target operating model design methodology

Target Operating Model: Definition, Design, and Example

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

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

The Target Operating Model typically includes the following elements:

Organizational structure.

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

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

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

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

Processes and Operations

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

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

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

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

Technology and Infrastructure

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

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

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

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

People and Skills

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

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

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

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

Culture and Behavior

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

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

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

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

Governance and Performance Metrics 

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

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

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

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

What are Performance Management Strategies?

How to design a target operating model

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

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

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

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

Example of a target operating model

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

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

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

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

New Operating Model:

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

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

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

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How To 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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Design Principles for a Robust Operating Model

Translating strategy into a small set of specific principles is the crucial first step in designing an effective model.

By Marcia Blenko and James Root

• April 08, 2015

Structure follows strategy.

Business historian Alfred Chandler proposed his thesis in 1962, observing that successful companies evolve their organizational structures based on their strategies. Chandler described how four American conglomerates that dominated their industries from the 1920s onward shifted from a functional, monolithic organizational form to a more loosely coupled multidivisional structure in order to address the challenges of growth and diversification.

Chandler’s insight that the organization must evolve to support strategy still holds true. But the challenge has become more complex as organizations must now be designed to support many more growth avenues, including new products, new steps of the value chain, new geographies, new customer segments and new channels.

Too often, companies make one of two missteps. Some fail to evolve their organization quickly enough to match a shift in strategy. A European technology company, for instance, stifled the growth of an innovative product by keeping it highly integrated with the existing core business, which starved it of the resources, management focus and flexibility needed to realize its potential.

The second mistake is to move full steam ahead with a new organization design that does not match how the business will actually create value. Consider the financial services company that moved from multiple independent divisions to a more integrated model in order to encourage cross-selling. Gearing the organization around this relatively small opportunity added complexity, slowed decision making and distracted the divisions from realizing major growth opportunities in their individual businesses.

So how can companies avoid these mistakes and ensure that they forge that link between strategy and organization? They need to go beyond structure to define their entire operating model, the blueprint for how resources are organized and operated to deliver the strategy. All elements of the operating model—structure, accountabilities, governance, essential behaviors as well as the way people, processes and technology get integrated to deliver key capabilities—must be explicitly designed to support the strategy. With this high-level blueprint defined, more detailed organization design can follow. (For an overview of operating model design, see the Bain Brief “ Winning operating models that convert strategy to results. ”)

The crucial first step in designing an appropriate operating model is to translate the strategy into a set of design principles—simple yet specific statements defining what the organization must do to enable execution of the strategy. A carefully drafted set of design principles, typically between 7 and 15 statements, helps align the leadership team around objective criteria for designing the operating model. This approach can apply to an entire company, a business unit or an individual function.

Defining what matters most

Design principles specify strategic requirements that the operating model must support. They also pinpoint aspects of the current organization that could hinder the future strategy and therefore must change, as well as organizational strengths that should be preserved (see Figure 1). While principles can cover a lot of ground, they usually address some combination of the following areas that are most relevant to their business:

Focus on the specific sources of value in the business. For example, a historically US-centered food company that was expanding internationally established a principle to “ensure a strong focus on our high-priority growth markets.” And Olam International, the Singapore-based commodities trading company, has a clear principle of optimizing the supply chain right up to the farm gate. As a consequence, Olam makes sure that local managers give relationships with local farmers the highest priority, because those farmers start the value chain.

Call out the critical decisions. The right operating model should make it easier to make important decisions quickly and effectively. Good principles often highlight specific types of decisions that the new model should facilitate. For instance, a technology company articulated the need to “improve how product roadmap decisions reflect customer requirements.” A consumer products company stated that “execution of global brands, including pricing and promotion decisions, should be highly devolved.”

Define scope and business boundaries appropriately, ensuring that the model reflects opportunities for customer-, cost- and capability-sharing across the businesses. A consumer products company recognized that the market had evolved and its product should in the future be managed globally in many respects. It defined its principle: “Product development and branding should be managed globally while maintaining local sales, marketing and customer insight.”

Explain which capabilities are essential to fulfilling strategic goals, such as “support a repeatable product design process that balances customer requirements and technical feasibility” or “allow us to easily add and subtract businesses.” The latter principle, for instance, would infer an operating model that maintains minimal integration across its business units.

One beverage company identified winning with 25-year-old male customers as a strategic priority. So one of its design principles highlighted insights into these customers and point-of-sale execution as two capabilities the operating model needed to emphasize.

Articulate organizational strengths to preserve or weaknesses to address. A company that had acquired a series of businesses, all selling to the same customers, articulated a principle to “ensure that how we go to market makes it easy for our distributors to do business with us.” A medium-sized, high-growth company specified the need to “professionalize our processes and improve coordination across product areas while minimizing bureaucracy.”

Where firm culture plays a major role, aspects of the culture can be called out. One company that runs an online marketplace and has grown through many acquisitions has a principle to “preserve the entrepreneurial spirit that had driven our past success.” This statement guided the new model to include business units with leaders retaining many of their general manager responsibilities.

Clarify the role of the center in leveraging scale and expertise. A chemicals company established a principle that “the model will have a bias for simplicity and local-market focus. Organizational elements that add complexity or centralize activities must unambiguously add value.” Another specified that “any unit that generates more than 80% of the demand for a shared service will have responsibility for managing that service.” And a global business services company made it clear that the new model should leverage expertise at the center with its principle that “all major bids will be supported by a global bid team.”

Putting design principles to work

Practical use of design principles comes when a senior executive team evaluates different operating model options. One service company had spent a decade acquiring businesses to build a global powerhouse, but its operating model did not fully leverage the company’s scale or global capabilities in activities such as common purchasing or branding. The executive team split into two factions, one arguing for a strong country-based model while the other pushed for a more centralized model.

So the team drew up, and aligned on, seven principles aimed at improving local strength and flexibility while using global scale to better advantage. Based on those principles, senior leaders could objectively evaluate four operating model options, and the process allowed them to make a clear choice of a matrix model with functions leading in select areas where scale and expertise mattered, such as procurement and branding. The model also specified mechanisms to promote collaboration with the countries (see Figure 2).

Aligning the senior executive team on principles before getting into debates on operating model solutions ultimately will accelerate development of the model. Senior leaders themselves need to spend sufficient time debating, refining and then using the principles so that they take full ownership. Delegation simply does not work.

Passing the “dog food” test

Across industries and countries, effective principles share three characteristics.

First, they’re grounded in facts in order to bring objectivity to a charged environment. When companies decide their operating model needs to change, the discussions that follow can degrade into emotional defenses of the status quo. Principles informed by a fact-based strategy encourage impartiality, highlighting gaps and forcing difficult choices.

Second, they’re specific enough to help senior management make trade-offs. A large industrial company decided to redesign its operating model several years ago, and the senior team spent substantial time articulating design principles. But the CEO worried that some principles were too generic to help them evaluate different operating model options. “Can any of them equally apply to a dog food company as to us?” he asked.

His question, while tongue in cheek, crystallized a real challenge: Generic statements such as “leverage scale” or “create a streamlined organization” initially feel good because people readily accept them, but they have little explanatory power. Any successful operating model starts with specific, clear principles that will help distinguish between operating model choices. For a sports apparel and equipment maker, for instance, the generic “improve collaboration across different categories” contains less useful direction than “make it easy for us to deliver coordinated head-to-toe apparel and footwear to stores in time for the season.”

Third, effective principles stay brief. The best sets of principles fit on one page. If they exceed 10 or so, it’s best to identify the ones that should be weighted most heavily.

Tripping up on these three characteristics can derail the process. And there are a few other pitfalls that leaders should anticipate and avoid (see Figure 3).

A beacon for employees

Ultimately, strong, specific design principles underpin all successful operating models. Construction of a house proceeds most effectively when the owner, architect and general contractor have detailed discussions first about the important design features and resolve potential problems before construction starts. Similarly, writing and debating the principles for an operating model design gives senior executives a chance to address the most vital issues, identify potential problems and resolve ambiguity. Strong design principles synthesize choices that leaders have made about what matters most. That precludes unnecessary debates from reopening later on.

Moreover, they endure. One manufacturing company that redesigned its operating model five years ago still uses the same principles to explain the model to employees as well as to test the merit of proposed additional organizational changes. The best principles serve as a constant beacon when the operating model is implemented and as it evolves.

Marcia Blenko is an advisory partner with Bain & Company’s Organization practice. James Root is the leader of the practice in Asia-Pacific. They are based, respectively, in Boston and Hong Kong.

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KPMG Target Operating Model

A blueprint for rapid and sustainable functional transformation.

Learners expect consumer-grade experiences that are immediate, engaging, and impactful.

Learning organizations are challenged with capability, capacity, and their inability to demonstrate value in an era where upskilling and engagement are more critical than ever.

KPMG Learning as a Service offers extensive learning strategy optimization approaches and managed solutions that range from target operating model transformation, to managed services providing help desk support and custom content and facilitation, that relieves leaders of operational burdens and associated costs. This allows leaders to save time and money by focusing on management data that will enable them to deliver against their business goals.

Our team of learning specialists source the optimal set of benchmarks, technologies, partners, and services to create impactful learning cultures. We will deliver innovative and flexible solutions that are underpinned by our robust analytics service to determine the most effective routes and methods to meet your transformation needs.

The power behind your sustainable functional transformation.

KPMG Powered Enterprise transformation approach guides you through your end-to-end transformational journey. At the heart of it, the KPMG Target Operating Model shapes your business transformation and maps out the optimum way for lasting value of your investment.

There are many challenges during a functional transformation program - none more so than envisioning what you can achieve and validating that it will work for your organization. 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 the KPMG Target Operating Model can help empower you to move to a 'best in class' vision.

Its real power is in the design.

Part of the problem with 'traditional' target operating models is 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.

KPMG Powered Target Operating Model

The KPMG Target Operating Model is designed as a blueprint for rapid and sustainable functional transformation. See how the six layers of the model can help you transform your business.

