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. There can be many reasons for this; they couldn’t raise the budget, 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 share some insights from my experience around this discipline and try to answer to very important questions:
- What is the Operating Model?
- What is a Target Operating Model?
I will also describe how an organisation can really reap the benefits of a successful business transformation programme, or project, that is designed to deliver a Target Operating Model.
WHAT IS THE OPERATING MODEL?
The operating model mustn’t be confused with the business model, even though this is often the case in many organisations.
The business model delves into an organisation’s customers and product offerings (or value propositions) and how to effectively commercialise 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 to service customers. The ‘Business Model Canvas’ by Alexander Osterwalder and Yves Pigneur is a great tool. It helps organisations, 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 life cycle 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 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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