take a data-centric approach; according to MIT Sloan Management Review, organizations driven by data are 5% more productive and 6% more profitable than their competitors. Companies like Amazon leverage big data analytics to understand not just market demands but also internal operational efficiencies, forming the basis of their robust TOM.

Stakeholder Interviews

Input from stakeholders—whether they are employees, suppliers, or even customers—provides invaluable qualitative data for the current state assessment. According to a study by PwC, stakeholder-engaged projects are 50% more likely to result in success. The automotive industry provides an illustrative example. Tesla conducts regular stakeholder interviews to understand the interdependencies and bottlenecks in its operating model, thereby achieving high levels of operational effectiveness.

Importance of a Holistic View

Taking a compartmentalized view can distort the assessment. For a balanced view, companies must look at processes, technologies, people, and governance in a holistic manner. A McKinsey study found that organizations adopting a holistic view had a 45% higher likelihood of achieving cost and efficiency gains. Unilever, for instance, used a holistic assessment approach to integrate its diverse units under a unified TOM.

Diagnosing the Malaise—Beyond the Symptoms

Often, companies make the mistake of addressing symptoms rather than underlying issues. For a transformative TOM, it’s crucial to delve deep into root causes. According to a Deloitte study, 23% of failed business transformations can trace their failure back to the ineffective diagnosis of the current state. General Electric’s unsuccessful expansion into the energy sector serves as a cautionary tale, where a failure to diagnose core operational challenges led to a strategy that was out of sync with its capabilities.

In conclusion, a thorough current state assessment forms the bedrock of a solid TOM. Organizations need to use structured methodologies, diverse data sources, and a balanced, deep-dive approach to grasp their present state effectively. This understanding, in turn, paves the way for a transformation that is both achievable and aligned with long-term strategic objectives.

Creating a Vision for the Future State

Alignment with corporate strategy and objectives.

One of the key imperatives in defining the future state of your Target Operating Model (TOM) is its alignment with corporate strategy and objectives. According to a Harvard Business Review study, 95% of employees are unaware of their company’s corporate strategy. This gap can be detrimental to TOM’s success. Look at IBM’s shift into cloud computing; the transformation was consistent with the firm’s broader objectives of moving from hardware to more scalable, high-margin businesses, ensuring a seamless transition and immediate returns on investment.

Futuristic Technologies and Trends to Consider

Understanding the trajectory of emerging technologies and trends is pivotal. Gartner estimates that by 2025, 75% of enterprise data will be processed outside a traditional data center or cloud, underscoring the importance of edge computing in future operational models. Companies like Tesla are already integrating IoT and AI into their TOMs to facilitate real-time data processing and automation. Incorporate these considerations into your TOM to future-proof your operations.

Scenario Planning

Scenario planning can act as a robust mechanism to prepare for various futures. According to a study by McKinsey, companies that engage in detailed scenario planning are 20% more likely to outperform industry benchmarks. Shell Oil employed this technique in the 1970s to foresee and adapt to the oil crisis, fundamentally changing its operating model to become more resilient against market fluctuations.

Crafting the Vision Statement – Setting the North Star

The vision statement serves as the North Star for the entire transformation journey. According to Bain & Company, companies that have well-articulated vision statements grow 50% faster than those without them. Google’s vision of organizing the world’s information provides a compelling example. It acts as a guiding framework for various initiatives, from search engines to machine learning algorithms, aligning disparate units under a cohesive TOM.

Aspirational yet Achievable Goals

While your vision should stretch the organization, it must also be grounded in reality. A Harvard Business School report indicates that 70-80% of companies fail to reach their strategic goals due to unrealistic targets. Tesla aimed to produce 500,000 cars in 2020, a figure seen as audacious, but reached an impressive 450,000, providing a motivational yet attainable target for its workforce.

In summary, creating a vision for the future state of your TOM is a balancing act. It requires strategic alignment, foresight into emerging technologies, scenario planning, a compelling vision statement, and well-calibrated goals. These elements are not only essential for the success of TOM but are critical in ensuring that the transformation yields sustainable long-term advantages for the organization.

Designing the Target State Operating Model

Components of the design.

Designing a Target Operating Model (TOM) involves multiple components, such as process architecture, organizational structure, technology, and governance. According to a Deloitte survey, only 23% of executives believe their companies are excellent at aligning strategy and purpose, highlighting the importance of a well-designed TOM in bridging this gap.

Considerations for Different Functions

Each function within an organization has unique requirements and challenges that must be incorporated into the TOM. For instance:

• R&D : With R&D, agility, and speed-to-market are crucial. According to PwC, companies that align their R&D strategies with their TOM are 77% more likely to meet their growth targets.
• Supply Chain : Resilience and scalability should be the focus. Cisco’s transformation included redesigning its supply chain to reduce operating costs by $490 million within a year.
• Manufacturing : Focus on process efficiencies and automation. Toyota’s Production System (TPS) is a seminal example of operational excellence.
• Marketing and Sales : Integrating data analytics for customer targeting can bring a revenue lift of 10-20%, as per a McKinsey report.
• Human Resources : HR must focus on talent management and succession planning. According to Bersin by Deloitte, companies with mature talent management programs have a 26% higher revenue per employee.
• Finance and Accounting : Compliance and risk management are critical. According to Accenture, two-thirds of CFOs are focusing on developing the financial services model that supports enterprise-wide digital transformation.
• Information Technology : IT must enable business strategies. Gartner suggests that by 2022, 80% of revenue growth will depend on digital operations, showing the pivotal role of IT.
• Data Management : The focus here is data integrity and security. Statista reports that data breaches exposed 4.1 billion records in the first half of 2019 alone.
• Customer Service : Personalization and rapid response are vital. According to a Salesforce survey, 80% of customers consider the experience a company provides to be as important as its products or services.
• Legal : Compliance, intellectual property rights, and contracts should be the focus areas.

Governance Structures

Governance acts as the keel of the ship, providing the stability needed during turbulent transformation phases. According to a report by the Project Management Institute, poor project governance is the reason for 20% of projects that fail to reach their original goals.

Levers for Success

The levers for success in designing a TOM are buy-in from leadership, effective project management, and robust KPI tracking. In a KPMG survey, 33% of respondents cited senior management buy-in as the key factor contributing to the success of transformation projects.

Enablers and Disablers

Enablers like agile methodologies, collaborative tools, and leadership support can accelerate the transformation process. In contrast, disablers like resistance to change, unclear objectives, and lack of communication can impede it. A McKinsey study showed that 94% of surveyed employees reported that they encountered resistance to change during transformation efforts.

Designing the Target State Operating Model is a complex but indispensable endeavor. The design must be multi-faceted, involving deep considerations for different organizational functions, robust governance structures, and awareness of the levers that can enable or disable the transformation.

Gap Analysis and Strategic Objectives

Tools for gap analysis.

Identifying the gap between the current and target state is crucial for any transformation journey. Tools such as SWOT Analysis, McKinsey’s 7S Framework, and the Boston Consulting Group Matrix are instrumental in this phase. According to a study by MIT Sloan, companies that effectively perform gap analysis are 2.5 times more likely to experience a successful digital transformation.

Setting Strategic Objectives

Strategic objectives serve as the backbone of your transformation process. They should align with the overarching company mission and vision. For instance, Microsoft’s objective to become a “productivity and platform company for the mobile-first and cloud-first world” led to significant investments in cloud computing, contributing to their $1.3 trillion market cap as of 2020.

Establishing Measurable Goals

All strategic objectives must translate into measurable goals. KPIs (Key Performance Indicators) need to be defined to track these goals effectively. A Harvard Business Review study states that 84% of companies fail to execute their strategies successfully, often due to poorly defined KPIs.

Identifying Gaps and Their Magnitude of Impact

Each gap identified must be scrutinized for its impact on the business. You can categorize them into low, medium, and high impact. For instance, General Electric identified a gap in its digital capabilities and realized its high impact on its competitiveness, subsequently investing over $4 billion in digital initiatives.

Prioritizing Changes

Not all gaps are equal, and resources are finite. Therefore, prioritization is key. The Eisenhower Matrix, which segments tasks into urgent-important, important-not urgent, urgent-not important, and neither, can be useful here. IBM successfully used this model in prioritizing its transformation efforts, which resulted in revenue growth from $88.3 billion in 2009 to $103.6 billion in 2019.

Balancing Business Needs and Realities

A fine balance must be struck between ambition and operational reality. This often requires making trade-offs. For instance, Amazon accepted lower profit margins to invest in its Prime infrastructure, a decision that paid off exponentially, with Prime memberships exceeding 200 million by 2021.

In summary, gap analysis and setting strategic objectives are foundational elements in the journey toward a Target Operating Model. Employing the right tools for gap analysis, setting measurable goals, and efficiently prioritizing changes are pivotal steps. It is equally essential to balance the idyllic vision with the pragmatic needs and realities of the business. Doing so not only sets the stage for a successful transformation but also ensures its sustainability and relevance in a rapidly evolving business landscape.

ETOM: Risk Management and Mitigation

Identifying risks and opportunities.

Risk identification is the first step in managing potential pitfalls and taking advantage of opportunities. According to a PwC survey, companies that invest in risk management save 37% more than companies that don’t. Risks can range from supply chain disruptions to cybersecurity threats, while opportunities might include emerging markets or technological innovations. Toyota, for example, identified risks in its centralized supply chain after the 2011 tsunami in Japan and modified its supply chain strategy, turning a potential weakness into an operational advantage.

Quantitative and Qualitative Risk Assessment Methods

Once you’ve identified risks and opportunities, the next step involves assessing their potential impact. There are two primary methods for this: quantitative and qualitative.

