Explainer
Operating model is one of those phrases everyone in a transformation uses and few define. Here is what it means, what a good one contains, how a target operating model differs from the current one and a free template you can use to write yours.
By Christopher Fagan, Managing Partner, PEF Consulting Partners
An operating model is the description of how an organisation actually delivers what it exists to deliver: who does what, in which processes, with which systems and data, under which decision rights and measures, and where. A strategy says what the business wants to be; the operating model says how it will run in order to get there. If the strategy is the destination, the operating model is the vehicle, and most transformations fail because they change the destination and keep the vehicle.
Most workable operating models cover the same six things. Processes: the end to end value chains and the supporting processes, with the handoffs made explicit. Organisation: the structure, roles, spans and the capabilities each role needs. Governance: who decides what, with what authority, and how performance is reviewed. Systems and data: the platforms that run each process and the data that flows between them, including who owns it. Locations and sourcing: what is done in house, by partners or by vendors, and where. Measures: the handful of numbers that tell you the model is working. A model that covers four of the six will fail at the two it ignored.
The current operating model is how things work today, which is often not how the organisation chart says they work. The target operating model, or TOM, is how they will work after the change, specific enough to build to and measure against. The difference between them is the transformation. The most common mistake is to write a target operating model as a set of principles, such as customer centric, data driven and agile, which cannot be built, tested or disagreed with. A target operating model has to say which team owns which process on which system with which measure, or it is a values statement.
The target operating model template below follows the six parts. Fill in the current state first, honestly, including the workarounds. Then write the target state for each part, with a named owner and a date. The third column, the gap, is the list of changes the programme has to deliver, and it should feed directly into the plan, the business case and the benefits tracker. Keep it to a few pages: a TOM that runs to eighty slides is a sign that the hard choices have been deferred to the slides.
1. Purpose and scope. What the model covers, which outcomes it serves and what is out of scope. 2. Processes. For each end to end process: current state, target state, owner, systems, measures, gap. 3. Organisation and roles. Structure, key roles, capabilities, spans, current and target headcount by team. 4. Governance and decision rights. Decisions, who makes them, who is consulted, review forums and cadence. 5. Systems and data. Platform per process, data owners, integrations, what is retired. 6. Locations and sourcing. In house, partner or vendor for each capability, and where it sits. 7. Measures. The five to ten numbers that prove the model works, with baselines and targets. 8. Transition. The sequence of changes from current to target, with dates, owners and dependencies. 9. Risks and assumptions. What has to be true for the model to work. You can download this as a Word document from our free templates page.
Related reading: operating model design, target operating model consultancy, target operating model design, business transformation consultancy, the downloadable target operating model template.
An operating model describes how an organisation actually delivers its strategy: the processes, people, structure, technology, data, locations and governance that turn plans into results.
A business model describes how the organisation creates and captures value: customers, offer, revenue and cost structure. An operating model describes how it organises itself to deliver that: processes, people, systems, governance, sourcing and measures. The business model is the why and what; the operating model is the how.
The operating model an organisation intends to have after a change, written specifically enough to build towards and measure against. It is the anchor for a transformation programme: every workstream should be able to point to the part of the TOM it delivers.
Six to twelve weeks for a function, three to six months for an enterprise, depending on how much of the current state is undocumented and how many people need to agree the target. The design is rarely the slow part; the decisions are.
The executive accountable for the outcomes it serves, usually a chief operating officer or divisional leader, with a design authority that keeps the programme honest when individual workstreams want to bend it. It should not be owned by the programme office or by a vendor.
If you are designing or rebuilding an operating model and want someone who has built them for programmes from £1m to £13bn, a short confidential conversation is a good place to start.