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 organization 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 sustainable 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 organization. Please do take the time to download it here:

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Crafting a Data-Driven Target Operating Model: Step-by-Step Guide

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Introduction

Target Operating Models are typically used when there is an organizational transformation journey ahead. In this guide we will outline how you can harness the power of internal and external data to build a robust new operating model, including:

What is an Operating Model?

What is the difference between an operating model and business model, what is a target operating model (tom), how to build a data-driven target operating model, five steps to implement a target operating model.

An operating model canvas refers to the framework that an organization designs for its core operations and processes to achieve the strategic objectives. Key components within all operating models include the organizational structure, technology infrastructure, and business processes.

In essence, the operating model is a significant element that enables organizations to navigate the complexities and changes to the business enterprise. A holistic operating model can also be used to develop the value chain, which outlines how a company adds value to its products or services as it moves through various stages of production and distribution before reaching the end customer.

The operating model should not be confused with a business model, which is more about how a business plans to make money. One example of a business model includes the business strategy to only sell software to corporate customers in the United States through partnering with another company that already has a lot of US corporate customers.

This business strategy outlines how the business will achieve it's vision while the business model delves into the value proposition. Comparably, the operating model outlines how an organization operates on a day-to-day basis and how it interacts with its customers, shareholders, and other stakeholders.

Now that you understand what an operating model is, we will look at how management can bridge the gap from the current and target state through continuous improvement and change management strategies in the next section.

The Target Operating Model (TOM) is a carefully crafted blueprint that defines an organization's future state for achieving its objectives and corporate strategy. They are typically used in a range of situations, such as a refresh of the organizational strategy, or internal factors such as a decision to sell or carve-out some business units from the company.

To develop a Target Operating Model, management should first understand the current capabilities of the organization by function or division, specifically the; number of people, IT systems and current operational procedures. Then using this baseline information they can refer to these three categories as they develop the target state operating model.

Many professionals use external headcount benchmarks (such as those provided by CompanySights ) to determine the number of people required in a particular function in the target state. Following this, the level of digital transformation that is to occur from the current to target state will determine the type of IT systems required, and any subsequent changes to operational procedures.

More and more businesses are becoming better at data management and understanding the key components underlining performance metrics. But actually using this data to build your Target Operating Model (TOM) is a whole other challenge. If you do use it, then you will improve stakeholder "buy in" and ultimately increase the chances of a successful transformation. Let's walk through the key steps required to build your first Data-Driven Target Operating Model.

Define the Strategic Objectives

Begin by outlining your organization's objectives and corporate strategy. These could include things such as increasing revenue by X times or reducing overheads by Y%. Once defined, they will serve as the foundation for your TOM, which you can refer to time and again.

Build the Baseline (with Data)

The next step is to build the baseline of the current operating model. As mentioned previously this includes three key components by function or division, including the; number of people, IT systems, and current operational procedures.

To get this information, ask your Head of HR for the number of people by function or division including all employees, contractors, outsourced resources, or even volunteers. Then go to your Head of IT or CTO to get the list of software and a short description of it used by function (or cross functional teams where necessary).

The final step (and most time consuming) is to write down all of the current operating capacities and processes function by function, which will require involvement from functional leads and managers.

Tip: If you can align the number of people required for each operational process, then it will make designing the target operating model much easier.

Assess the Current Operating Model (with more Data)

The next step is to assess the baseline that has been created. Follow the same logic and assess each function based on the number of people, IT systems, and current operational capabilities.

To help assess the performance of certain things you should consider using specific key performance indicators (KPIs). For example, you could calculate the Revenue per Sales employee to understand the average performance of a sales person in your organization today.

Some people will also use external benchmarks to identify opportunities within the current operating model based on industry best practices. This includes how many people an organization should have in a particular function based on the revenue or total number of employees in the organization today.

Continuing with the example of Sales people, you could compare the Revenue per Sales employee in your company against external benchmarks (e.g. using CompanySights ) to determine the level of efficiency in your sales function.

Following an assessment of all functions, you can then evaluate the current operating model to understand its strengths and weaknesses.

Design the Future State (a.k.a. Target Operating Model)

Now with reference to your long term objectives and current operating model you can design the target operating model. The best way to do this is function by function. Review each of the functions in your current operating model and outline how many people you may need in the future state (hint: you can also use external benchmarks to do this).

Then also determine how much automation will occur in future state operational procedures, which will be used to confirm the IT systems that the business will need. There is a growing consensus among businesses to focus on digital operations, meaning the use of big data, analytics and artificial intelligence to inform decision-making and optimize operational levers.

The digital aspect is a critical component of designing the future state operating model to gain a competitive edge, especially in the face of emerging competitors. Then we need to circle back to our original objectives to confirm that our target operating model will likely achieve them.

Remember that building a Data-Driven Target Operating Model involves a systematic approach of integrating data analysis, strategic planning, and constant improvement to align your operating model with your organization's goals and industry best practices.

Implementing a Target Operating Model (TOM) is the crucial step to turn your overall vision and strategic intent into reality using operational levers. The following five steps are what we recommend to achieve this:

1. Prepare for Implementation

Begin the implementation phase by thoroughly preparing your organization for the upcoming changes. This includes ensuring alignment of your corporate strategy and objectives, while also having effective communication strategies in place to engage all key stakeholders.

Successfully realizing transformation efforts starts with a good plan, as the old saying goes "fail to plan, then you plan to fail". So, after the TOM has been built and the implementation plan has been created it becomes about communication, tracking and governance.

2. Clear Communication

Communication to relevant stakeholders while developing the TOM, and during implementation is critical to the success of the program. The key components include being proactive, clear and frequent in communication with others.

A popular management system to achieve a successful transformation is to establish a change management office, which will usually involve both internal and external stakeholders to oversee the whole project. We will explore this further in the governance section below.

3. Effective Governance

Having a separate project management team in place is a highly effective way to implement the TOM. This will usually involve a steering committee and may also include external consultants who have specific experience to effect this change. At a minimum, all of the stakeholders involved need to understand how the project is being managed and what responsibilities they have.

Effective governance also means monitoring and managing risks associated with the implementation. The change management office should be proactive in addressing challenges to minimize disruption. In addition to this, an effective governance structure should maintain alignment between the TOM and the businesses strategic goals.

4. Constant Tracking

The project team or change management office should also be responsible for daily or weekly updates to all stakeholders. Typically a steering committee will meet once or a few times per week depending on the stage of the project, which will involve status updates from each workstream lead.

When workstreams fall behind in what they have to do, it is usually identified early on by the tracking procedure setup by the change management office. There are many different reasons for a workstream to fall behind, but usually they involve being under resourced or some kind of dependency holding back the change.

Whatever the issue, constant tracking is about identifying problems early on so they don't derail the whole transformation program. With an early diagnosis any issue can be addressed and corrected before it becomes really problematic. So in short, constant tracking is all about effective risk management.

5. Data-Driven Decision-Making

During a change management program there will be lots of decision making required. Effective governance structures can help to identify who makes decisions, but the next question is how?

We encourage the continued use of data and analytics throughout implementation. This includes measuring key performance indicators as part of the continual tracking process. Then with this data the change management office can make informed decisions to guide the transformation journey.

In summary, the successful implementation of a Target Operating Model requires careful planning, effective communication, robust governance, and data-driven decision-making. By incorporating all of these elements, your organization can effectively realize the strategic vision set out by the target operating model canvas and enhance operational excellence.

Looking for headcount benchmarks to design your TOM? Search here

Today we have explored many aspects of the operating model in the world of business. This includes what an operating model is, the difference between an operating model and a business model, and how to build and implement a target operating model using as much data as possible.

To build a TOM you first need to develop the strategic goals, review the current state, and design the future state of the business, including any changes to the value chain. Then the challenge for management is to effectively deliver on implementing the required changes.

With an ever changing business environment the need for developing and implementing TOMs is becoming increasingly important. Especially as external drivers change the technological infrastructure within many businesses, then the number of people and types of processes will also have to change.

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How Do You Create A Target Operating Model?

Business transformation is impossible without a clear vision of your target operating model. Let's explore how you can build a model target state and map out your path to get there.

Before you can run a marathon, you need to know where the finish line is. If you don't know where you're going, even your first step could be in the wrong direction.

An ill-defined target could also be the reason why 70% of digital transformations fail . Without the right process for defining the vision and purpose of your business transformation, you're unlikely to succeed.

This is why you need a clear target operating model before you begin a business transformation. Let's consider what a target operating model is and the steps you need to take to get your organization where it needs to be.

What Is A Target Operating Model?

A target operating model is a blueprint for the optimum way your organization would function, if there were nothing preventing you from doing so. It's a vision for your company to strive for and allows you to plan out how to circumvent blockers and take gradual steps toward your ideal state.

There are as many formats for plotting out your target state as there are companies using them. From basic Excel spreadsheets to high-tech 'digital twin' computer models, whatever your target operating model looks like, it needs to act as a rallying call for your colleagues.

Even if you never actually achieve that target state, then a target operating model still gives your organization a shared goal to strive for. Every change you make that gets you closer to your target will be an improvement in the way you work.

As time moves on and technology and the market changes, so too will your target operating model change to accommodate the new needs of the market. This all means that the process of creating a target model and working towards it never ends.

It does, however, begin, so let's consider the seven steps you can take to establish and get the most from a target operating model.

Step 1: Understand Your Current Landscape

There are many methodologies and formats for target operating models, but there's one thing that everyone seems to agree on: the key to creating the right target operating model is to understand your current business state.

A deep and comprehensive understanding of your business capabilities and processes from the ground level is key for optimization. Without understanding how your business works, you'll never be able to improve it.

That level of understanding of processes can only be obtained from the people who actually carry out those processes every day. That's why the bulk of the work in designing a target operating model comes from talking to your colleagues across your business and understanding their work.

Surveys are vital for gathering standardized information from diverse groups of workers within your organization. From this information, you'll be able to derive each team's specific needs and challenges.