Quantitative Risk Assessment

Quantitative methods involve numerical evaluations using metrics such as the Net Present Value (NPV) or the Value at Risk (VaR) model. JP Morgan Chase utilizes quantitative methods to assess the risks of its investment portfolios, thus maintaining its financial stability even during volatile periods. According to a Gartner report, companies that employ quantitative risk assessment methods are 25% more successful in achieving their business objectives.

Qualitative Risk Assessment

Qualitative methods, on the other hand, involve subjective assessments based on experience, intuition, or comparative ranking. These are often used in assessing risks that are difficult to quantify, such as geopolitical risks or company reputation. A classic case is how Johnson & Johnson handled the Tylenol tampering crisis in the 1980s. The company’s qualitative assessment of the potential damage to consumer trust led to a complete product recall, which ultimately salvaged the brand.

Mitigation and Contingency Planning

Mitigation strategies aim to reduce the likelihood of a risk occurring or minimize its impact if it does occur. Boeing’s delayed launch of the 787 Dreamliner, plagued by battery failures, is an example of insufficient risk mitigation that led to over $20 billion in additional costs. Therefore, robust mitigation plans are essential.

Contingency planning is the development of alternative courses of action for scenarios where risks cannot be mitigated entirely. According to the Project Management Institute, companies that excel in contingency planning are 17% more efficient in terms of time and 45% more efficient in terms of budget.

Effective risk management forms the cornerstone of any successful Target Operating Model implementation. By identifying risks and opportunities, employing both quantitative and qualitative risk assessment methods, and preparing mitigation and contingency plans, organizations are better positioned to navigate the complex terrain of business transformation. This proactive approach to risk equips companies to not just survive but thrive, turning potential setbacks into strategic advantages.

Toward a Target Operating Model: The Transformation Roadmap

Crafting a detailed roadmap.

Creating a detailed roadmap serves as the navigational chart guiding your enterprise toward the Target Operating Model (TOM). In a report by McKinsey & Company, 70% of organizational transformations fail, and one key differentiator for the successful 30% is a comprehensive roadmap. The roadmap spells out each step, milestone, and criteria for success, fostering alignment and accountability.

Phases and Milestones

A transformation doesn’t happen overnight. It comprises various phases, each containing specific milestones to achieve. For example, IBM’s transformation into a cloud and cognitive solutions company unfolded in well-defined phases that first focused on cost restructuring, then on re-skilling the workforce, followed by technological investments. Milestones can include things like completing an organizational audit, initiating a pilot program, or achieving a specific ROI figure. Each milestone should be SMART: Specific, Measurable, Achievable, Relevant, and Time-bound.

Quick Wins and Sustainable Moats

Quick wins refer to improvements that require minimal effort yet offer significant impact. They serve as motivational boosts and validate the transformation strategy. A study by Harvard Business Review reveals that companies that identified and capitalized on quick wins saw a 33% higher engagement level among employees during transformations. However, quick wins are not sufficient for long-term success. Sustainable moats—long-term strategic advantages that protect a firm against competition—are vital. Amazon’s customer-centric model, for instance, started as a quick win but has grown into a sustainable competitive moat, contributing to a market cap exceeding $1.5 trillion.

Resource Allocation and Budgeting

Allocating resources effectively is integral to the successful execution of your roadmap. According to a Deloitte study, misallocated resources can inflate transformation costs by up to 75%. You will need to allocate human resources, technological infrastructure, and financial capital with precision. Budgeting also plays a critical role. Walmart, for instance, allocated $2 billion towards its digital transformation in 2019, specifically earmarking funds for eCommerce and supply chain improvements, thereby improving its competitive stance against digital-first companies like Amazon.

Crafting a detailed transformation roadmap is a pivotal step in transitioning toward your Target Operating Model. With careful planning of phases and milestones, judicious selection of quick wins and sustainable moats, and meticulous resource allocation and budgeting, you set the stage for a transformation that not only succeeds but also stands the test of time. By observing these principles, you are laying down the foundational bricks that will uphold your new operating model, making it resilient, efficient, and agile.

TOM Implementation: Change Management Essentials

Identifying fud (fears, uncertainties, and doubts) factors.

Before embarking on a transformation journey, you must address Fears, Uncertainties, and Doubts (FUD) prevalent among your workforce. According to a KPMG study, FUD factors contribute to 65% of failed transformation initiatives. These emotional triggers can stem from concerns about job security, workload changes, or the learning curve associated with new technologies. Only by pinpointing these FUD elements can you effectively strategize how to alleviate them.

Anticipating Resistance

Resistance is not a question of ‘if’ but ‘when’ and ‘how much.’ According to Prosci’s 2020 benchmarking study, resistance from employees is one of the top obstacles to successful change. Anticipating resistance allows you to prepare countermeasures, such as targeted communication campaigns or re-skilling programs. Kodak failed to anticipate resistance to digital technology within its organization, ultimately contributing to its bankruptcy.

Identifying Champions, Advocates, Followers, and Skeptics

In any transformation process, you’ll encounter four primary categories of individuals:

• Champions: They actively push for change and can sway others through influence and enthusiasm.
• Advocates: Though not as influential as champions, they fully support the change.
• Followers: They’re neutral but willing to go along with the majority.
• Skeptics: They resist change and may even try to halt the transformation.

Recognizing these groups early enables you to tailor your change management strategies accordingly.

Best Practices for Change Management

Adherence to change management best practices can substantially improve your chances of a successful transformation. A study by McKinsey found that transformations are 6.3 times more likely to succeed when applying change management best practices, which include:

• Consistent communication
• Inclusive leadership
• Employee involvement in solution design
• Feedback loops

Training and Development

Training programs should be designed not just to introduce new skills but also to align employees with TOM’s core values and objectives. Accenture reports that 94% of employees are willing to stay longer at a company that invests in their career development. Through well-orchestrated training initiatives, you can catalyze this form of loyalty and ensure smoother transitions.

Communication Strategies

Effective communication serves as the backbone of any change management program. According to Towers Watson, companies that employ highly effective communication practices are 3.5 times more likely to outperform their peers. You should consider multi-channel approaches that include town halls, newsletters, webinars, and one-on-one sessions.

In summary, the intricacies of change management go beyond mere procedural adjustments. It encompasses psychological, social, and organizational aspects that can significantly impact the success of your Target Operating Model. By identifying FUD factors, anticipating resistance, classifying internal players, adhering to best practices, implementing effective training, and employing robust communication strategies, you’re positioning your enterprise to not merely navigate but thrive amidst change.

TOM: Execution and Monitoring

Solution design.

The starting point for effective execution is a robust solution design. This framework delineates the “how” of translating your Target Operating Model (TOM) into applications. According to PMI, 47% of unsuccessful projects fail to meet goals due to poor requirements management, which often starts at the solution design stage. Here, cross-functional teams need to collaborate to create a comprehensive blueprint that aligns with both strategic objectives and operational realities.

Identifying Tools and Vendor Selection

The selection of appropriate tools and vendors can make or break the execution phase. A Gartner study revealed that 80% of companies that pay close attention to the tool selection process succeed in achieving their transformation objectives. Metrics for vendor selection should include compatibility with existing systems, scalability, customer support quality, and total cost of ownership. For example, when General Electric decided to go digital, they opted for Predix, a custom-built platform, over off-the-shelf solutions to meet their specialized needs.

Implementation Plans

A well-crafted implementation plan serves as your execution roadmap. It should specify timelines, allocate resources, and set responsibilities. A Harvard Business Review study indicates that 70% of change initiatives fail due to poor execution, emphasizing the necessity of a robust implementation plan. Key milestones and deadlines must be communicated clearly to all involved parties to foster a sense of urgency and focus.

Performance Metrics and KPIs

Once the implementation phase kicks off, ongoing measurement becomes critical. Key Performance Indicators (KPIs) must align closely with the TOM’s objectives. According to a Bain & Company survey, organizations using analytics are twice as likely to be in the top quartile of financial performance within their industries. Metrics might include operational efficiency ratios, customer satisfaction scores, or time-to-market for new product launches. These KPIs will serve as your compass during the execution phase.

Review Mechanisms and Feedback Loops

Regular reviews are integral for ensuring the transformation remains on course. Utilizing mechanisms like a Balanced Scorecard can provide a holistic view of progress. Moreover, opening feedback loops with front-line employees can yield critical insights. A report by Salesforce showed that employees who feel their voice is heard are 4.6 times more likely to feel empowered to perform their best work.

Making Necessary Adjustments

Execution is rarely a straight path. A study by BCG found that 75% of transformation efforts deviate from their initial trajectory. This isn’t necessarily negative, provided you have mechanisms in place for timely course corrections. For example, Toyota’s well-known kaizen philosophy, which emphasizes continuous improvement and responsiveness to change, has been instrumental in its global success.

The execution and monitoring phase is where the conceptual meets reality. By focusing on meticulous solution design, rigorous tool and vendor selection, disciplined implementation planning, data-driven performance metrics, robust review mechanisms, and adaptive flexibility, you significantly increase your likelihood of successfully realizing your Target Operating Model’s potential.

The Role of Technology in the Target Operating Model

Continuing the march toward digital first, cloud first approach.

The Digital First and Cloud First strategy has been at the forefront of business transformation, and it’s more relevant now than ever. A Forrester report indicates that companies implementing a cloud-first strategy are 80% more likely to achieve their business objectives. Adopting this approach provides scalability, agility, and the capability to implement innovations rapidly, thereby aligning directly with the tenets of a Target Operating Model (TOM).

The Future of TOM in an Increasingly Digital World

In a PwC survey, 86% of CEOs acknowledged the significance of digital technology for their business strategies. The evolution of TOM is inexorably linked with this digital transformation. Future TOM designs will heavily incorporate digital components such as Artificial Intelligence, Machine Learning, and Blockchain to streamline operations and enhance decision-making.

