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:
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.
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.
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.
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.
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:
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.
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.
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.
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.
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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