Step 2: Gather Information On Pain Points

When processes and workflows are optimal, things go smoothly. When things go smoothly, workers don't get frustrated.

When you speak to your colleagues about their processes, look for signs of frustration or stress. These will usually be red flags that there is room for improvement in processes.

When you have a list of the pain points your colleagues are experiencing in processes and workflows, you will have a list of where you need to focus your transformation efforts.

Step 3: Assess The Potential

The next step in constructing your target model requires detailed knowledge of operating methodology and the business technology available on the market. Understanding this will allow you to turn your colleague's problems into opportunities for improving processes.

This is where your creative problem-solving skills come into play and you show your true value for your organization. This is for your target operating model, however, so there's no need to worry too much about the details of implementing your solutions.

This is simply a way to show how the deficiencies in your operating model could be avoided. Stay creative and don't get bogged down with the technical details just yet.

Step 4: Build Your Vision

When you have a list of potential solutions to all the problems present in your organization, you can start combining them into your target operating model. If updating your enterprise resource planning (ERP) platform, moving some applications to the cloud, and updating to a new version of your sales system will avoid pain points, then you know those elements need to be in your target operating model.

In addition, you need to take into account your future needs, available resources, market, scale, and strategy. Putting all of that together, you can start to create a picture of what your target operating model might look like.

There are a large variety of aspects to your organization to consider in your target model. Ashridge Executive Education recommends looking at six aspects making up the acronym POLISM (or POLIST in McKinsey's version ):

• O rganization
• I nformation and IT
• M anagement (sometimes referred to as ' T imescales')

This perhaps oversimplifies the complexity of an expansive list of aspects to consider. A few more examples include:

• Business strategy
• Agility and long-term planning
• IT landscape
• Organization chart
• Resources and training
• Governance and controls
• Stakeholder buy-in
• ...and much more...

A key thing to remember is not to fix what isn't broken. Even when restructuring your organization, you can still make use of your existing people and resources in the new structure, wherever possible.

Step 5: Design Your Roadmap

Whereas actually creating your target operating model is complex and laborious, once you have it, creating a roadmap is fairly simple. You merely need to draw a metaphorical line between the current state you have explored and the target state you designed.

The complexity in this stage lies in choosing what changes are feasible to tackle first, which are long-term goals, and which are just pipe dreams for now. There's also the matter of charting the process and timescales for progression.

When you finally have a map of your current state, your target operating model, and the roadmap between the two, it's time to start making use of them. The key to that, however, is collaboration.

Step 6: Share, Share, Share

At every stage of the process, it will be key to involve your stakeholders. This will allow you to:

• Validate your conclusions and the feasibility of solutions and timescales, with the experts
• Make it clear to those impacted by the decisions you've made why you've made them, so they can see the value you're trying to achieve
• Identify and overcome any objections to the changes before you begin making them

Once again, your target operating model should be a rallying call for your organization and a goal to work towards. This can only be the case if you achieve buy-in from all your stakeholders.

Step 7: Take Action

We've talked a lot about the theory of target operating models, but there's no value to them unless they inspire action. While it wouldn't be possible to simply enact your target operating model exactly as it is, you need to ensure that you're always looking to take steps towards it.

Even the tiniest amount of progress toward your target state should be an increase in productivity and employee or customer experience. That's why it's important to remain vigilant for opportunities to take steps along your roadmap.

This is the value of having a dedicated enterprise architecture function within your business, so someone is responsible for driving your progress forward. Enterprise architects can also work on continually refining your understanding of your current state, your target operating model, and your roadmap.

The LeanIX EAM

Keeping track of your current business state, designing your target operating model, and building a roadmap is challenging enough. When you need to continually iterate on all of these things, it can become even more difficult.

To keep track, you need to empower your enterprise architects with a tool that's specifically designed for them. LeanIX EAM is an enterprise architecture management platform built specifically to track your IT landscape and application portfolio, target IT operating model, and technology roadmap.

To find out more about how LeanIX EAM can help you make the most of your target operating model, book a demo:

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Target Operating Model – A Complete Guide

A Comprehensive Roundup of Target Operating Modelling

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

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

Components of a Target Operating Model

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

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

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

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

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

Case Study: Insurance Company

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

‘Carsure Insurance Ltd.’

Vision: Insure electric cars and e-scooters.

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

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

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

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

According to Deloitte a COM is:

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

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

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

Target Operating Model Characteristics

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

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

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

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

TOM and Strategy: The Differences

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

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

In the diagram above, we can see distinct phases:

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

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

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

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

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

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

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

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

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

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

Other Considerations

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

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

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

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

Benefits of a TOM

TOMs have some good benefits, including:

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

TOM Framework – McKinsey 7S Model

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

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

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

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

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

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

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

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Target Operating Model: Elements, Principles, Types, and Purposes

Written By : Bakkah

26 May 2024

Table of Content

What is the Target Operating Model?

Elements of the target operating model, principles of target operating model, the purpose of the target operating model, types of target operating models, how is a target operating model implemented, benefits and importance of target operating model, explore bakkah's certified courses in project management to embark on your journey toward success, popular articles.

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The Target Operating Model (TOM) defines the desired future state of an organization's operations, outlining processes, capabilities, structures, roles, and technologies to align operational activities with strategic goals. 

Organizations develop effective TOMs by adhering to principles such as clarity, alignment, agility, and continuous improvement. Clarity involves defining clear objectives and responsibilities, alignment ensures support for strategic goals, agility allows adaptation to market changes, and continuous improvement promotes ongoing optimization. 

TOMs can be functional, process-oriented, customer-centric, or digital-centric, tailored to organizational needs. A well-designed TOM enhances efficiency, strategic alignment, decision-making, agility, and customer satisfaction, driving sustainable growth and success.

The Target Operating Model (TOM) is a blueprint or framework that outlines the desired state of an organization's operations and processes to achieve its strategic objectives. It serves as a guide for aligning various aspects of the organization, including people, processes, technology, and governance, to deliver value effectively and efficiently. 

The TOM defines how the organization should operate across different functions, departments, and business units to support its business model and strategic goals. It outlines the structure, roles, responsibilities, workflows, and key performance indicators (KPIs) required to achieve desired outcomes and drive continuous improvement. The TOM serves as a reference point for organizational change initiatives, helping leaders and stakeholders understand the future state of operations and the steps needed to reach that state.

The Target Operating Model (TOM) typically consists of several key elements that collectively define how an organization will operate to achieve its strategic objectives. These elements may vary depending on the organization's industry, size, and specific needs, but commonly include:

1. Governance Structure

This element defines the framework of the organization's decision-making processes, roles, and responsibilities. It outlines the hierarchy of authority and accountability to ensure effective oversight and management of operations.

2. Organizational Structure

The organizational structure specifies how the organization is divided into departments, teams, and reporting lines. It defines the relationships between different parts of the organization and how they collaborate to achieve common goals.

3. Processes and Workflows

Processes and workflows outline the activities and tasks required to accomplish various business objectives. They define how work is performed, managed, and optimized across different functions and departments.

4. Roles and Responsibilities

This element specifies the roles, responsibilities, and accountabilities of individuals within the organization. It ensures clarity and alignment regarding who is responsible for what tasks and outcomes.

5. Technology and Tools

Technology and tools encompass the systems, software, and infrastructure needed to support organizational operations. This element defines the technology stack and digital capabilities required to enable efficient and effective business processes.

6. Performance Metrics and KPIs

Performance metrics and key performance indicators (KPIs) are used to measure the effectiveness and efficiency of organizational operations. They provide insights into performance against strategic objectives and help drive continuous improvement.

7. Culture and People

Culture and people refer to the values, norms, and behaviors that shape the organization's work environment. This element includes aspects such as leadership style, employee engagement, talent management, and organizational values.

The principles of a Target Operating Model (TOM) serve as guiding concepts or beliefs that underpin the design and implementation of the operating model. These principles help ensure alignment with the organization's strategic objectives and support effective decision-making throughout the TOM development process. While specific principles may vary based on the organization's needs and context, some common principles include:

1. Alignment with Strategy

The TOM should be closely aligned with the organization's strategic goals and objectives. It should support the execution of the strategy by defining how operational activities contribute to achieving desired outcomes.

2. Customer-Centricity

The TOM should prioritize the needs and preferences of customers or stakeholders . It should aim to deliver value by providing products, services, or experiences that meet or exceed customer expectations.

3. Simplicity and Efficiency

The TOM should promote simplicity and efficiency in operations. It should streamline processes, eliminate unnecessary complexity, and minimize waste to enhance agility and responsiveness.

4. Flexibility and Adaptability

The TOM should be flexible and adaptable to changing business conditions, market dynamics, and customer demands. It should enable the organization to quickly adjust its operations in response to new opportunities or challenges.

5. Accountability and Transparency

The TOM should establish clear lines of accountability and transparency in decision-making and performance management. It should ensure that roles, responsibilities, and expectations are clearly defined and communicated throughout the organization.

6. Continuous Improvement

The TOM should support a culture of continuous improvement and learning. It should encourage experimentation, innovation, and feedback loops to drive ongoing optimization and innovation.

7. Resilience and Risk Management

The TOM should incorporate resilience and risk management principles to mitigate potential threats and disruptions. It should identify and address operational risks to ensure business continuity and long-term sustainability.

8. Collaboration and Integration

The TOM should foster collaboration and integration across different functions, departments, and stakeholders. It should break down silos and promote cross-functional teamwork to achieve shared objectives.

The purpose of the Target Operating Model (TOM) is to provide a clear and structured framework for designing, implementing, and managing the operational aspects of an organization. It serves as a blueprint that defines how the organization's resources, processes, systems, and capabilities should be structured and aligned to deliver value and achieve strategic objectives. 

The TOM articulates the desired state of operations and outlines the changes required to transition from the current state to the future state. Key purposes of the Target Operating Model include:

1. Alignment

Ensuring alignment between operational activities and the organization's strategic goals and objectives. The TOM helps translate high-level strategic priorities into actionable plans and initiatives at the operational level.