Selecting the Right Technology Stack

The technological infrastructure is the backbone of your TOM. A poorly selected tech stack can derail even the most well-planned operational model. A Gartner study shows that 75% of businesses that strategically align their tech stack with their TOM achieve an ROI within the first year of implementation. Important factors include interoperability, future scalability, and ease of integration with existing systems. For instance, Adobe shifted from traditional software to a cloud-based subscription model by carefully selecting a tech stack that supported this monumental change.

Taking Care of Data, the Critical Asset

In an age where data is often likened to oil, its management should be a cornerstone of your TOM. According to IBM, poor data quality costs the U.S. economy $3.1 trillion a year. Data governance, therefore, becomes critical to maintaining the integrity and usefulness of this resource. Secure storage, responsible handling, and judicious use of data can provide a competitive advantage.

Cybersecurity as an Overarching Concern

Security can’t be an afterthought. Cybercrime is expected to inflict damages totaling $6 trillion globally in 2021, as per Cybersecurity Ventures. Embedding cybersecurity measures within your TOM not only safeguards the organization but also instills customer trust. Companies like Target and Equifax have faced severe repercussions due to lackluster cybersecurity measures, showcasing the dire need for robust security protocols.

Accounting for Emerging Technologies and their Impact

Technological landscapes are ever-changing. According to Deloitte, 56% of companies are redesigning their HR programs to leverage digital and mobile tools. Emerging technologies like the Internet of Things (IoT), 5G, and Quantum Computing can have unforeseen impacts on your TOM. Therefore, your technology strategy within the TOM must be agile enough to adapt to these advances. For example, companies like DHL and Maersk are leveraging blockchain to disrupt and improve their supply chain operations, and this has a direct bearing on their operating models.

Technology serves as both a catalyst and an enabler in the successful execution of a Target Operating Model. A cogent technology strategy that aligns with your TOM can deliver exponential benefits, whereas a misalignment can be catastrophic. By paying careful attention to each technological aspect—from platform selection and data management to cybersecurity and the integration of emerging technologies—you can create a resilient, future-proof TOM.

Implementing Target Operating Mode: Lessons from the Trenches

Case study: the transformation journey at superdupermegaco.

In 2019, SuperDuperMegaCo, a leading manufacturing firm, realized it faced challenges with declining profit margins, inadequate supply chain coordination, and disengaged employees. They turned to a Target Operating Model (TOM) to rewrite their destiny. By 2021, they had achieved a 20% improvement in operational efficiency and a 12% increase in customer satisfaction.

The Strategy

SuperDuperMegaCo aligned their TOM with a Digital First, Cloud First approach. They partnered with vendors to move their legacy systems to a scalable cloud infrastructure.

The Execution

Utilizing a phased roadmap, they focused initially on quick wins, automating invoicing, and customer relationship management systems. They ensured governance by establishing a Steering Committee that conducted monthly evaluations.

The Outcome

Within two years, they had fully integrated a digital supply chain, using IoT devices for real-time tracking and AI algorithms to forecast demand.

Best Practices

• Stakeholder Engagement : One of the key lessons from SuperDuperMegaCo’s journey was the importance of stakeholder engagement. According to McKinsey, projects are 50% more successful when they have the full backing of key stakeholders.
• Data-Driven Decision Making : Decisions based on empirical data led to more predictable and satisfactory outcomes. A Gartner survey reveals that data-driven organizations are 23 times more likely to acquire customers.
• Agile Adaptation : Embracing agile methodologies can help organizations adapt to change more quickly. A Boston Consulting Group study shows that agile firms grow revenue 37% faster and generate 30% higher profits.

Pitfalls to Avoid

• Misalignment with Corporate Strategy : According to a KPMG study, 70% of digital transformations fail due to a lack of alignment between the strategy and the operating model.
• Ignoring the Human Factor : Resistance to change can be a project killer. A Prosci survey indicates that initiatives with poor change management meet objectives only 15% of the time.
• Budget Overruns : Without proper planning and governance, costs can spiral out of control. PMI’s Pulse of the Profession report indicates that 45% of projects exceed budget.

Critical Success Factors

• Leadership Commitment : SuperDuperMegaCo’s transformation was spearheaded by committed leadership, which is consistent with findings from a Harvard Business Review survey, where 92% of respondents identified leadership commitment as critical.
• Resource Allocation : Adequate and timely allocation of resources is crucial. A Standish Group study found that 33% of projects failed due to a lack of resources.
• Performance Metrics : KPIs must be realistic, achievable, and aligned with the organization’s goals. According to the MIT Sloan Management Review, companies that adopt a balanced set of performance measures achieve better financial performance.

The transformation journey at SuperDuperMegaCo serves as a case study of both the efficacy of a well-implemented TOM and the pitfalls that organizations must navigate. From best practices to avoiding common mistakes and understanding critical success factors, the insights gained from those who have been through the grind are invaluable. With careful planning, stakeholder buy-in, and a meticulous eye for detail, organizations can optimize their operations and set the stage for enduring success.

Target Operating Models: Trends and Outlook

Upcoming trends in tom design.

As businesses evolve, so do Target Operating Models (TOMs). It is imperative to stay ahead of the curve to remain competitive.

Decentralization and Flexibility

A growing trend in TOM design is the shift toward decentralization and more flexible operational structures. According to a Deloitte report, 63% of organizations surveyed are moving towards more decentralized models to encourage innovation and agility.

Sustainability Focus

With a growing emphasis on environmental consciousness, future TOMs will increasingly prioritize sustainability. For instance, Unilever aims to become carbon neutral by 2030 and has integrated this goal into its TOM.

Integration of AI and Machine Learning

The advent of artificial intelligence (AI) and machine learning is automating decision-making processes. A Capgemini study reveals that organizations implementing AI in their operations see a 14% increase in efficiency.

ESG Criteria

Environmental, Social, and Governance (ESG) criteria are becoming integral in TOM design. A recent PwC study shows that 75% of surveyed companies have ESG criteria embedded in their business strategy and, hence, their operating models.

The Need for Iterative Development and Continuous Improvement of Target Operating Models

Creating a TOM is not a one-time activity; it requires continuous refinement.

Embracing Change

The market landscape changes rapidly. According to a study by Innosight, the average tenure of companies on the S&P 500 index has shrunk from 33 years in 1964 to 24 years in 2016, and it’s forecast to shrink to just 12 years by 2027. The need for iterative development becomes crucial in such a volatile environment.

Building a Culture of Continuous Improvement

A Lean Six Sigma survey reveals that companies that invest in continuous improvement report a 20% improvement in performance metrics. Continuous improvement is not just about process optimization; it’s about building a culture that embraces change.

KPI Tracking and Adjustment

Constant monitoring of Key Performance Indicators (KPIs) is essential. According to a report by Accenture, 80% of companies that closely monitor and adapt their KPIs report exceeding their business objectives.

Feedback Loops and Learning

Implementing robust feedback mechanisms ensures that the TOM remains relevant and effective. A Bain & Company report indicates that organizations with effective feedback loops are 3.5 times more likely to outperform their peers.

The Target Operating Model is not a static framework but an evolving construct that must adapt to emerging trends and shifts in business priorities. By staying updated with future trends and embedding a culture of continuous improvement, organizations can maintain a TOM that is both resilient and agile, ensuring long-term viability and success.

Wrapping Up the ETOM Journey

Summary of insights.

This guide has traversed the landscape of Target Operating Models (TOMs), elucidating their critical role in aligning organizational strategy with execution. From the essential groundwork to risk mitigation and from change management to continuous improvement, we have covered a gamut of areas that constitute a well-executed TOM. According to a McKinsey survey, organizations with well-defined operating models are 3.2 times more likely to exceed industry performance benchmarks.

The Pros and Cons of Hiring Consultants for TOM

• Expertise : Consultants bring specialized knowledge and insights crucial for effective TOM development.
• Objective View : External parties offer an unbiased perspective on organizational inefficiencies.
• Accelerated Implementation : The McKinsey Quarterly states that companies employing consultants in TOM implementation reduce their time to market by approximately 23%.
• High Costs : Consulting fees can be exorbitant and might not offer value for money.
• Organizational Disconnect : Consultants might not fully grasp the unique culture and dynamics of your organization.
• Dependency : There’s a risk of becoming too reliant on external expertise for internal processes.

Next Steps and Actionable Insights

• Leadership Buy-In : Secure commitment from top management for TOM initiatives.
• Initial Assessment : Use SWOT or PESTLE analyses to evaluate your current state.
• Develop the Roadmap : Prioritize actions and allocate resources efficiently.

According to a Gartner report, 28% of failed enterprise transformation projects cite a lack of a coherent roadmap as the key factor. Hence, roadmap creation becomes a non-negotiable first step.

The Benefits of a Pre-Built and Customizable Do-It-Yourself Target Operating Model Toolkit

A ready-made enterprise target operating model toolkit can expedite the process by providing templates and lines. A study by Forrester found that using pre-built toolkits can cut down project timelines by up to 35%.

Cost-Effectiveness

Instead of relying entirely on consultants, an in-house team can undertake significant portions of the process, thereby reducing costs.

Customizability

A pre-built toolkit usually comes with the flexibility to adapt it to specific organizational needs. This ensures that you’re not trying to fit a square peg into a round hole.

Utilizing a DIY toolkit fosters a sense of ownership among internal teams, thereby enhancing engagement and commitment to the TOM initiative.

Target Operating Models serve as the linchpin for achieving strategic alignment and operational excellence. Whether you opt for external consultancy, internal development, or a blend of both, the ultimate aim is to create a coherent, efficient, and resilient TOM, thereby ensuring sustainable business success.

Please consider purchasing Capstera’s Enterprise Target Operating Model Toolkit.  

