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There are many, often highly technical and wordy, descriptions of Target Operating Models and what needs to be done to define and realise them. The article below is my take on this and hopefully provides a simple, easy to understand explanation on the key factors to consider when embarking on any transformational journey.
An organisation’s Target Operating Model (TOM) is the operational manifestation of its corporate vision and strategy – what it wants to do, how it wants to do it, where, when, who with, who to etc. Realisation of its TOM will enable an organisation to achieve its corporate objectives and goals.
However, a TOM is a fixed description of an organisation’s future operating state based on current knowledge and understanding and, as such, will need to be periodically reviewed to ensure it remains valid and continues to be aligned with the overall corporate strategy. Divisional strategies, i.e. operational, customer, product, IT, marketing, sales etc. should also be reviewed and revised as necessary.
For example, with a 5-year planning horizon ‘TOM drift’ may occur as a result of changing internal and external drivers and influences. The first 12 months or so are likely to be confidently ‘plannable’ (green box in Figure 1), however, the further into the future, the greater the possible impact on the TOM due to changes in regulation, technology, competition, economic factors etc.
There are three key objectives to developing a TOM and pursuing its cost effective realisation:
- To transform an organisation’s current operating state i.e. how it works now, which is described by its Current Operating Model (COM), to that described by its TOM
- To develop an organisation’s change capability so that it can react and adapt to change effectively and efficiently, without detriment to customers, quality of service, profitability, security, competitiveness etc
- To develop an organisation’s strategic planning capability so its TOM, divisional strategies and annual plans can be reviewed regularly to ensure they continue to be aligned and support the organisation’s strategy and direction
The purpose of these three objectives is for an organisation to get to a stage where the amount of change required to move its current operating state to its target operating state is minimised, as:
“Target Operating Model = Current Operating Model + change required”
An organisation that has already successfully developed a TOM and undergone the transformation required should be in a good position to accommodate any change needed to realise its updated TOM. In so doing it will enable the organisation to continue to operate optimally and continue to achieve its corporate objectives and goals.
If an organisation has not already undergone such a transformational journey, the time needed to develop and realise its TOM may be substantial, however, this should not necessarily be seen as something new and costly. Simplistically, all a ‘TOM initiative’ should do is put an overarching, aligned, prioritised and cohesive structure around the activities the organisation is probably (or should be) doing anyway.
To aid the transformational journey, a number of Intermediate Operating Models (IOMs) may be developed to provide natural checkpoints and give further opportunity to review the TOM. The IOMs can be defined as operational states following significant transformational initiatives e.g. the implementation of a new system, acquisition of another company or structural organisational change.
To develop and realise the TOM a strategic ‘roadmap of change’ needs to be defined. Although a TOM provides the description of an organisation’s target operating state, to confidently determine the correct direction and roadmap the start point also needs to be understood – this is the organisation’s Current Operating Model (COM). Understanding the COM is a critical factor in maximising an organisation’s chance of successfully realising its TOM in a cost-effective way.
Defining a Strategic Roadmap for Change
With an organisation having developed and agreed its TOM, it will need to develop a strategic roadmap for change that sets out the steps to transform the current operational state to the target operational state (as described by the TOM). Many aspects of an organisation may need to change including its business model, the shape and structure of its organisation, locations, the number and type of people employed, processes and procedures, systems and applications used, and its underlying technology and infrastructure.
However, organisations often have little interest in understanding their COM and see its definition as a costly activity to undertake and broadly irrelevant if things are soon expected to change – both these views are misguided. Although projects often have their ‘as-is’ and ‘to-be’ states defined these are often done in relative isolation of the holistic operation resulting in a partial and fragmented view of how things actually work.
The potential costs of not understanding an organisation’s COM, particularly before embarking on any significant transformation initiative, are illustrated in Figure 2 where COM* is the perceived (and incorrect) Current Operating Model. The strategic roadmap that is defined, based on this incorrect starting point, is shown by the grey path to the TOM. At some stage along this incorrectly defined route (point A ) it will be realised that the path is wrong. Time, effort and cost will need to be incurred to understand what is wrong and what needs to be done to get back on track.
Getting back on track will involve moving from point A to point B which is on the correct path (a sideways move), as well as taking remedial action to address any incorrect change already delivered (denoted by the red cross hatched area).
The later it is realised that the start point was incorrect, the costlier it will be to address. Alternatively, if not addressed, the organisation is likely to find itself with a compromised operating model with numerous workarounds and, over time, an increasingly ‘clunky’ and inefficient operation that just gets harder and costlier to support and change.
TOM’s – Linking Corporate Strategy to the Current Operating Model
The diagram below shows how the Target Operating Model links strategic activity to the actual business operation. From a top down view, starting with the ‘External’ layer and following the purple arrows, each layer defines, shapes and/or influences the layer below. From a bottom up view, starting with the ‘Underlying infrastructure’ layer and following the yellow arrows, each layer supports or enables the layer above.
For an organisation to operate effectively and efficiently, the purpose and function of each layer needs to be understood, as does the interaction between them. This understanding enables all the layers throughout an organisation to be aligned, resulting in the entire organisation ‘pulling in the same direction’, and working together to realise its corporate goals and objectives.
- External: Entities and factors external to an organisation such as customers, competitors, shareholders, investors, the economic climate and regulatory environment etc.
- Corporate vision & goals: The external factors influence an organisation’s goals and Realisation of these goals satisfies the external entities (customers, shareholders etc.) and ensures the organisation remains profitable and competitive.
- Corporate strategy: The corporate strategy specifies the direction an organisation needs to pursue to achieve its objectives, and allows divisional strategies to be defined.
- Divisional strategies: Each division within an organisation has its own strategy which is aligned to the corporate strategy. Successful execution of the divisional strategies will result in the corporate strategy being fulfilled.
- Target Operating Model (TOM): An organisation’s TOM describes the target operational state required to deliver its divisional and corporate strategies.
Layers 2 – 5 constitute an organisation’s strategy function from which strategic change can be formulated. Strategic change is executed by an organisation’s change function which will deliver the change into the organisation’s Current Operating Model, layers 6 – 10.
- Business model: An organisation’s business model describes its primary business function.
- Organisational structure & people: The business model influences the shape of an organisation, and the roles required for it to operate.
- Processes: The business model and organisational structure shape the processes required to enable an organisation to operate. Processes should have access to the necessary data and be performed by appropriately skilled resources, at the right time and to the specified standards (quality and timeliness).
- Applications & data: Applications and data should be secure and support the execution of all processes performed across an organisation.
- Underlying infrastructure: An organisation’s underlying infrastructure should be resilient and secure, and ensure that all applications and data are available when required, through the channels and locations required.
So, considering all of the above, I hope it’s clear that defining a Target Operating Model is only part of the picture. Yes, it’s important to have a clear and agreed understanding of an organisation’s direction, however, to make the journey to the TOM as simple and as painless as possible, the roadmap has to be correct, which requires the Current Operating Model to be understood. This will enable the most direct route to be planned and minimise unnecessary time, effort and cost being expended, and also increase the chances of keeping the business ‘on-side’ and minimise the prospect of ‘change fatigue’.
With the COM understood an organisation’s change capability will be greatly enhanced as any project can refer to a single source of ‘operational truth’. This understanding is increasingly important as technology continues to enable greater connectedness between businesses and customers … blockchain anyone?
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