Providing clarity and direction for decision-making and resource allocation. The TOM defines roles, responsibilities, and workflows, reducing ambiguity and enhancing accountability across the organization.

3. Efficiency

Improving operational efficiency and effectiveness by streamlining processes, optimizing resource utilization, and eliminating redundancies and inefficiencies.

4. Scalability

Enabling the organization to scale its operations to support growth and expansion while maintaining consistency and quality.

5. Change Management

Facilitating organizational change by providing a structured approach to implementing new strategies, initiatives, or technologies. The TOM helps manage resistance to change and ensures smooth transitions.

6. Risk Management

Enhancing risk management capabilities by identifying, assessing, and mitigating operational risks. The TOM helps build resilience and agility to respond to external threats and disruptions.

7. Performance Management

Establishing metrics, KPIs, and performance targets to monitor and measure operational performance. The TOM enables continuous monitoring, analysis, and improvement of key operational processes.

8. Stakeholder Engagement

Engaging stakeholders, including employees, customers, suppliers, and partners, in the design and implementation of operational changes. The TOM promotes collaboration and alignment of interests among stakeholders.

Target Operating Models (TOMs) can vary significantly depending on the organization's industry, size, structure, and strategic objectives. Several types of Target Operating Models exist, each tailored to address specific business needs and requirements. Some common types of TOMs include:

1. Functional Target Operating Model

• Focuses on optimizing specific functional areas within the organization, such as finance, human resources , marketing, operations, or IT.
• Defines how each function should operate to support overall business objectives.
• Helps streamline processes, improve collaboration, and enhance efficiency within individual departments.

2. Process-based Target Operating Model

• Centers around key business processes or workflows that span multiple functions or departments.
• Maps out end-to-end processes, including inputs, activities, outputs, and stakeholders involved.
• Aims to streamline and standardize processes, eliminate bottlenecks, and improve cross-functional collaboration.

3. Customer-centric Target Operating Model

• Places a strong emphasis on understanding and meeting the needs of customers or clients.
• Aligns operational activities with customer expectations, preferences, and value drivers.
• Focuses on delivering exceptional customer experiences, building customer loyalty, and driving revenue growth.

4. Digital Target Operating Model

• Focuses on leveraging digital technologies and capabilities to transform operations and deliver value.
• Emphasizes the use of data analytics, automation, cloud computing, and other digital tools to improve efficiency, agility, and innovation.
• Addresses digital transformation initiatives, such as e-commerce, mobile applications, digital marketing, and data-driven decision-making.

5. Agile Target Operating Model

• Adopts agile principles and practices to enable rapid adaptation and response to changing market conditions.
• Emphasizes flexibility, collaboration, and iterative development across functions and projects.
• Supports the delivery of projects and initiatives in short cycles, with frequent feedback and course corrections.

6. Hybrid Target Operating Model

• Combines elements of multiple TOM types to create a customized approach that fits the organization's unique needs.
• Recognizes that different parts of the organization may require different operating models based on their goals, challenges, and environments.
• Allows for flexibility and adaptation as business requirements evolve.

Implementing a Target Operating Model (TOM) requires careful planning, coordination, and execution to ensure successful adoption across the organization. 

By following these steps and leveraging change management principles, organizations can effectively implement a Target Operating Model and realize the intended benefits of improved efficiency, agility, and performance. The implementation process typically involves several key steps:

1. Define Objectives and Scope

Clearly articulate the objectives, scope, and desired outcomes of the TOM initiative. Identify the areas of the business that will be impacted and establish metrics to measure success.

2. Conduct Current State Assessment

Assess the organization's current operating model, including processes, systems, capabilities, and organizational structure. Identify strengths, weaknesses, inefficiencies, and areas for improvement.

3. Design Future State TOM

Develop a detailed blueprint for the future state Target Operating Model based on strategic objectives, industry best practices, and input from stakeholders. Define the desired processes, structures, roles, responsibilities, and technology solutions.

4. Engage Stakeholders

Secure buy-in and involvement from key stakeholders across the organization, including senior leadership, department heads, frontline staff, and external partners. Communicate the vision, rationale, and benefits of the TOM to gain support and alignment.

5. Develop Implementation Plan

Create a comprehensive plan outlining the tasks, timelines, resources, and dependencies required to implement the TOM. Define roles and responsibilities for project teams, establish governance structures, and allocate budgetary resources.

6. Pilot and Test

Begin by piloting the TOM in a small-scale, controlled environment to identify potential issues, validate assumptions, and gather feedback from stakeholders. Use this feedback to refine the TOM before scaling up implementation.

7. Execute Rollout

Roll out the TOM gradually across the organization, department by department or region by region, depending on the complexity and scale of the initiative. Provide training, support, and resources to help employees adapt to the new operating model .

8. Monitor and Evaluate

Continuously monitor the implementation progress and evaluate the effectiveness of the TOM against predefined metrics and KPIs. Identify any gaps or challenges and make adjustments as needed to ensure alignment with strategic objectives.

9. Drive Continuous Improvement

Foster a culture of continuous improvement by soliciting feedback from employees, customers, and other stakeholders. Regularly review and refine the TOM to adapt to changing business needs, market conditions, and technological advancements.

10. Embed Change

Institutionalize the new operating model into the organization's culture, policies, and practices to ensure sustainability over the long term. Provide ongoing support, training, and reinforcement to embed the desired behaviors and practices.

The Target Operating Model (TOM) offers several benefits and holds significant importance for organizations looking to optimize their operations and achieve strategic objectives:

1. Enhanced Efficiency and Effectiveness

By defining clear processes, roles, and responsibilities, the TOM helps streamline operations and eliminate redundancies, resulting in increased efficiency and effectiveness. Standardizing workflows and leveraging technology solutions can further enhance productivity and reduce costs.

2. Alignment with Strategic Objectives

A well-designed TOM ensures that organizational activities and resources are aligned with strategic objectives and priorities. By defining the desired future state and specifying the necessary capabilities and resources, the TOM helps focus efforts on activities that drive value and support long-term goals.

3. Improved Decision Making

The TOM provides a framework for making informed decisions by establishing clear governance structures, decision rights, and accountability mechanisms. By clarifying roles and responsibilities, organizations can empower employees to make timely and effective decisions that support organizational goals.

4. Enhanced Agility and Adaptability

In today's rapidly changing business environment, organizations must be agile and adaptable to respond to market dynamics and emerging opportunities. The TOM enables flexibility by designing processes and structures that can quickly adapt to changing business needs and customer requirements.

5. Better Resource Allocation

By identifying and prioritizing key capabilities and investments, the TOM helps organizations allocate resources more effectively to areas that deliver the greatest value. This ensures optimal use of financial, human, and technological resources to support strategic objectives.

6. Improved Customer Experience

A customer-centric TOM focuses on delivering value to customers by optimizing processes and touchpoints across the organization. By enhancing customer interactions and satisfaction, organizations can strengthen their competitive position and build long-term relationships.

7. Enhanced Risk Management

The TOM facilitates better risk management by identifying and mitigating potential risks and vulnerabilities in operational processes and systems. By implementing robust controls and monitoring mechanisms, organizations can minimize disruptions and ensure business continuity.

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Overall, the Target Operating Model serves as a blueprint for organizational transformation, guiding efforts to optimize operations, align resources with strategic objectives, and drive sustainable growth and competitive advantage. By embracing the TOM, organizations can unlock greater efficiency, agility, and value creation, positioning themselves for success in today's dynamic business landscape.

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How to design a Target Operating Model that delivers tangible outcomes

• March 9, 2017

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Is waitlist:0, virtual classroom, the term target operating model (or tom) has been used a lot in many of the organisations that i have worked for all around the world over the years. many 100s of millions of dollars in business change budget has been invested in these projects along with many 1000s of people, man hours and resources. having been involved in numerous initiatives, i’ve seen all manner of possible outcomes. some have succeeded in delivering very beneficial outcomes for their organisations. some have failed to deliver anything..

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 organisation. 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. Nico benefited from a slightly better operating model, and that’s what led to his overall title. 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. It is clear Lewis also had some organisational 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.

WHAT IS A TARGET OPERATING MODEL (TOM)?

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

A Target Operating Model doesn’t exist yet, and to achieve it, the Operating Model itself must change, requiring a large transformation effort in the form of a programme 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 programme moving towards this new Target Operating Model, 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 organisation 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 Target Operating Model 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.

In my next article, I will take a look at some of the different types of Target Operating Models and how you can adapt your Target Operating Model initiatives accordingly based on the type of organisation you are working with.

Blog Article by Julie Choo; subject matter expert, industry specialist and  Applied Operating Model Design  course designer and instructor. 

Our Applied Operating Model Design is a 4 day practical workshop that teaches you how to design a Target Operating Model along with a transition plan that you can use to lead and drive business change in an organisation. The goal is to empower participants by providing them with the frameworks and skills to achieve measurable and sustainable results in delivering operating model transformation.

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What is a Target Operating Model (TOM)? | Determine Your Organisations Desired State

The modern business environment is more complex than ever before. With the increasing role of the remote workforce, increasing potential risk issues, and more challenging customer needs, it’s becoming more and more difficult to successfully navigate through the ever-evolving marketplace.

For companies to continue to thrive and operate efficiently in these conditions and be capable of quickly adapting, it’s necessary to create some sort of strategic plan for managing change. While each business shares a common goal of expanding and growing, each of them has its own, unique set of goals and objectives. 

To successfully accomplish these goals and develop a plan for moving forward, the organisation must be capable of properly defining its current state as well as the driving factors behind it. Target operating model, or TOM , provides businesses with a tool that can help them focus on working towards their objectives without putting their current work environment in danger.

Table of Contents

What is a target operating model (tom).

Target operating model is the high-level representation of a company’s business vision that helps drive and steer the organisation to a new and optimised way of working. The structured approach of TOM allows for a better understanding of what the organisation is at its core and helps create the methodology needed for implementing a change. 