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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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Differentiation Begins With a Target Operating Model

July 16, 2014  By  Gary Shub ,  Simon Bartletta ,  Brent Beardsley ,  Hélène Donnadieu ,  Craig Hapelt ,  Benoît Macé ,  Andy Maguire , and  Tjun Tang

On average, asset managers commit more than 25 percent of costs to IT and operations. Yet, in many cases, those functions don’t receive even a quarter of the company’s time and attention. As a result, most managers’ operating models evolve piecemeal, without being explicitly anchored to the company’s vision or strategy.

Global Asset Management 2014

• Steering the Course to Growth
• Differentiation Begins with a Target Operating Model
• Insurers Attack the Target-Operating-Model Opportunity

This incremental approach might seem to work for a while, but it leaves managers at increasing risk of being left behind. Clients and products proliferate, new markets are entered, footprints extend globally, and acquisitions bring new technologies that are patched onto legacy systems. In the new new normal of regulatory overload, shifting investor preferences, and competitive digitization, such haphazard evolution can quickly morph into a cripplingly complex tangle of systems and processes.

Most asset managers try to get by with such patchwork operating models. But they are light-years from achieving the enormous potential benefits of a strategically conceived target operating model that leading competitors have defined for themselves and are moving toward.

Broadly defined, a target operating model is an overall operations and technology ecosystem that allows a company to chart a path for achieving its strategic vision on the basis of its priorities and starting point. When an operating model becomes a critical part of a manager’s strategy, the benefits are tangible and the profound business impact can include the following:

• Shorter time-to-market cycles due to greater agility in launching new businesses and trading new products
• Better ability to ramp up volume quickly at minimum marginal cost
• Increased client satisfaction due to a more transparent and compliant operating model
• Superior investment performance, from focusing investment management resources on priority growth areas and supporting them with tools, data, and insight
• Reduced risk from a more controlled and stable operating environment
• Greater long-term cost-effectiveness

In contrast, managers who fail to act might lag behind as they deploy increasingly greater resources simply to manage the tangle. In many cases, inaction inhibits growth because of the exponential costs of adapting technology and processes to the flow of new regulations; the inability to trade in new asset classes, markets, and locations; and an increased operational risk profile.

Trends Reshaping Asset Management and Its Operating Models

While the new new normal reshapes financial services, managers will find that the five disruptive trends introduced in Global Asset Management 2014: Steering the Course to Growth provide critical inputs as they define their target operating model. (See Exhibit 1.)

Many asset managers invest insufficient time in defining how they will translate their strategic vision into an operating model that takes into account their starting point, resources, and priorities. The path to achieving that goal begins by creating a target operating model.

The first step in defining the model is to understand the company’s strategic vision and priorities for the next five to ten years. The answers to the following questions can help frame the process:

• What is your business strategy—in broad brush and detail?
• What markets, products, and segments will you compete in?
• How do you implement your investment philosophy to win?
• What is your differentiated client value proposition?

Once the company has agreed on its strategic vision, it will need to analyze its operating-model ecosystem in order to define how to achieve the vision. Ecosystems vary by company, location, and asset type.

Our definition of operating model is based on three elements: process and technology, work structure, and organization. (See Exhibit 2.)

These three elements translate into a series of far-reaching business questions and decisions for the front office (including the level of sharing across trading platforms), middle- and back-office operations (such as the appropriate degree of outsourcing and centralization), and the enterprise data group (including governance and the level of real-time integration). (See Exhibit 3.)

A World-Class Target Operating Model

There is no single, ideal target operating model that fits all managers. Rather, the design of each company’s model will depend on the company’s starting point, history, and the optimization goals it has prioritized.

However, agreement on these optimization goals must be explicit and shared at all levels of the organization—not just within the operations and technology silos.

We generally look at six possible design choices for a target operating model, and the selection of a particular model depends on the organization’s optimization goals. (See Exhibit 4.)

The relative weight to assign each of these design choices varies by manager and asset type. For example, a manager of passive products would focus on responsiveness, scale, and efficiency. An active asset manager would likely stress a flexible and adaptive model. An asset owner might emphasize the importance of having a single view of performance and risk across investments. Insurance company asset managers , who oversee the world’s second-largest asset pool, could be seeking business upside, risk, and efficiency.

Truly world-class operating models will deliver value across multiple elements, reconciling often opposing forces such as scalability and flexibility.

To illustrate, we have selected four operating models that we find particularly interesting and innovative. Although these models must be consistent with the objectives of a particular company, their core characteristics have valuable lessons for other asset managers.

Shadow Outsourcing: Redundancy. Outsourcing core processes and technology has become standard, but in many cases, asset managers decide to keep some aspect of quality control and oversight in-house. Now a small number of innovative asset managers have begun to outsource such “shadow” capabilities. The goals are to focus on core activities and improve risk management culture and practices through increased independence and better quality control. Shadow outsourcing also makes it easier to switch outsourcers. (See “Emergence of the Shadow Outsourcer.”)

Emergence of the Shadow Outsourcer

Although it has become standard to outsource processing capabilities, many companies keep a “shadow” of such operations in-house for oversight and quality control. Now a small number of hedge funds have begun to outsource this shadow responsibility, using two providers simultaneously. This model merits consideration by traditional asset managers as well.

This dual-outsourcer model is particularly relevant given today’s high premium on transparency, risk management, regulatory compliance, operational risk, and variable costs. It also responds to emerging regulatory requirements in Europe and the U.S. for better business-continuity planning—that is, the ability to substitute a new service provider for one that, for example, fails to perform well or goes out of business.

The outsourcer model is structured so that an execution partner and a shadow partner operate and control, respectively, the middle- and back-office operations. The execution partner is responsible for operating those functions and manages the official books and records. The shadow partner is responsible for replicating critical functions of the middle- and back-office operations, reconciling and resolving differences with the execution partner, and providing an independent quality control of the execution partner’s results.

This model removes the requirement to maintain an internal oversight team and the associated technology and tools required to perform a controlling function for the most critical and risky activities.

Variations of the model range from full shadow to light shadow.

• Full Shadow. Both outsourcers operate the full scope of processing and accounting, although only the primary outsourcer interfaces with counterparties. The asset manager achieves full “switchability”—the ability to move from one outsourcer to the other quickly.
• Partial Shadow. The shadow outsourcer duplicates and verifies only the most critical functions—such as valuation and reconciliation—which are typically replicated in-house. This model is less costly and simpler to implement, but it provides limited switchability.

Cost is among the obvious questions about the dual-outsourcer model. The usual, though incorrect, expectation is that two outsourcers cost twice as much as one and, thus, that having two is financially prohibitive. This notion fails to account for the true costs of personnel, technology, maintenance, network hardware, and office space that come with internal shadowing. On the basis of service provider discussions and our modeling, we believe that the dual-provider model can deliver significant additional value of 5 to 25 percent more than the all-in cost of the single-outsourcer model with an in-house shadow operation. In the long run, the cost of maintaining an up-to-date internal shadow function will continue to grow. These rising costs, coupled with the increasing scale of the outsourcers, will likely drive the cost benefit even further.

The value of the dual-outsourcer model is compelling because it provides the following benefits:

• Increased transparency and independence in client-sensitive areas of positions and valuations, whose importance was highlighted by the recent crisis
• Quality assurance that is the result of having two reputable independent outsourcers
• A healthy competitive tension between outsourcers, supporting ongoing service quality
• Evolution of internal roles from processing to higher-value and differentiated strategic-partner management
• Elimination or reduction of ongoing technology investments
• Ability to switch providers quickly if an outsourcer does not deliver the expected level of service or goes out of business

The dual-outsourcer model is very new. At this stage, we don’t believe that it applies to every asset manager or asset owner. However, we do believe that it has potential appeal for sophisticated managers and asset owners as well as large hedge funds.

The Global Operating Model: Global Scale, Local Customization. This model aims to achieve twin objectives: scalability, by taking advantage of an institution’s global scale, and management of cost and efficiency, by, for instance, leveraging lower-cost locations. The global model is also a powerful means of creating a template for future expansion to new regions.

This model relies on a global infrastructure comprising core, fully integrated front-to-back systems, single repositories for reference and market data, and common operational processes. The industrialization of systems, repositories, and processes creates scale benefits while accommodating the customization required by individual investment-management teams and regions.

Another benefit is the creation of shared services of critical functions—such as data management, technology, and recon-ciliations—in lower-cost locations as a way to build scale and reduce unit cost. However, location-dependent functions—such as trading and regulatory reporting—and those needing proximity to portfolio managers or clients remain within local or regional hubs.

The Utility Operating Model: Monetizing the Model. The manager’s premise in this case was to create a customizable, flexible operating model that would allow for the addition of volumes and new products at minimum marginal cost. After investing heavily, the manager created world-class middle- and back-office operations that would have value for others and looked for ways to pool future costs and investments and to generate additional revenues.

The solution was to turn the multiyear investment into a service-providing business. The company commercialized select “com-moditized” portions of the operating model as a “utility” service for competitors. Two functions that differentiated the company—front office and data—were of course kept off limits.

Data-Centric Operating Model: Real-Time Decision Making. The manager’s primary objectives for this model were threefold: to maximize flexibility for new and unique assets and strategies, to improve the risk management culture and practices (for instance, by providing increased transparency and a better risk view across assets), and to create superior investment performance through better use of data in investment decisions.

Delivering on this goal requires a technology-heavy operating model and a real-time data capability feeding a modular technology and operations platform.

This last model reinforces the strategic importance that data occupies in target-operating-model transformation. In many cases, transformations are enabled by data infrastructure. Mature data-management practices are formidable enablers that allow a high level of automation and near-real-time analytics. (See “Recognizing Data as a Strategic Asset.”)

