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:
- Strategy
- Roadmap
- Design
- Implement
- Monitor
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.
Roadmap
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.
Design
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
Implement
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.
Monitor
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.
Conclusion
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.