All of this helps organise the company in a way that allows it to operate with efficiency and effectiveness when it comes to delivering and executing the overall business strategy. In the modern business environment, it’s necessary for the organisation to be able to develop a strong target operating model so it can define what’s next and achieve the desired target state. 

TOM is there to bridge the gap between day-to-day business operations (current operating model) and the strategic vision for transformation, expansion, development, and growth.

By following the approach laid out on the TOM, companies can better understand their own business processes and more efficiently prioritise needs and requirements . With the help of TOM, they can create a methodology for change that is shared across the enterprise and is more unique and effective than a standard piecemeal model of business change.

However, target operating model shouldn’t be confused with the company’s strategy. A business strategy, as well as a company’s priorities, can change depending on internal factors and external drivers. On the other hand, TOM equips the organisation with the necessary foundation and flexibility needed to execute initiatives. 

They are mutually codependent though, as a strategy helps the realisation of the target operating model, and TOM influences the strategy principles.

How is a Target Operating Model Implemented?

Creating a target operating model requires a significant amount of effort and expertise. However, an even bigger challenge is to develop and implement TOM in a way that will deliver the strategic goals and make your business stand out from the competition. 

The implementation of TOM needs to take into account several important factors. It should consider the implications of designs and development processes, additions of new staff and their training and motivation, building up and acquiring new knowledge, and systems selection, customisation, integration, and implementation.

The target operating models will determine what every employee and every team in the company should be working on and how it adds value to the organisation. The proper implementation of TOM will help them streamline their working process and improve their performance. 

Most companies implement one business-wide target operating model, as designing one for each department or each person would be impractical and too much for every individual to take on. However, each department or team will commonly have their variation of the company’s TOM and use it as a guideline for their operations.

How to Build a Target Operating Model?

While it’s challenging, creating a target operating model isn’t necessarily too complicated. Still, there are several steps that shouldn’t be skipped no matter the type and scope of business, if TOM is to be well-aligned with the company’s strategy and successfully steer the organisation through changes of the target operating model development.

Developing Design Principles

Design principles serve as high-level guidance pointers on how the entire organisation should operate. They should properly identify the priorities of both the business and the customers, as well as user needs and desired experiences.

These principles need to include information acquired through high-quality customer insight and be well-aligned with the broad vision and strategic goals of the company. 

When properly developed, design principles help guide the creation of the target operating model and help team members make informed design decisions along the way. The ability to lean on set design principles leaves less room for potential mistakes.

Mapping the Journey of Target Audience

The experience customers have with the company can be represented in form of a diagram through customer journey maps. They detail every step a customer goes through in their interaction with the organisation and show how each step makes them feel. 

The mapping should start with the current user experiences and identify any potential pain points. Ideally, the journey map will be designed so it that offers a way around those pain points. This should be repeated for every segment of the potential audience. 

The more people involved in the process, the better. Finally, the journey maps should be validated directly with the customers. The result of this process should be a set of diagrams that accurately describe the experiences customers would ideally want when interacting with the company.

Defining the Required Capabilities

Drawing up a list of capabilities needed to deliver the desired user experience can be of great help when creating a target operating model. The best way to do this is to walk through the previously designed journey map and determine what the organisation needs to deliver each step. 

Every capability should come with a description of the current and future state. This includes the identification of necessary channels, processes, people, and technology. Every future change may require a different operational setup and this section of TOM should describe what it should look like.

Articulating the Changes Needed

This step involves comparing the current and future state of every capability and defining the gap between them. Doing this will significantly simplify drawing out necessary changes to turn customer journey maps into reality. 

Often, the direct jump from the current to the future state will not be possible. In those cases, it’s necessary to create interim stages and conduct changes incrementally. With all the needed changes identified, the next step is to prioritise them and fit them onto a change roadmap which should guide the organisational transformation.

What are the Components of the Target Operational Model?

Regardless of business structure and the type of product that is being offered, each target operating model should contain certain key target operating model components.

External Drivers

Internal factors, competitive dynamics .

Involve identifying and accessing the state of current and emerging competitors. This assessment can be done with the help of factor-based analysis.

Culture and Core Values 

Imply the morals, ethics, and overall values of the company. The way a company conducts its business and treats its customers is often a deciding factor in attracting a new audience.

Vision and Mission

Should indicate where and what the company wants to be in the future. These visions usually impact the scope of needed changes.

Strategy and Plan

Define the map the company will use to achieve its target operational model and reach its point of arrival. They should provide guidance on how, when, and where the company will implement changes.

Capability Analysis

Should elaborate on what capabilities are needed to reach the TOM. This may lead to evolving current capabilities, acquiring new ones, and phasing out ones that are not necessary.

Strategic Levers

Define conditions needed for the company to maintain or further develop its capabilities in order to attain its target operating model.

Tactical and Operational Levers

Are more specific than strategic ones and refer to particular processes within the TOM. For example, they may include implementing new management systems or expanding certain departments.

Transformation Map

Outlines incremental and sequential evolution as the organisation transforms into the target state.

Initiatives, Programs and Projects 

Determine the exact types of actions, efforts, plans, and programs, an organisation needs to accomplish its target.

Governance Structure 

Defines how the organisation will govern its future operations. While it’s not possible to accurately predict the future, the governance structure part of TOM attempts to establish a framework for rule-setting and enforcement.

Key Performance Indicators (KPIs) 

Provide metrics for measuring success and establishing what a successful transformation is. KPIs serve to optimise performance and productivity.

Target Operating Model (TOM) Template – Operating Model Canvas

The authors developed the operating model canvas as a tool to help organisations to design and describe their operating models in a clear and concise way. The canvas is based on their years of experience working with organisations on improving their operations and the insights they gained from their research.

The target operating model framework blueprint in the book will teach you to:

• Define the primary work processes
• Choose an organisation structure
• Develop a high-level outline of IT systems
• As well as provide guidance on which aspects of the new operation to locate and how they should be laid out, establish supplier relationships, and design both a management system and scorecard.

Jerry Nicholas

Jerry continues to maintain the site to help aspiring and junior business analysts and taps into the network of experienced professionals to accelerate the professional development of all business analysts. He is a Principal Business Analyst who has over twenty years experience gained in a range of client sizes and sectors including investment banking, retail banking, retail, telecoms and public sector. Jerry has mentored and coached business analyst throughout his career. He is a member of British Computer Society (MBCS), International Institute of Business Analysis (IIBA), Business Agility Institute, Project Management Institute (PMI), Disciplined Agile Consortium and Business Architecture Guild. He has contributed and is acknowledged in the book: Choose Your WoW - A Disciplined Agile Delivery Handbook for Optimising Your Way of Working (WoW).

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How to Design an Operating Model

Operating Model Design

Key steps and tools for crafting an efficient operating blueprint

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Introduction – The Basics of An Operating Model

Where to start, what to watch out for, ensuring success, business model canvas, value chain analysis, pestle analysis, operating model design principles, operating model and organizational design.

In our previous blog, we detailed an operating model: it depicts how a business functions at its core by describing how various organizational components collaborate to deliver customer value and achieve company objectives. This includes the processes, structures, systems, and resources involved in daily operations. An operating model provides a clear picture of how a business functions by understanding and defining these components. This helps ensure organizational alignment towards shared goals for smooth, effective operation. To learn more about it, check out our previous  Operating Model  blog, but  now,  let’s focus on how to  design  an operating model.

How to design an Operating Model?

Designing an operating model begins with a clear understanding of your business strategy and objectives, which serve as the foundation of the entire model. Begin by mapping out your capabilities. Create a   Capability Map   and involve stakeholders from various departments to ensure a comprehensive perspective and identify critical activities and interdependencies.

Example of a Capability Map (at an Airport)

Be vigilant for potential inefficiencies, bottlenecks, and areas lacking alignment with the overall strategy. Address redundancies in processes, misaligned roles or responsibilities, and technology gaps that could hinder operations.

To validate the operating model’s effectiveness, continually measure it against business goals and objectives. Solicit feedback from stakeholders and conduct pilot tests or simulations to pinpoint any deficiencies. A well-designed model should enhance efficiency, align closely with strategic goals, and improve the organization’s ability to deliver customer value. Regularly review and adjust the model based on performance data and feedback to ensure it remains adaptive to evolving business needs.

Tools for Starting Your Operating Model Design

While capability maps are a strong starting point for operating model design, several other tools offer structured methodologies to ensure alignment with business strategy, improve efficiency, and deliver value. Here are some commonly used tools:

The  Business Model Canvas  is a strategic management tool that helps visualize and develop business models. While it focuses on the overall business model, it can also guide operating model design by outlining key elements like value propositions, customer segments, channels, relationships, revenue streams, activities, resources, partnerships, and cost structures.

Example of a Business Model Canvas

Developed by Michael Porter, the value chain analysis identifies and optimizes primary and support activities that create customer value. It enhances understanding of organizational contributions to value creation and identifies areas for efficiency improvement.

Example of a Value Chain Analysis

PESTLE analysis assesses the external environment’s political, economic, social, technological, legal, and environmental factors. It informs strategic decisions and adjustments to align the operating model with external influences.

Example of a PESTLE Analysis

These tools can be used individually or in combination to design a comprehensive and effective operating model tailored to the specific needs and goals of an organization. Starting with foundational tools such as the Capability Map or the Business Model Canvas, organizations can progressively integrate additional tools like PESTLE Analysis. This iterative approach deepens understanding and ensures alignment across all aspects of the business. By systematically incorporating elements from diverse tools, organizations can develop a robust operating model that promotes understanding and engagement among employees, fostering a cohesive and efficient organizational environment.

Operating model design principles are fundamental guidelines that help shape the creation and implementation of an operating model. These principles ensure the model is effective, aligned with business strategy, and capable of delivering value. Here are some key operating model design principles:

  Strategy Alignment

Ensure the operating model aligns with the overall business strategy and objectives. It should support the long-term goals of the organization and enable the execution of strategic initiatives.