Recognizing Data as a Strategic Asset

Most asset managers have considered improving their data management, but their progress along the data maturity curve has generally been slow.

We classify data maturity into three levels—controlled chaos, managed, and optimized. (See the exhibit below.) In BCG’s Global Asset Management survey, about 60 percent of respondents rated themselves in the lower levels of the data maturity curve. This implies that most managers have not yet embarked on formal data-management programs or that they have done so only with single, localized initiatives.

Nonetheless, managers overwhelmingly recognize the value of improving data management practices. The majority of our respondents were in the lower levels of maturity, but all planned to achieve high levels within three years. For most, this will mean a step change advance, requiring substantial attention and investment, from where they are today.

Better data management has the potential to enable operating-model improvements in several ways. On the revenue side, data management can create flexibility in investment strategies and improve investment performance—for example, identifying trade opportunities by mining social-media preferences or integrating risk management analysis across locations and asset classes. It can improve customer acquisition through more targeted marketing while supporting a better customer experience through a customized and all-inclusive view of holdings.

On the cost side, leaders in data management can improve efficiency by removing manual processes from data cleaning and consolidation. They can achieve flexibility and scale in navigating market change—including meeting new regulatory reporting requirements, introducing new asset classes, and delivering custom client reporting.

For most organizations, the step change required to extract the most value from data can be achieved only by undertaking a data transformation. Companies embarking on a data transformation face the challenge of balancing investments in both foundational initiatives and improvements that support business needs. In weighing these trade-offs and to achieve success, companies must be sure that data transformations are clearly aligned with business strategy so that foundational initiatives can be traced to a business need.

Successful organizations will capitalize on data improvements and derive significant business benefits. But the road to achieving a state in which data is a strategic asset can be difficult. Data improvement programs risk morphing into multiyear IT-investment projects that are costly but lack clear business benefits. Successful organizations will not achieve data maturity for data maturity’s sake: they will clearly understand and articulate the strategic value of their data and make investments appropriate to their situation.

Seizing the Moment

Target-operating-model transformation is a multiyear journey, not a big-bang, do-it-all-now endeavor. Indeed, although transformation must be aggressive, it should entail a series of realistic and achievable steps. Each step should deliver clear and tangible benefits to clients, to the business, and to overall financial results. Several actions are crucial to the success of a target-operating-model transformation program:

• Lead from the top. Transformation should rank among a company’s top two or three initiatives. It should be championed by the CEO and regularly discussed by the management team. The senior sponsor—typically the CTO or COO—should have a seat at the table.
• Anchor to business priorities. Target-operating-model transformation is much more than an IT or an operations transformation. It is a critical enabler for the business, especially for front-office professionals. Their buy-in and engagement throughout the transformation is crucial.
• Fund the journey. The transformation will need to deliver tangible results early and have a self-funding business case.
• Involve the A-team, both internal and external. A target-operating-model transformation is a large and complex project involving business, operations, IT, and corporate functions. It requires the best talents internally as well as deep partnerships with vendors, including outsourcers, IT vendors, integrators, and strategic advisors.

Now is the time for asset managers to redefine their operating model—from top to bottom. Many have started the journey timidly, focusing only on the back office rather than committing to a complete transformation.

In a rapidly evolving industry, asset managers that invest the resources to transform their operating model will differentiate themselves among clients, enable superior performance and growth, and capture market leadership.

Managing Director & Senior Partner

Global PA & Moonshot Operations Senior Director - BCG X

Senior Advisor

ABOUT BOSTON CONSULTING GROUP

Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.

Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.

© Boston Consulting Group 2024. All rights reserved.

For information or permission to reprint, please contact BCG at [email protected] . To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com . Follow Boston Consulting Group on Facebook and X (formerly Twitter) .

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Looking for a better way to transform in the cloud?

A target operating model might sound like something for your business analysts to sink their teeth into, but it's something we believe that leaders within your business should embrace to secure a better and more strategic functional transformation to the cloud.

There are many challenges during a functional transformation program (eg. finance, HR) – none more so than envisioning what you can achieve and validating that it will work for your organisation. So, it is worthwhile understanding the fundamental role the KPMG Target Operating Model can play in achieving this.

The initial stages of your transformational journey can have the most profound impact on your ultimate outcome. It's during this stage that the big decisions are made and the place you are trying to end up is determined. The quality of the outcome is in direct relation to how clearly you understand where you are trying to go. Business leaders should be the driving force for the vision, but need a starting point to work from. That's where KPMG's Target Operating Model can help empower you to move to a 'best in class' vision.

How it differs from other models

Part of the problem with 'traditional' target operating models is that they're often not comprehensive enough in scope. If they only cover the traditional process-people-technology relationship, they can miss where the work will get done, how it will be reported and measured and how it will be governed and controlled. To overcome this weakness, the KPMG Target Operating Model includes not three, but six 'layers' – Process, People, Service Delivery Model, Technology, Performance Insights and Governance.

Understanding how all six components of your Target Operating Model layers relate to each other is key to creating an integrated and highly functional solution.  They provide unparalleled visibility of each potential change and their corresponding consequence.

Breadth and depth

Each of the six layers contain a number of 'assets' which are predefined and are designed to help you get to where you need to be sooner. Each asset can be thought of as a collection of solution accelerators comprised of hundreds of predefined or prebuilt processes, workflows, definitions, integrations, reports, dashboards and even training programs. Using this combination of assets to suit your organisation goes a long way towards helping you to envision where you are heading and validate that it will work for you.

Turn a move to the cloud into a transformation

The goal of the KPMG Target Operating Model, is to turn a potentially standard cloud implementation project into a dynamic functional transformation. The KPMG Target Operating Model is based on a deep understanding of how transformation works within, and across, an enterprise.

It does this by building on the excellent work of the wider functional and specialist practices across the KPMG network of member firms to help you envision your model, on your chosen cloud platform (or a short-list of cloud platforms), for your particular business. This is why we - and you - can be so confident of the outcome and the value potential it brings.

We've written a Target Operating Model guide for CXOs (and other business leaders) which expands on this theme and can be shared in your organisation. Please do take the time to download it here:

Start with the model answer. How KPMG’s Target Operating Model can help – A guide for CXOs.

Download PDF (568 KB)

What’s in the box.

Powered Enterprise provides you with three integrated elements for transformational success. Using our tried and tested operating model, implementation suite of tools and ongoing evolution services you can choose your desired functional outcomes then make them a reality.

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Shape how transformation plays through every layer of your organisation.

Ensure you gain maximum benefit from your technology platform, simplify organisational challenges and choose the most efficient path to achieve your functional goals by using KPMG leading practice pre-configured on the platform of your choice.

2 KPMG Powered Execution Suite

Achieve transformation value faster with reduced program risk.

Access an integrated platform of next generation tools and methods to help deliver functional transformation. Take the complexity out of implementation and unlock value faster with reduced risk.

3 KPMG Powered Evolution

Adopt a platform and approach that drives continuing evolution and innovation.

Use specialised on-demand services to drive continuing evolution and innovation. Keeping pace with the latest developments in technology and leading practice allows you to make transformation a way of business.

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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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• Target Operating Model Design

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Drawing on experience from both corporates and government entities across all our key industry verticals, Teneo’s operating model design practice helps clients rethink every aspect of how they run their businesses.

Whether our clients are aiming to optimize the day-to-day, or undergoing a major transformation event, we collaborate with CEOs and their leadership teams to develop bespoke strategies with a focus on realizable implementation.

To do this, Teneo approaches operating model design using a framework based on five key pillars that work in combination to deliver our clients’ organizational objectives: people, process, structure, technology and governance.

Our rapid, flexible approach enables us to tackle engagements across these dimensions, working on the aspects that will bring our clients the most value.

Furthermore, we draw on Teneo’s unique, cross-functional expertise in leadership, culture change and communications to arm business leaders with tools to maximize the success of any subsequent change program.

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People design

Effective people design requires matching groups of skills with processes to be delivered and expanding this into fully costed job specifications.

We work with our clients to determine the skills and capabilities required for their organization to succeed, before grouping complementary ones into specific job roles.

Once the roles are defined, we provide analytical support by leveraging market benchmarks and internal compensation data to determine the appropriate renumeration packages/structures. We are then able to calculate the total cost to the company of the end-state model.

In addition, we can provide a robust, 360-degree leadership assessment which establishes an organization’s capability baseline. From this baseline, we develop a set of laser-focused accelerators for the executive team to focus on which will move the needle on development, team integration and organizational impact.

Teneo was engaged by a leading EdTech business, to redesign its North American go-to-market function as part of the integration which followed a transformative acquisition.

Process design

At Teneo, process design focuses on multiple outcomes – faster decision making, more effective, enhanced collaboration and increased transparency.

We work with our clients to conduct diagnostic assessments of current processes, identifying key pain points, inefficiencies and duplications before mapping out a future state that addresses these, while being conscious of tooling requirements and/or systems constraints.

To ensure success, we agree to measurable KPIs at the outset, which are then tracked throughout the design and testing phases, ahead of final sign-off with the process owners and key decision makers.

Teneo worked with a leading Cyber Security provider to optimize its client delivery operating model, with a focus on streamlining and standardizing processes across both domestic and international markets.

Organizational structure design

High-performance organizations require structures that are consistent with the size and diversity of scope of their operations if they are going to be able to extract the maximum value from their people.

At Teneo, we combine our extensive experience and proprietary benchmarks with in-depth assessments of our clients’ businesses to develop cost-effective, realistic organizational structures.

This includes ensuring that management spans and layers are optimized and work is appropriately located, whether that be centralized or consolidated into ‘centers of excellence’ or distributed closer to customer delivery.

Teneo conducted a detailed review of a global Cloud Computing provider’s front-office organizational structure, to identify areas of inefficiency and develop optimization strategies.