Customer-Centricity

Design the operating model with a focus on delivering customer value. Understand customer needs and preferences, and ensure that processes, structures, and resources are oriented towards enhancing customer satisfaction and experience.

Efficiency and Effectiveness

Aim for operational efficiency and effectiveness. Streamline processes, eliminate redundancies, and optimize resource utilization to achieve high productivity and cost-effectiveness.

Flexibility and Adaptability

Create an operating model that is flexible and adaptable to changing market conditions and business environments. It should be able to respond quickly to new opportunities, threats, and evolving customer demands.

Integration and Collaboration

Promote integration and collaboration across different parts of the organization. Ensure that various functions, departments, and teams work together seamlessly to achieve common goals. Foster a culture of collaboration and open communication.

Keep the operating model as simple as possible. Avoid unnecessary complexity in processes and structures. Simplicity enhances understanding, execution, and agility.

Operating Model and Organizational Design are closely interrelated, and both essential for aligning an organization’s structure with its strategic and operational goals. Let’s first clarify each concept and then explore their relationship.

• Operating Model  outlines key aspects that generate value, encompassing capabilities, processes, systems, and technologies essential for executing the business strategy. It defines how these components interact to produce and deliver the organization’s products or services.
• Organizational Design  focuses on the arrangement of roles, responsibilities, and relationships within the organization. It establishes formal hierarchies and structures that determine task allocation, reporting lines, and facilitate coordination and collaboration.

Effective organizational design is integral to a well-defined operating model. The operating model specifies  what needs to be done to deliver value , while organizational design determines h ow individuals within the organization are organized to accomplish these objectives . Essentially, the operating model serves as the blueprint for the organization’s operational framework, with organizational design translates this blueprint into a functional, organizational structure.

Understanding the operating model is pivotal in business strategy—it defines how an organization functions by integrating capabilities, processes, and resource allocation. Designing an effective model requires aligning it closely with strategic goals to enhance efficiency and value delivery, guided by principles such as strategic alignment, customer-centricity, and adaptability. Tools like the Capability Map and PESTLE Analysis offer structured approaches to tailor operations to specific organizational needs, optimizing processes and promoting collaboration. It’s crucial to distinguish between an operating model and organizational design: Mastery of these distinctions empowers businesses to streamline operations and cultivate a unified workplace culture where each employee contributes to the organization’s success.

Learn more about Operating Models and how they can enable seamless business transformation.

Explore key features and benefits of adoit’s innovative solutions for operating model design., get the industry proven ea tool., more on the topic.

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Everything you need to know about Business Strategy Development and Execution

How to design a Target Operating Model (TOM)

Once you've articulated your strategy, one of the next things to do is to design the organisation to deliver it. This is usually expressed in the form of a Target Operating Model (TOM). A TOM may be for a new organisation you're going to set up, or it may describe the end state for a change programme for an existing organisation.

The general approach is to define the people, processes and technology required to deliver the strategy.

The most common approach for identifying an organisation's processes for creating value is to use Value Chain methodology popularised by Michael Porter . This allows you to identify both

• the core processes, such as manufacturing, sales and distribution, and
• the supporting functions, such finance, IT and HR.

Both types of processes may be essential to the delivery of your strategy.

For each process, it is important to understand

• what the critical success factors (KSFs) and key performance indicators (KPIs) are. That is, what does 'good' look like in the performance of the process.
• what the inputs are and who provides them.
• what the outputs are and who receives or consumes them.
• the type of process: for example, you can classify processes as
• unit or job processes:  units of work are processed one at a time from start to finish, like building houses or tailoring suits.
• batch processes:  a defined number of units are processed together, like off-the-rack clothing, 
• mass production processes:  units of work move in sequence through stages, like assembling automobiles, or 
• continuous processes:  output is continuous, like paper milling.
• anticipated volume and frequency of performance, and drivers of both.
• whether and how the process is required to be performed in a differentiated manner in order to deliver strategic value.

Once you've identified and defined your processes, it should follow naturally what people and technology the processes will need.

For each process, identify:

• the roles, 
• numbers of people in each role, and 
• skills, capabilities and knowledge required by each role.

Consider also whether you will need to:

• hire in new or additional people, 
• provide more training to existing people, or 
• partner with organisations who already have the types of people you need.

You're then in a position to consider:

• reporting lines,
• organisational design,
• governance and 
• rewards (including compensation and benefits).

Don't forget to think about where the people are or will be physically located, and what implications that might have for your organisation.

Finally, consider the impact of organisational values and culture.

• Structure follows Strategy
• On organisation structure, and breaking the rules

Technology and systems enable the people to perform the processes.

These include computer systems, manual systems, manufacturing systems and any other supporting technologies.

Do these systems and technologies exist or can you buy, license or rent them? Can you use 'off-the-shelf' systems, or will you have to develop bespoke solutions especially for your business? The more differentiated your processes are the more likely it is that you will need bespoke solutions, or that pre-existing solutions will need extensive customisation.

How will you integrate and maintain these systems? You should be able to map this back to your process view.

Extended approaches

There are a number of different ways in which you could extend this general people-process-technology approach.

Firstly, you could go beyond the convention of considering just people and technology. For example, you could consider all 7 dimensions encapsulated in the McKinsey 7S analysis. People or S taff and technology or S ystems are two of the 7 Ses. McKinsey 7S does not emphasise the process dimension.

Secondly, you could adopt the POLISM model developed by Andrew Campbell, and others, at Ashridge Business School. POLISM stands for Process (or value chain), Organisation, Locations, Information Structure and Management system. This gives more prominence to location and suppliers. It considers information and management systems more explicitly than it does technology.

Andrew then went on to propose an integration of the POLISM model and the Business Model Canvas. I have previously written about this in  Introducing the Enhanced Business Model Canvas .

The Target Operating Model's role in business strategy execution

Your strategy implementation plan needs to consider all of the implications of the above:

• designing processes,
• hiring, training and motivating staff,
• acquiring or building up knowledge, and
• selecting, implementing, customising, building and/or integrating systems.

Designing a TOM is a significant piece of work. But, the real challenge lies in developing and implementing a TOM which actually

• delivers your strategy and
• differentiates your organisation from the competition.

StratNavApp.com  is the online collaborative tool for strategy development and execution. It integrates all of the tools mentioned above: Porter's Value Chain, including Process, People and Technology,  McKinsey 7S, and the Enhanced Business Model Canvas. So it can help you develop your Target Operating Model. It is free to use, so go ahead and give it a try.

Do you provide online training for Target Operating Model ?

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How to start building your next-generation operating model

A North American bank took less than two years to shift 30 percent of its in-branch customer traffic to digital channels and dramatically reduce its brick-and-mortar footprint. A European cruise line redesigned and relaunched five core products in nine months to increase digital conversions by three to five times and sales by 150 percent.

These companies have been able to transform because they have developed next-generation operating models that provide the speed, precision, and flexibility to quickly unlock new sources of value and radically reduce costs. The operating model of the future combines digital technologies and process-improvement capabilities in an integrated, sequenced way to drastically improve customer journeys and internal processes.

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Lean management has already played a significant role in putting in place processes, capabilities, and tools to improve how businesses operate. But the digital age has increased both the opportunities for businesses who know how to react and the difficulty of getting it right. For one thing, tasks performed by humans are more complex, whether it’s accessing information in multiple formats from multiple sources or responding to changing market and customer dynamics at ever-increasing speeds. And as an increasing number of tasks become automated or are taken over by cognitive-intelligence capabilities, companies will need to take many of the lessons learned from lean management and update them. Like a sprinter who needs all her muscles to be finely tuned and working in concert to reach top speeds, fast-moving institutions must have a system to continually synchronize their strategies, activities, performance, and health.

But how? Many institutions understand the need to change how they work and have embarked on numerous initiatives, yet few have been able to get beyond isolated success cases or marginal benefits.

We have found that companies that successfully build next-generation operating models do two things well. They focus on putting in place the building blocks that drive change across the organization, and they select a transformation path that suits their situation. These practices don’t apply only to companies that have yet to start their digital transformation. In our experience, even companies that are well along their transformation journey can pivot to putting in place a next-generation model that delivers massive value while significantly reducing costs.

Building blocks of the next-generation operating model

Whatever the path companies choose to develop their next-generation operating model (a subject we return to later), we have found there is a set of building blocks of change that successful leaders put in place. Think of them as the mechanics of change—elements needed to underpin the development of the operating model. Given the dynamic nature of digitization and the fast pace of change, it’s important not to think about perfecting the implementation of each building block before the operating model can function. The process is highly iterative, with elements of each building block tested and adapted to grow along with the model through a constant evolutionary cycle.

Building Block #1: Autonomous and cross-functional teams anchored in customer journeys, products, and services

Successful companies constantly rethink how to bring together the right combination of skills to build products and serve customers. That means reconfiguring organizational boundaries and revisiting the nature of teams themselves, such as creating more fluid structures in which day-to-day work is organized into smaller teams that often cut across business lines and market segments. This approach includes empowering teams to own products, services, or journeys, as well as to run experiments. These organizations are also becoming nimble in how they build skills across their teams by making “anchor hires” for key roles, setting up rotational and “train the trainer” programs, and committing to ongoing (often weekly) capability building and training for key roles.

Many insurers, for example, are dismantling traditional claims and underwriting units and reconstructing them to embed subject-matter experts such as lawyers and nurses into service groups. In the best companies, these teams also work side by side every day with technologists to design the tools and technology to improve efficiency and effectiveness.

Would you like to learn more about our Digital McKinsey Practice ?

Iteration is crucial to making this approach work. Leaders test various team configurations and allow flexibility in response to changing customer needs. One credit-card company, for example, shifted its operating model in IT from alignment around systems to alignment with value streams within the business. Cross-functional teams were pulled together to work on priority journeys and initiatives to deliver on the value stream. These changes dramatically simplified the operating model, lowered direct leadership expenses, and contributed to a 200 percent increase in software-development productivity within three months.