Technology & data

To achieve process efficiencies, the associated technology architecture should enable streamlined workflows and seamless data exchange.

To facilitate this, we map out clients’ systems landscapes and define the associated requirements and dependencies, acknowledging any function-specific nuances (e.g., around growth ambitions).

In parallel, we look to identify any duplication or redundancy in as-is, to highlight potential systems which could sunset, as we move towards a proposed design which is appropriately conscious of the inherent trade-offs between the limitations of the existing landscape and the complexity of any new implementations.

Teneo supported a leading European ERP vendor to assess and update its systems strategy and wider back-office operating model.

Governance & KPIs

Strong governance and effective operational KPIs are critical to enable management teams to make strategic decisions and track results.

At Teneo, we work with businesses to identify key, measurable success metrics which have a meaningful linkage to performance. Once these are agreed on, we layer on a repeatable reporting approach, documenting the required output, cadence, audience, escalation thresholds and targets.

We also develop governance frameworks, covering formal delegations of authority, meeting cadences, attendee lists, agendas and responsibilities etc. These will focus on having the right people and the right time to ensure a strong chair is able to maintain focus, while allowing for necessary pragmatism and agility.

Teneo worked with a global Telecoms operator to complete a multi-year overhaul of its global operating model, including revising its governance structures and authorization thresholds to enable greater regional autonomy.

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Case Study: Target Operating Model

by Stephen Warburton | Jan 5, 2024 | Case Studies

Working with a major national service business, we developed a Target Operating Model (TOM) which has fundamentally re-defined the customer relationship and expectation of value, whilst at the same time re-setting the industry standard of excellence. As a result:

• Additional value-add services are being delivered, increasing both revenue and retention
• Customer response times have been drastically reduced, with a more consistent positive user experience and at lower cost
• Work in progress has been virtually eliminated, resulting in lower cost and reduced working capital
• Back office costs have been reduced by over 60% whilst improving customer satisfaction
• Reliance on individuals and retained knowledge has been eliminated

To do this we undertook a fundamental review of what customers really wanted and how existing processes contributed or detracted from this. Using this analysis we were able to identify that there was a fundamental mismatch of expectations, which was industry-wide. We also realised that the processes in place were not sustainable within existing ways of working, leading to excessive stress levels, increased churn and low levels of productivity. Having framed the problem and defined the desired outcome, we deployed a collaborative approach to build the solution.

We knew that the only choice was #KillingComplexity© . We did this by applying each of our four perspectives.

Through our Customer and User Experience perspective we focussed on speed to fulfilment and effective communication (not cost per hour as was the perceived wisdom) as this allowed our clients’ customers to utilise their assets for longer and reduce their customer disruption. We used the Digital and Data perspective to demonstrate there was real value in collecting trend analysis, which could then be used to support pro-active maintenance.

This was supported by the Commercial perspective which not only drove the payment terms from hourly rates, estimated in advance, validated afterwards and billed monthly, to fixed price work packages authorised in advance and billed on completion, but also allowed the creation of trend analysis for defined work packages which simply wasn’t possible when all that had been previously captured was the number of hours charged. And finally we looked holistically at what was detracting from performance and motivation using the Organisational Development and Behaviours perspective .

Our client now has a discernibly differentiated offering, has established an industry “new norm” which it is exploiting through 1st mover advantage, and is rapidly creating clear blue water between itself and other industry players.

Are you ready for #KillingComplexity© ? Is so get in touch today to find our how we can help you become a market leader.

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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.

Realizing the value of your merger with the right operating model

A merger provides an exceptional moment for executives to reflect on the performance of a company’s operating model—the organization of structures, processes, and people in service of value creation. Substantial changes to an operating model are often necessary to achieve the strategic objectives and deliver the promised value of a merger. Making these important changes is not something that top teams can or should delegate.

Mergers have a bias for speed, leading to the temptation to cut corners during operating model redesign. For example, top teams might focus on structure with the hope that future leaders will attend to processes and people. In our experience, this is generally a mistake and can lead to serious change management challenges during the transition process.

Conducting an operating model redesign during a merger also presents some unique constraints and risks:

• Success depends on building a new executive-leadership team that aligns on a vision, agrees on the path to get there, and commits to modeling the new company’s ways of working.
• Heightened anxiety and jockeying for position in the executive ranks increases the pressure for a CEO to get the top-team selection and alignment right.
• Transitioning from two existing operating models to a new, combined operating model requires thoughtful transition planning and increased attention to change management—underdeveloped skills in most organizations.
• Despite pressure to deliver value quickly, teams often need to use an interim operating model for some time after a deal closes before transitioning to an end-state model—and the interim model needs to be functional enough to start delivering on deal rationale.
• Workforces are typically anxious during a redesign, and a desire for information and clarity may decrease productivity during the process.
• Regulatory and legal considerations restrict what organizations can do, design, communicate, and implement.

This article looks at the approach to designing operating models during mergers, including how to think about an overall operating model for a new company, the process to design and implement it, and key factors for success.

Defining the operating model

An operating model has three elements: structure, process, and people (Exhibit 1). Our research confirms what most leaders intuitively know—many companies tend to focus on one subset of structure: organization structure, or “boxes and lines.” 1 McKinsey Organizational Redesign Survey, 2015. It also confirms that this tendency is exactly what leaders should avoid. Addressing a holistic set of design levers across all three elements is essential to getting operating model design right and capturing the value promised to investors and employees.

A broad understanding of structure ensures that a new, postmerger organization is clear on not only who reports to whom but also primary value-creation streams, governance structures (how decisions will be made), scope of important roles, how functions will support business lines, and where the company will conduct business. 2 For more on effective decision making, see Aaron De Smet, Gregor Jost, and Leigh Weiss, “ Three keys to faster, better decisions ,” McKinsey Quarterly , May 2019; Iskandar Aminov, Aaron De Smet, and Dan Lovallo, “ Good decisions don’t have to be slow ones ,” McKinsey Quarterly , May 2019; and Aaron De Smet, Gregor Jost, and Leigh Weiss, “ Want a better decision? Plan a better meeting ,” McKinsey Quarterly , May 2019.

Companies are living organisms and often organically develop unique ways to get things done—methods that may not be appropriate for a new, postmerger company. As any operator will remind us, processes are the way work gets done in an organization. Clear, robust processes will be essential in a new company delivering distinctive value. Yet despite the criticality of process design, we often see this step start too late in the planning process, likely because of understandable apprehension around individual roles (and boxes and lines). Leaders we work with often wish they had begun designing core cross-functional processes well before the close of a merger. As one executive reflected, “Until you design how the processes will work, you don’t really know how the company will operate with the new org structure.”

The dimensions of people and culture are of utmost importance when building a combined organization. We recommend managing them through dedicated workstreams for culture  and talent, working in close collaboration with the workstream for operating model design.

Designing the operating model for the new company

In most successful integrations, the C-suite plays a heavy role early in the design of the top-level organization structure and governance for the new organization. Once there is a defined blueprint for the operating model, integration teams take on the heavy task of creating the more detailed end-state designs for each organizational unit and the core cross-functional processes. Given the pace at which integrations move, full implementation of the end-state design is unlikely to occur on day one (deal close).

Unlike classical organization design, in which a company moves directly from the current state to the end state, organization design during a merger is unique because it often requires interim steps that can be different in various parts of the organization. Depending on what issues the integration encounters, this usually means leadership must work quickly to align on not only an end-state model for the new company but at least one interim model. Each of the steps in this process have specific elements that require attention to achieve success (Exhibit 2).

Step one: Align on design principles and establish the baseline

What are design principles.

Design principles are:

• enterprise-wide rules that define the future-state design in line with an organization’s ambitions
• commitments to enable employees to make complex decisions and to increase accountability
• guardrails for what is part of design scope and what is not
• specific, measurable (both quantitative and qualitative), actionable, relevant, and time-bound expectations
• aspirations for structural points (such as spans and layers) and ways of doing the work
• the rationale behind an initiative’s worthiness

Design principles are not:

• dollar-value goals for the organization
• prescriptive requirements for all future organizational choices
• a one-time exercise with unchanging output
• a “final answer”
• specific initiatives

When designing an operating model, in any context, we believe that clearly establishing the expected deliverable is critical. An operating model design is one of the most powerful tools in a leader’s tool kit to shape a new company that will produce the promised value. Leaders should align on a clear set of design principles that will shape the objectives, outcomes, and guardrails for the end-state design (see sidebar “What are design principles?”). This will help integration teams design the new operating model for an outcome, and not just “design to design.”

The combined company’s CEO should lead the development of the operating model’s design principles in line with the combined company’s strategic objectives. The principles—and development methods for them—can vary, depending on capacity and context. For example, in an integration with a much smaller entity, a new company’s CEO may choose to add just one or two principles to the acquiring company’s existing operating model. This will allow the integration team to preserve value and move as efficiently as possible, with minimal disruption to the broader organization. In an acquisition of a company for unique capabilities or talent (such as in R&D), the acquiring organization’s leaders may choose principles to ring-fence and nurture that important organizational unit. In an integration of two large companies with a focus on full-scale transformation, the new company’s leaders may choose principles to double down on centralization and scaling of efficiencies.

While leaders are deciding on design principles, the integration team should build the baseline understanding of each company’s current operating model and distinctiveness to understand where the organizations are coming from. For example, take two engineering organizations that look the same on the surface, with the same number of full-time equivalents, locations in the same region, and similar products for similar markets. One organization uses rigorous, highly documented, stage-gated product-development processes, and the other operates in an agile model  with a fail-fast methodology. Obtaining accurate and complete baselines of each organization across all operating model elements would allow the companies to uncover these types of differences.