Building Block #2: Flexible and modular architecture, infrastructure, and software delivery

Technology is a core element of any next-generation operating model, and it needs to support a much faster and more flexible deployment of products and services. However, companies often have trouble understanding how to implement these new technologies alongside legacy systems or are hampered by outdated systems that move far too slowly.

To address these issues, leaders are building modular architecture that supports flexible and reusable technologies. Business-process management (BPM) tools and externally facing channels, for example, can be shared across many if not all customer journeys. Leading technology teams collaborate with business leaders to assess which systems need to move faster. This understanding helps institutions decide how to architect their technology—for example, by identifying which systems should be migrated to the cloud to speed up builds and reduce maintenance.

This approach both accelerates development and prioritizes the use of common components, which in turn leads to development efficiency and consistency. Another important reason for building more flexible architecture is that it enables businesses to partner with an external ecosystem of suppliers and partners.

Similarly, leaders are investing heavily in DevOps and combining people, process, and technology changes to automate software testing, security, and delivery processes as well as infrastructure changes.

Building Block #3: A management system that cascades clear strategies and goals through the organization, with tight feedback loops

The best management systems for next-generation operating models are based on principles, tools, and associated behaviors that drive a culture of continuous improvement focused on customer needs. Leading companies embed performance management into the DNA of an organization from top to bottom, and translate top-line goals and priorities into specific metrics and KPIs for employees at all levels. They make visible the skills and processes needed for employees to be successful, put clear criteria in place, and promote the sharing of best practices.

The best institutions are evolving their management systems to create feedback mechanisms within and between the front line, back-office operations, and the product teams that deliver new assets. They are also using their management systems to harvest the surfeit of data generated by day-to-day activities to create user-friendly dashboards and reports, some of them in real time.

Performance management is becoming much more real time, with metrics and goals used daily and weekly to guide decision making. These metrics are supported by joint incentives—not just for individuals—that are tailored to each level of the organization and reinforce behaviors to support customers regardless of organizational boundaries.

One North American insurer struggled to make the predictive analytics models developed by central teams relevant to its front-line claims adjusters, who therefore failed to adopt the new capability. Knowing it was leaving significant value on the table, the company established daily feedback sessions between the central development team and the claims adjusters and embedded analytics specialists into customer-service teams to develop better insights into customer issues. The teams created shared goals based on customer value that were consistent with the organization’s strategy and the daily work of adjusters. Under this new management system, the analytics specialists and claims adjusters shortened cycle times and dramatically improved the effectiveness of assignment. This freed up time for leaders to coach, problem solve, and iterate on the next opportunities for the teams to pursue.

Building Block #4: Agile, customer-centric culture demonstrated at all levels and role modeled from the top

Successful companies prioritize speed and execution over perfection. That requires agility in delivering products to customers and quickly learning from them, as well as willingness to take appropriate risks. The best organizations have already made agility a cornerstone of how they work beyond IT. One credit-card company brought together law and compliance personnel to sit in with marketing teams to intervene early in processes and have daily conversations to identify and resolve issues. Law and compliance functions have also begun to adopt agile methodologies to change their own work. As functions and teams collaborate, they are on track to reduce effective time to market by 90 percent for some core processes while also reducing operational risk.

Critical to success is leading the change from the top and building a new way of working across organizational boundaries. Senior leaders support this transformation as vocal champions, demonstrating agility through their own choices. They reinforce and promote rapid iteration and share success stories. Importantly, they hold themselves accountable for delivering on value quickly, and establish transparency and rigor in their operations. Many manage the change aggressively, often changing performance incentives, mothballing outdated processes, assembling communication campaigns to reinforce culture, and writing informal blogs. At one asset-management company, the top team jettisoned its legacy budgeting process and asked leaders to be aggressive about capturing more value. They established an ongoing process for redistributing funding to the highest-value experiments that were working.

Defining the path for your organization

There is no one way to develop a next-generation operating model. It depends on a company’s existing capabilities, desired speed of transformation, level of executive commitment, and economic pressure. We have seen four paths that leading companies take to drive their transformation, though organizations often move to a different path as their capabilities mature. These paths offer a guide for the first 12 months of a transformation journey.

An innovation outpost is a dedicated unit set up to be entirely separate from the historical culture, decision-making bureaucracy, and technical infrastructure of the main business. It creates inspiring products that illuminate the digital art of the possible (sometimes with questionable economic impact), and hatches new business models in informal settings such as over foosball tables. This path has traditionally been popular as a first move, but is now less common.

One retailer with an ineffective online business chose to open such an outpost. It introduced next-gen analytics, focused on customer experience rather than technology, and drove the mobile interface. Staying largely separate from the main business, the outpost created a buzz around innovation, attracted better talent, and repatriated many of its creations into the broader organization.

This path works well when there is limited alignment among executives on the importance and value of transformation, a need to move very quickly in response to market pressures, and significant legacy culture challenges to overcome. However, it is less effective as the “tip of the spear” for changing the culture or building sustainable capabilities, and often yields a low return on investment.

The next-generation operating model for the digital world

A fenced-off digital factory is a group of groundbreakers that works in partnership with businesses and functions (such as IT infrastructure and security, legal, compliance, and product development) while enjoying a high degree of autonomy. It typically houses specialized capability groups in technologies such as robotics or analytics, and deploys them to support the development of specific journeys in concert with business and functional partners. It both models a new way of working and integrates developed capabilities into the main business. As such, it focuses internally on integrating with and shifting the culture of the organization.

This is the most common starting point, as it balances the need for incubation with that of broader transformation. One European bank built a digital factory in a building on a campus. Each of the lower floors is dedicated to a separate journey, while the top floor is dedicated to creating reusable components and utilities—such as customer identification and verification or esignature—that the other journeys can deploy in a modular way.

Business and functional colleagues come together to work with teams in the factory. Each of these teams develops products and services, moves them quickly from prototype to deployment, and then transfers them into the main business. As part of the management system, the team continues to monitor and iterate the product or service based on economic performance and customer feedback.

This path works well when there is a broad-based belief in and commitment to transformation, and a need to incubate a critical mass in internal capabilities. Many organizations have used this approach to attract digital talent, combat large-project inertia within IT groups, and speed transformation. Culture change is slower within the rest of the organization, but it happens over time as business and functional specialists partner with the factory for each journey. It can, however, also create a “have and have not” split within the business if not managed appropriately, and can require significant initial C-suite support and funding. (For more on the digital factory, see “Scaling a transformation culture through a digital factory,” forthcoming on McKinsey.com.)

A business-unit accelerator is a scaled-down digital factory that incubates a transformation inside a business unit to tackle local customer journeys and business functions. The business unit builds its own skills, such as process-redesign and robotics capabilities, and has control over specific capabilities and investments. This means it doesn’t need central funding or organization-wide agreement on a host of issues to get going.

One North American bank shifted to a business-unit accelerator model after the first few years of its transformation. It found that this move gave it more control and a closer connection to business strategy and the customer—benefits that outweighed centralized scale and capability building. The bank invested heavily in talent and tools with the aim of building a reputation among customers as a digital business that happens to produce banking products and experiences.

This path works well for organizations with large business units that operate independently. It’s also a good starting point when one business unit is particularly far ahead in its thinking and belief, or where digital services have disproportionate value-creation potential. However, companies that choose this model must mitigate several risks. When business units choose their own digital tools and processes, for instance, complexity and costs increase for IT teams managing maintenance, licensing, and enterprise architecture. This model can also make it harder to build and share capabilities across the organization since the skills developed are specific to the business unit.

A full-scale evolution is a comprehensive transformation in which the enterprise reorganizes itself almost entirely around major journeys. This is the natural operating model for many digital natives, as technology, digital services, and product delivery are basically inextricable. Companies focus on specific digital initiatives that deliver on business priorities, deploying specialized talent and cross-functional teams to support each one. The model is highly attuned to the customer, and rapidly develops, tests, and iterates on new products or services. Team members may be managed through a center of excellence or by business-unit leaders. This path is the aspiration for many incumbents, especially those that deliver services rather than physical products.

In one European bank undergoing a full-scale evolution, agile has become the default way for people to work, with colleagues from multiple functions including IT sitting sit side by side. Results are measured by value streams—the sources of the value being generated—and journeys, flowing from the customer need back to the performance of the bank. Prioritization and resourcing take the form of active daily and weekly conversations about the next most important thing to work on. This approach is initially almost like shock treatment, but it offers important benefits, allowing companies to shake up the traditional management system and achieve culture change quickly and at scale. The organization builds agile skills broadly, identifies high and low performers, and pinpoints valuable and missing skills.

This path works well when there is a broad and top-down organizational mandate for change. Given the time it takes to move the needle, there should be no pressing near-term economic imperative. Companies that choose this model need to mitigate several risks, such as ensuring that best practices are shared across the operating model rather than being confined to individual teams. In addition, organizations must share any scarce resources across business functions to drive impact, and ensure coordination with IT as it seeks to keep up with the technical architecture.

No-regret steps leaders should take

Every organization’s transformation journey will be different. However, a simple set of immediate, no-regret steps can help leaders shape their first set of priority decisions and provide clarity on the way forward. These often include:

• Creating clarity on enterprise strategy and on where digital services can quickly enable sustainable value creation. (For more on this, see “ The next-generation operating model for the digital world .”)
• Challenging the board to be explicit about the importance of the transformation and its support for investment; or, as a board, making this decision and challenging the executive team for a bold vision.
• Building top-team excitement and belief in change through visits to leading digital natives or incumbents pursuing their own transformation paths.
• Assessing the maturity of the management system using benchmarking against other organizations to identify strengths to build on and risks to mitigate.
• Investing in targeted capability building, especially for the top 50 leaders in the organization. Exploring core concepts such as digitization, agile, design thinking, and advanced analytics can create a shared vocabulary and spur action.
• Making an honest objective assessment of talent and capabilities within the organization, benchmarked against peers and cross-sector leaders. Disruption often comes from outside an industry rather than within.
• Surveying the cross-sector landscape for ideas and inspiration. It’s easier than ever to learn from others, and a rapid inventory of ideas can shed light on potential execution challenges to resolve.
• Assessing the level of change that the organization can realistically absorb in the near and long term given its other priorities.