Given the speed at which mergers move, leaders should be prepared to make decisions with less-than-complete information, relying as necessary on the deal analysis and due diligence to fill in informational gaps. The baselining work can extend into step two of the process described earlier, but alignment on the top-level structure is essential to proceeding to step two. By the time teams are ready to move to step two, they should have a concrete understanding of what each company brings to the merger, the balance of capabilities required to capture maximum value, and how the future company will fulfill the promise of the deal rationale.

Step two: Develop the preliminary end-state design

After aligning on the design principles and understanding the current operating models, merging companies can transition to defining the end-state operating model. While all organization design levers have a role in shaping how a company creates value, because it shapes the main value streams of a business, no lever has more “architecting” influence than boxes and lines.

It is vital for leaders to be open to meaningful change. The new company will likely be an organization that neither organization’s leaders have experienced. Therefore, relying only on what worked before or “how we do it in my organization” is unlikely to be helpful. Thus, it is important to lean on the design principles and a strong fact base to determine what is right for the new organization—that may mean maintaining structures and processes from the original organizations in some instances and developing new ones in other instances.

Consequently, leaders should pay special attention throughout to what is being communicated  when, how, and to whom as companies need to manage communication with external stakeholders, from investors to suppliers to customers, to avoid business disruption. As an organization navigates building and deploying a new design, it should recall that mergers affect nearly all employees in differing ways. People are understandably eager to digest the decisions that companies are making and how those decisions will affect them, particularly if head-count cuts are on the table. Mergers involve not only employees and structures within the company but also their broader networks and the value-creation ecosystem of which the company is a part.

In one recent merger, the CEO decided to make fundamental changes to the structure and processes to maximize the potential value to be captured. While this approach took more effort and created more changes for the organization, it went quickly and effectively, with a dedicated integration team and significant ownership from the top team. A design that the team members believed in allowed them to communicate it clearly and confidently, which helped employees understand why the company was transforming and get on board.

One key component of building such understanding is a cascaded change story. 3 Oliver Engert, Becky Kaetzler, Kameron Kordestani, and Andy MacLean, “ Organizational culture in mergers: Addressing the unseen forces ,” March 2019. A change story is a communication that cascades from the CEO to employees and speaks about a merger in a personalized way. It helps the organization achieve two objectives: one, understand the reasons for the merger, and two, demonstrate leader-led support for the change. The integration team in our example also developed a plan for working with suppliers and customers to help them understand the basics of the transition, prepare them for known issues, and assure them of service delivery and their importance to the organization.

Organizational blueprint: Designing the level-one and -two structures. Level-one and -two organizational structures will define how the organization will serve its customers and generate value. What will be the main value streams? Will they group by business unit, geography, product, or some other factor? How will functions and shared services serve the value streams?

A CEO should start by defining the top two levels of the end-state organization—and the roles that will characterize it—with a small, core team of top leaders. A level-one structure often describes the organization’s main value-creating streams (for example, by business line, customer segment, or geography). A level-two structure often describes how functions will serve value-creation streams and designates the second dimension (for example, geography or product line) that will help organize the level-one structure further.

The methods of organization that leaders choose for level-one and -two structures frequently are highly correlated with the value-creation thesis. For example, one chemical-industry player looking to merge with a like-size competitor believed that the key to long-term success postmerger was opening the Asian market. The company’s top team first spent a substantial amount of time considering whether to organize as global business units or geographical, multiproduct regions at level one. Then it considered whether to treat Asia as one market or break it into China, Northeast Asia, and the rest of Asia. This step involved a few critical elements: establishing nonnegotiable features based on the agreed-upon design principles, reviewing external examples based on trends observed in other players within and outside the industry, and looking at both successes and main pain points of each merging organization. Through this process, the company established the foundational aspects for value creation to allow the integration team to develop the appropriate design.

Organizational culture in mergers: Addressing the unseen forces

Detailed approach to structure design. Functional- and business-unit-integration teams begin their detailed, end-state operating model design (spanning structure, governance, and processes) upon completion of the design for the top two structure levels. 4 “Top two levels” are the first and second levels under the CEO. They typically work with their level-one leaders 5 “Level-one leaders” (sometimes referred to as “N-1 leaders”) are those who report directly to the CEO. (once announced) in designing the full, end-state operating models for their functions or units. The high-level design principles communicated by the CEO and the operating model baselines and comparative analysis previously completed by the team guide their work. Detailed design usually extends into step three of the approach, depending on the timing required because full, detailed design of all organization levels is rarely complete until after day one.

With pressure from all sides to complete a design as quickly as possible, it is tempting simply to choose a model option from external examples and assume the new company can achieve the same success. This assumption is usually untrue given that the new company is unlikely to have the same processes, resources, culture, and other defining features as the external example did. We recommend taking examples from other companies under advisement when designing structure but making a thoughtful decision based on the new company’s strategic objectives, deal rationale, and pain points.

During detailed design, an integration team should work with the top team to recommend the functional knowledge and expertise the company should preserve at the core, the functional knowledge and expertise the business units should own, and the centralized expertise and shared services a center should offer—and how these arrangements will work (for example, via charge-back or dedicated support). The details will evolve during the interim state, but the basic architecture should be part of the discussion when designing an end-state organization.

Governance. How leaders define the governance structure is one of the most critical contributions to accelerating the speed and quality of important decisions in an organization. Boxes and lines may establish the performance management of and hierarchical relationships among employees, but they do little to help an organization understand how decision making will happen. For example, the executive team should not make all decisions—some decision making should occur through a defined process or by individual roles. We recommend delegating decision-making responsibility as far into the organization as possible to maximize proximity to the work being done and thereby improve the speed and likelihood of making a high-quality decision . A top team should concern itself with defining the way that the organization will make its most important decisions (or “big-bet decisions”). The team should spend serious time in laying out the architecture of committees, decision rights, and even meeting agendas  that will force the organization to apply a data-backed, high-velocity approach to decision making.

In thinking about the governance architecture of a company, it can be helpful to start by defining the appropriate level of centralization, given the desired organizational structure. Will the executive team centrally handle most of the big decisions or will individual operating units have more autonomy? Regardless of where a new company lands on that spectrum, it is helpful to lay out all major decisions and clearly define the decision rights—who decides, who participates, and who receives information. We also endorse laying out the decision-making roles of key committees. It is important to define charters for these committees early, otherwise organizations will find it difficult to make decisions at the pace required to stabilize a new organization and avoid a productivity dip. Furthermore, as designers are creating the governance structure, they should be careful to ensure that an organization’s cultural priorities reinforce the governance rather than in conflict with it. 6 For more on organizational culture in mergers, see Oliver Engert, Becky Kaetzler, Kameron Kordestani, and Andy MacLean, “ Organizational culture in mergers: Addressing the unseen forces ,” March 2019.

Addressing governance and decision making should always happen early in the process. In the merger of two financial-services companies, integration teams experienced roadblocks because they did not have guidance on the process for making major enterprise decisions. Furthermore, there was no list of individuals with final decision rights. This made it challenging for integration teams to progress on detailed designs for process and governance for each function and business unit. Once a leadership-team member took the lead to design the governance model and get buy-in from fellow executives and the CEO, the integration teams were able to progress. The process of securing leadership-team approval for the enterprise-governance model raised several sensitive topics regarding the future viability of core product lines and geographies and how that affected the choice of leaders to include in the top team. By putting the issues on the table early and having the debates required to come to a good conclusion, the leadership team became more close knit and aligned, and that improved the productivity of other teams.

Cross-functional processes. In practice, realization of a new company’s operating model occurs through its processes. A central team should select at least five to ten of the most important cross-functional processes to design early in order to achieve stability as quickly as possible. The integration team that “owns” a cross-functional process will typically be responsible for working across stakeholders to design the end-state process, which is subject to the approval of the CEO or integration steering committee. Upon achieving initial alignment, integration leadership should lead an exercise to “run the water through the pipes”—a simulation exercise to ensure that the new operating model really works and that interfaces and decision rights are clear and do not conflict.

Prioritized cross-functional processes should align with integration priorities and deliver on deal value. For example, two international engineering-services organizations wanted to combine their complementary end-to-end offerings on large projects to offer a new, unique value proposition. Proving they could win projects because of this joint offering was critical to the success of the merger. The leadership team prioritized defining a joint bidding process before day one. Directly after day one, it launched a task force to lead competitive biddings in which the new joint offering would be a differentiating factor.

Step three: Design the day-one and interim-state models and plans

What about our enterprise resource planning.

The integration strategy for enterprise resource planning (ERP) is usually a major input to the transition timeline—and affects the pace of capturing full deal value. For example, in a recent merger of two distribution companies, transitioning to the target company’s ERP was central to the deal rationale. To accommodate the time required to transition without slowing value capture, the companies decided to use the following approach:

• integrating the parts of the organization that weren’t ERP dependent (for example, higher-level managers and select support functions, such as legal), as early as possible
• consolidating select client-facing roles and creating “IT bridges” where necessary
• rolling out the new ERP by wave and rigorously limiting any system changes to those legally required or business critical
• transitioning business and support teams to the new model after each ERP-rollout wave

As we have discussed, full implementation of a new operating model rarely occurs by day one. Organizational units move toward their end states at different paces. For example, functions like HR and finance often move to their end states more gradually because they need to retain excess capacity in the months after close to support the rest of the organization’s transition (see sidebar “What about our enterprise resource planning?”). On the other hand, a sales force may transition to its end state on or immediately after day one to streamline customer points of contact. Why? A sales team in flux risks damaging the customer experience . Conversely, it is nearly impossible (and inadvisable) to align processes by day one. This is something that a day-one/interim model should plan to happen over time, as the new organization begins to cohere, to ensure that the primary value-creating levers do not break in service of speed and symmetry.