Most companies recognize the need for a next-generation operating model to drive their business forward in the digital age. But how well they actually develop it makes all the difference between reinventing the business and just trying to do so.

Joao Dias is a partner in McKinsey’s Cologne office; David Hamilton is an associate partner in the Detroit office; Christopher Paquette is a partner in the Chicago office, and Rohit Sood is a partner in the Toronto office.

The authors would like to thank Somesh Khanna, David Wilkes, Alex Singla, Rohit Bhapkar, Zachary Surak, Marta Rohr, and Andy Eichfeld for their gracious support and expertise in creating this article.

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When You Should Design a New Target Operating Model

ON THE MARK (OTM) ran Executive Briefings on both sides of the Atlantic on the theme of When to Know It’s Time to Modernise Your Operating Model – Real Stories from the Frontline. These were informal gatherings where senior executives had an opportunity to raise and discuss front-of-mind issues about their current or planned business operating models with both their peers and organization design experts from OTM, whilst enjoying a delicious breakfast. The following are main themes to have arisen throughout the events.

Having banned any mention of ‘Brexit’ or ‘The Wall’, the issues that senior executives brought to the table seemed to cluster around three big themes. However, before we explore these in a little more detail let’s remind ourselves of the definition of ‘Operating Model’ that we used to frame the conversations.

In simple terms, an Operating Model is an organization’s operational blueprint of how it brings value to its customers.

An Operating Model is an organization’s operational blueprint of how it brings value to its customers.

A company’s business model, on the other hand, defines a strategic intent about how it will make money. Its operating model defines how it organizes around the work necessary to deliver its strategic intent.

Clarity around what we mean by “operating model” provided a very clear focus to conversations about what was ‘keeping people awake at night’ and, as mentioned above, three big themes emerged. That is not to say that these themes covered everything that was discussed, but they did capture much as what was raised.

Times That Call for a New Target Operating Model

Agile is a term that is now widely written about, repeatedly searched on Google, championed by many, and rigorously researched.  We have written extensively on this topic and in doing so have tried to help organizations and their leaders understand the differences between the Agile Methodology (an iterative development methodology with its roots in software development) and an agile organization (an outcome of an organization design which is responsive and flexible), recognizing that you can have one without the other.

You can find deeper information on Agile in the articles below:

• What is the Manager’s Role in Agile?
• How to Create an Agile Organization
• The Early History of Agile

No one disagrees that a move to become more responsive, flexible and agile is clearly a case for designing a new target operating model. In the limited time available in the executive briefing events, we discussed the pitfalls to avoid when deciding to implement Agile methodologies into one part of a company’s structure, whilst hoping to leave the rest of the structure untouched.

In fact, changing the way one part of the work is done impacts on all the remaining parts of the structure. It requires changes in roles, including management roles and jobs. It changes management mechanisms, particularly planning, budgeting and objective setting. And finally, implementing Agile methodologies changes the way people are rewarded and recognized, fundamentally changing the social system (mindset and culture).

It’s clear that regardless of whether the intent is to implement Agile methodologies (even in a small way) or to become more agile, both require a modernization of the operating model. This happens through a holistic redesign, as a few tweaks to the existing operating model is not the answer.

2. An unclear structure

Although the term ‘the role of the Centre’ was probably never explicitly voiced and is probably a phrase of my own making, it does sum up the kernel of a series of interesting and wide-ranging discussions.  Phrases that emerged from the executive briefing discussion about centralizing or localizing included:

• Roles and responsibilities are unclear, particularly in relation to decision-making
• As we have grown, we have lost track of what work gets done where
• We seem to have more ways of doing things than we have people
• Everything seems to have to go to Head Office for approval

The above are all indicators of a lack of clarity in the structure about both how work gets done, and where work gets done.

Although the topic was wide-ranging, we also had some interesting discussion around the concepts of standardization and integration of work in the target operating model design.

Standardization involves the decisions that are made during the design of the Operating Model about the extent to which work will be standardized across the whole enterprise. That is to say which work will be done in the same way everywhere versus which work can be varied ‘locally’.

Integration involves deciding how, or even where, that work will be done. Integration of the work could be achieved by bringing all the work into ‘the Centre’ and then passing it back out, or it could be achieved by ‘the Centre’ producing Standard Operating Procedures (SOPs) for all to follow locally then potentially policing, checking or auditing the work. More local responsiveness and flexibility can be achieved by designing the role of ‘the Centre’ as being to produce frameworks and guidelines to be followed and implemented locally.

Again, there is no doubt in our minds that whether the intent is to ‘centralize’, even in a small way, or to ‘localize’, both required a modernization of the operating model through a holistic redesign, not just a few tweaks to the existing structure.

3. Mergers & Acquisitions

Although the topic of Mergers & Acquisitions never goes away, there seems to be something in the air at the moment. Whether it is lack of confidence or market instability is unclear, but consolidation and M&As do appear to be demanding an increasing share of airtime.

M&A is not a new topic, but the fears of perceived benefits not being realized and of value being eroded through poor integration of the acquired/merging entities remains at the forefront of the minds of senior leaders who are smart enough to know that M&A is not just a case of bolting two organization charts together and hoping that costs fall out of the sides.

The discussion in our executive briefings was not about whether a merger or an acquisition was a candidate for a need to modernize the operating model, this was just taken as read.  The key discussion was about how the redesign work gets phased, and ensuring that sufficient focus is given to ‘prediction of fit’ at the Due Diligence phase. Without this the scale and the scope of the Business Integration Strategy will always be an unknown.

It’s Time to Modernize Your Operating Model

In summary, many changes in operating model were discussed and in the cases above, the ‘Tipping Point’ has clearly being passed. There are sufficient indicators telling us that It’s Time to Modernize Your Operating Model. Sometimes it is not always clear and we are trading off the risk of not taking a holistic approach to changes in the operating model and creating further problems or starting a redesign when it is not required and wasting valuable time and resources.

If in doubt, always undertake a quick Fit for Purpose review looking at all the points of the OTM Applied Star Model to assess the degree of fit between your strategic intent and your current operating model. This will quickly tell you if you have passed the Tipping Point and that It’s Time to Modernize Your Operating Model.

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Peter Turgoose is a Senior Consultant at  ON THE MARK.

OTM is the leading global boutique organization design consultancy with offices in the USA and UK. With over 450 successful redesigns and operating model modernizations completed, OTM is owner of the industry’s most integrated, comprehensive and holistic organization design solution. OTM enables its clients to realize their future ambitions.

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Investigation of derailment and wheel wear in a BEML metro coach under different operating conditions

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• Amit Kumar Das 2 ,
• Sanjay R. Singh 3 &
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Derailment and wheel wear in railways are of major concern which involve complex operating and conflicting dynamics parameters. Metro trains undergoes through sharp turns, steep gradients, frequent high acceleration and decelerations, and overloading during peak hours which heighten the multivariate ate aspect of the problems. In this work, an attempt has been made to investigate the derailment coefficient and wheel wear of all the eight wheels of a BEML (Bharat Earth Movers Limited) metro coach under different operating scenarios. Various running conditions are generated through response surface methodology (RSM) approach by varying vehicle speed, axle load and friction at the rail-wheel contact. For this, a multibody vehicle dynamics model replicating BEML metro coach is built in commercial software Simpack. The developed multibody dynamics model is validated from the field trials conducted in Kolkata, India, by matching vehicle motion and ride comfort indices along the track. Validated multibody dynamics model is then used for simulating different running scenarios according to the central composite design (CCD) scheme. Data generated from the multibody dynamics model under different operating scenarios are taken as inputs and outputs target data for a deep neural network (DNN) model. Results of the RSM approach indicate that lower friction at the rail-wheel contact is desirable for lower wear indices and smaller derailment coefficients. Operating speed, in the speed range considered, has little influence on wear index and derailment coefficient. Results of the developed DNN model demonstrate that the mean absolute percentage error (MAPE) value is lower than 4% for all the eight wheels in both training and test.

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Acknowledgements

The authors thank BEML Limited and Kolkata Metro Rail Corporation staff for their valuable suggestions, support, and guidance during the instrumented field trials. We are grateful to Ministry of Education, India (formerly called MHRD) and BEML Limited for funding this under Uchhatar Avishkar Yojana (UAY) project.

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Department of Mechanical Engineering, Indian Institute of Technology Kharagpur, Kharagpur, West Bengal, 729302, India

Sudhir Kumar Singh & Vikranth Racherla

Indian Institute of Management, Mumbai, Maharashtra, 400087, India

Amit Kumar Das

BEML Limited, Bangalore, Karnataka, 560027, India

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See Fig. 14 , Tables 6 , 7 , 8 and 9 .

Details of the OEM data used for building the multibody dynamics model in Simpack are given below. These data include mass and inertia of coach, bogie, and wheelset. Modelling parameters of air spring. Characteristics of conical rubber springs along with the characteristics of lateral and vertical dampers (see Fig. 

Characteristics of a conical rubber springs (primary springs) and b vertical and lateral dampers, used in the Simpack model

14 ). Physical parameters of the air springs are shown in Table 6 Mass, inertia and centre of gravity (CG) are shown in Table 7 ANOVA tables for maximum derailment coefficient and average wear index for left wheel of front wheelset of front bogie are given in Tables 8 and 9 , respectively.

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Singh, S.K., Das, A.K., Singh, S.R. et al. Investigation of derailment and wheel wear in a BEML metro coach under different operating conditions. J Braz. Soc. Mech. Sci. Eng. 46 , 596 (2024). https://doi.org/10.1007/s40430-024-05156-7

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Received : 07 June 2023

Accepted : 20 August 2024

Published : 09 September 2024

DOI : https://doi.org/10.1007/s40430-024-05156-7

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