Given these varying transition speeds, a central team must develop a detailed, consolidated plan to reach the end-state operating model. It should include a day-one/interim structure, governance model, and transition plan that details the strategic decision making that is taking place across the organization. The transition phase can also provide a chance to continue testing the lower-level structures and the detailed process and governance design.

Clearly, then, change management planning is critical to the sustained success of an implementation to help employees learn how to operate after deal close and through transition. While change management often associates with making cultural transitions and blending workforces harmoniously—important considerations—the operational component is also crucial. Employees will face not only a new employer but also new hierarchies, role descriptions, and work processes.

Building a heat map of key operational changes and the employees most affected can help an integration team prioritize the areas of the businesses that require the most change management support. The heat map can help to assess the level of effort required to support an operational change by considering the degrees of difference between the new operating model and the legacy models, the number of people affected, and the impact to value capture if the change is not addressed. Remember, change management is not only about building emotional investment in the new company—it is about creating strong understanding and confidence within employees about their roles, expectations, and the new way of working.

One of the most powerful tools to pressure-test the impact of the proposed changes to the operating model is a scenario exercise (like running water through the pipes, the exercise discussed in step two). Conducting use-case sessions with teams ensures that all stakeholders know how to work in the new operating model, promoting a positive experience for key stakeholders in the period immediately following deal close. Typical outcomes from these sessions include detailed resolution plans for likely scenarios, pre- and post-close communications for internal and external stakeholders, and training plans to address awareness or capability gaps. Importantly, the workshops also facilitate alignment on roles, responsibilities, and interactions among functions for critical operational processes.

Step four: Integrate, stabilize, and transform

After day one, a company will continue the process of detailed organization design while beginning to move to the new operating model. This is often an exercise even more complex than the typical reorganization because the two merging entities usually lack a shared current-state baseline and will be transitioning to the new company’s design with a new set of colleagues. The largest, most complex mergers can take 18 months or longer to transition fully to an end-state operating model.

To monitor and manage progress, an organization design should embed a transition governance structure that distributes work to integrated teams but retains its role as the source of truth on progress. Although a central integration team plays a continued role in supporting transition coordination, we highly recommend establishing clear accountabilities and roles for managing the transition in business units and functions.

Additionally, it is important that a new company have defined key performance indicators to track progress so that owners of the change can understand their performances and react accordingly. Investing the time to ensure that each integration team feels accountable and responsible for fully executing their detailed integration plans builds investment in the new company, its design, and the capabilities to support it. These activities then move to business-as-usual processes and managers over time.

Implementing a new operating model is a long journey, and day one is just the first step—and sometimes the most visible step. In our experience, key success factors include clarity on deal value; executive-leadership alignment and role modeling; implementation of interim operating models during finalization of the detailed, end-state model; definition of cross-cutting processes and decision rights beyond structure; and effective communications and change management support. With these tools you can ensure a more positive outcome not only for your integration but also for the future success of the combined company.

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Caitlin Hewes is an expert in McKinsey’s Atlanta office, Rebecca Kaetzler is a partner in the Frankfurt office, Kameron Kordestani is a partner in the New York office, and Olivier Rigaud is an associate partner in the Chicago office.

The authors wish to thank Laura Lynch and Stefanie Rehberg for their contributions to this article.

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Designing a target operating model and delivering a revolutionary approach to data gathering, processing and reporting

Who was the client.

Our client is a multi-national Venture Capitalist Fund.

What was the issue?

Our client’s data structure and processes were disjointed. So, they asked us to design a target operating model for their data future state. As well as provide guidance and support in order to implement the right software solutions. And finally design and deliver state of the art reporting capabilities in order to support their future business intelligence.

What did we do?

The process encompassed three distinct streams of work, which we project managed throughout.

Step 1: Defining the Target Operating Model

This involved revolutionising the firm’s current approach to collecting and reporting on all portfolio company data. So, we took both a short term and medium to long-term approach, defining data warehousing and the PowerBI reporting architecture.

In the short-term by a revitalised series of underlying Excel sheets. Thus allowing improved reporting outputs.

In the medium to long-term by newly implemented portfolio monitoring and cap table management systems. Which were selected following the completion of workstream two.

Crucially, the target operating model and associated work was built with a view to future-proofing operations. So we ensured the short-term revitalisation and build of the data extraction, ingestion and warehousing processes performed in a way that would allow the easy incorporation of the new systems.

Step 2: A full vendor selection process for a Portfolio Monitoring System and a Cap Table Management solution

The second work stream required the completion of a full RFP process across the complex needs of this data science led fund, in portfolio monitoring and cap table management. In order to develop and document the complex requirements, we worked closely with the key stakeholder for the project. Whilst leveraging input from others within the firm in relevant areas. This led to the development of a highly detailed RFP document, which was sent to a wide-range of vendors from across the software ecosystem.

The process included the identification and elimination of over 12 providers, with the formal assessment process being conducted across a variety of PE and VC specific solutions. Finally, the selection process was completed successfully and the chosen vendors are now working closely with us to deliver the required end-product.

Step 3: Building the data input and extraction processes, the data warehouse and the PowerBI reporting framework

The final work stream ensured data from multiple sources, including the new systems and external feeds (fund admin and FX,) could be combined and reported on from one centralised repository. Thus providing full oversight and clarity on its source and accuracy. The use of PowerBI was recommended by our team, given the flexibility and breadth of analysis available. The dashboards and reports were designed on a pixel perfect basis, using the client’s preferred branding and overall look and feel.

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On-boarding target operating model.

The merger of two global investment banks required the implementation of a single client onboarding firm structure and alignment of systems and procedure to a single global policy.

The merger of the two global investment banks.

The two major global investment banks had their own set of systems, procedures and clients that needed integrating into the single bank whilst continuing to on-board their new clients.The requirement included the implementation of a single client on-boarding firm structure and alignment of systems and procedures to a single global policy.

Lysis provided experienced regulatory compliance and operational change consultants to design a suitable single solution to meet the business needs of the merged bank. A Target Operating Model which incorporated a strategic systems architecture was developed. Also, a System Integration Plan was developed to leverage the “best of breed” technology and working practices was produced. Lysis then successfully managed the execution of the programme over a 28-month period.

The Target Operating Model was implemented on a global scale and synergies which included staffing and application support were delivered. Lysis ensured that operational effectiveness, through global enablement of efficient workflow solutions, were in place and a reduction in the administrative burden on Front-Office sales-focussed staff was achieved successfully.

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Rethinking procurement target operating models

The foundation for standardization, productivity gains, and savings

What is a target operating model? Procurement professionals have heard it all before:

• You’re not delivering goods and services fast enough
• CFOs say the firm isn’t realizing the savings procurement promised
• Suppliers are put off by late payments
• Processes aren’t consistent
• Employees aren’t using costly new procurement tools and
• Automation isn’t working as promised

No silver bullet can solve all of these problems, but the right TOM - target operating model – one with a solid structure, correctly skilled staff, streamlined processes, and the right technology – can turn procurement into a sleek, efficient profit center.

How to develop a target operating model

When Genpact develops a target operating model project, our outside perspective shows you target procurement through a new lens.

The engagement typically lasts between eight and 14 weeks. Along the way, we benchmark to best-in-class companies and give you a heat map of problems to address.

The first step is to get a clear picture of the end-to-end target operating model components – a procedure that involves gathering and evaluating existing process maps and volumetric data. One goal is to assess how many handoffs take place between people and platforms. That's important, because the more handoffs there are, the more likely errors will occur.

The map also highlights the disparity in processes across sites, geographies, and business units because too much variation reduces enterprise-wide visibility. We talk to people performing similar functions in different ways to identify and understand why variations occur. Business and procurement stakeholders play an important role here, because their knowledge, information, and corporate insights ensure that follow-up discussions are relevant.

As soon as this first stage is completed, you'll have a comprehensive view of the as-is state.

Figure 1: Key objectives of a target operating model review

Design thinking takes center stage

During the next stage, we conduct procurement-wide design-thinking workshops to outline the goals and steps toward achieving a target operating model geared to your specific business needs and to anticipate potential roadblocks. The aim is to develop an example of target operating model that standardizes processes, decreases variations, and reduces handoffs.

This is when we evaluate your existing technology.

Too often, companies invest millions in technology enhancements only to be disappointed when results don’t materialize. Understanding how each technology option works can help you shape processes to get the most out of them. For example, we’ll assess whether a technology upgrade is really necessary, whether enhanced automation would be enough, or whether you just need to simplify procedures so that people will use what you have.

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Figure 2: accelerate the transformation process by leveraging proven tools, frameworks, and benchmarks.

Becoming a strategic business partner

The final step? Taking a hard look at your organization and asking whether the procurement operating model supports the business or is seen as a necessary evil. Do you have the right structure in place to become a strategic partner to your firm? Do you have the resources to staff up if necessary? Does your team have the right skills? Do you have incentives in place to encourage them to perform at their best? By asking the right questions, we help signpost the way for you to become a strategic partner, actively involved in long-term business planning and execution.

When we're done, you'll have a comprehensive transformation roadmap. We'll make recommendations based on impact and ease of implementation, including short-, medium-, and long-term opportunities to deliver best-in-class performance given existing initiatives and constraints. And we'll produce a business case that makes the argument for a procurement operating model change.

Example of our target operating model projects at work

• Sourcing savings – saved $200 million savings by automating processes for a global manufacturer that was significantly understaffed across its indirect strategic sourcing organization
• Operational efficiency – 40% efficiency gains for a global industrial manufacturer by standardizing global processes and driving automation across its direct procurement organization
• Restructuring – realized $50 million in savings for a global aviation manufacturer by decoupling direct target procurement activities and centralizing them into a center of excellence model
• Compliance – achieved $19 million in savings for a global aerostructure manufacturer through proactive and reactive compliance

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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.

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