Knowledge Center: Article
How to develop a world-class operating model1/1/2016 TA Mitchell
Pace and agility to develop and deploy strategic capabilities are necessities to stay ahead in the current age. Consequently, the rate of adaptation has become the new battleground for organizations. The speed and effectiveness with which organizations cannot only identify but implement competitively advantaged products and delivery systems is the new source of value creation. Change and adaptation have moved from nice-to-haves to critical capabilities for organizational survival.
Yet we know that most organizations fail in serious transformation efforts. Many research efforts have highlighted the same depressing truths. Only 30% of transformational efforts achieve their intended outcomes. Organizations are simply more “sticky” than we would wish. It is tremendously difficult to shift an organization to a new pattern of performance.
Some organizations do succeed. Indeed, it is the ability of these organizations to out-adapt their competitors that leads to competitive advantage. The question for any organization considering a transformational effort is not really how many succeed and how many fail but ‘how do we become one of the minority that succeed?’ The answer to that question is critical for any organization. Articulating that answer in the form of a map of the landscape is not particularly difficult. The diagram below outlines our approach to the anatomy of change. It articulates a set of process requirements and a set of outcomes, which are built on best practices in the management of large-scale change.
However, any such generic map tends to understate the intractable difficulty of transformation. The two particular points of pain that this article will examine are best thought of as the ‘What’ and the ‘How’ of change: the ‘What’ being the articulation of the desired future state or, in our language, the Target Operating Model (TOM); and the ‘How’ being the mechanisms by which the organization can channel and focus its behavior to realize the Target Operating Model.
What is a Target Operating Model?
What are the benefits of a Target Operating Model?
Developing a Target Operating Model is all about making the tough choices and getting alignment around those choices. Organizations have a tendency to drown in a multiplicity of initiatives. Senior leaders often define their worth by launching powerful initiatives to change today into tomorrow. While this is laudable, the difficulty it produces is one of multiple, layered, and redundant streams of activity. Developing a simple, yet consistent operating model will enable, indeed force, the executive team members to reach alignment around the target state they are aiming for.
Take, for instance, a business-to-business financial services company with which we have worked closely. It was primarily a domestic player that had achieved significant market share. To grow, it was looking to expand into its top three targeted international markets. The company’s aim was to achieve a 15% market share in each of those markets over a three-year period. A fundamental choice leaders had was whether or not to replicate its domestic model in each of the new markets or to leverage the domestic central support function capabilities and infrastructure. It chose the latter. This had implications for the products the company was able to offer, the people and capital assets that it needed to invest in, the technology and processes that it needed to apply, etc. – in effect, their TOM.
As leaders developed the content of the TOM, they made some critical decisions:
- Rather than develop specific customer and service models for each market, they would leverage their domestic product range as a consistent platform and only tailor it for local markets where absolutely necessary.
- They would invest heavily in developing local capability building, particularly in the marketing and sales channels.
- They would invest in the development of a common data set and data mining capabilities in order to leverage customer trends across their multiple geographies.
Our client achieved its aspirations. The company first developed the Italian market to enhance its capabilities and prepared the support services back home to deliver to this initial market. In doing so, it was able to build capabilities ready to enter the Spanish and French markets simultaneously. It achieved a top quartile industry standard for cost performance and its customer advocacy rates were top decile in its chosen segments.
Developing a TOM in and of itself does not lead to realizing change. It is a critical enabler and a crucial first step for the executive team, but is not the whole story.
The three E's of realizing the TOM
Bringing the Target Operating Model to Life
Many smokers want to stop smoking yet few do. The challenge is in behavior change. Many high-spirited commitments to develop personal fitness and run a marathon end up in only a few visits to the gym. The key is in behavior change. Many well developed Target Operating Models promise a rewarding future and yet few deliver. The key is in behavior change. We believe that there are three arenas leaders can focus on which will, if taken together, dramatically increase the odds of a Target Operating Model delivering on its promise.
The Target Operating Model needs not only to be a well-crafted and internally consistent document but it also needs to come alive in the behavior of the senior leaders. The executive team needs to be able to set and communicate a clear and compelling vision of where the organization is going in its language and actions. It doesn’t matter whether the words vision, story, narrative, aspiration or Target Operating Model are used, the key is that the executive team genuinely shares and communicates a common view of the future.
One of our clients in support services recently spent about $53 million trying to deliver a software solution and a business capability around a shared services model for HR, payroll, finance and procurement. Two years in the firm had little to show for its efforts. Leaders were at the point of deciding whether to press ahead with the program when several opportunities to provide outsourced HR, Finance and payroll services came to market. The executive team debated the opportunity and used the market opportunity to mobilize resources and build internal capability. This new market was extremely attractive and many of the other factors for success were in place. It allowed the executive team to have a shared vision about its operating model and it aligned the behaviors and decisions aligned with the target state.
A consistently internalized and shared vision is achieved through the use of a number of different interventions depending on the context. One key lever that is useful is to steer away from providing the leadership with a straw man TOM and instead outline a handful of options that reflect the strategic statements and aspirations but encourage an active discussion, debate and constructive dialogue. A TOM is simply not of value unless it makes the hard choices explicit. Of course every organization wants increased revenue, decreased cost, reduced risk and enhanced cash. The key question is ‘what trade-offs are we prepared to make’? The TOM needs to tackle this question head on. The development of the TOM is essentially a process of executive dialogue. Facilitation of these sessions can be very helpful. Facilitators can combine the use of the logical fact base and deep behavioral understanding to enable the executive team to explore alternatives and gain alignment.
A second useful intervention, in addition to facilitation, is executive coaching. Almost any Target Operating Model will imply the need for senior leaders to change their own personal behavior. What made these leaders successful so far is unlikely to be perfectly attuned to the TOM. Skilled executive coaches can work with key individuals and teams to understand the personal implications of the impending changes, explore the blockers and enablers for personal change, expand their insight and self-awareness about how they might need to personally adapt and support their personal development to maximize success for the organization as well as for themselves.
How do you know it’s working? Here are two clues to look for:
- Executives have fewer operational and steering committee meetings as the direction and purpose for the organization has been set and the leaders are deeply aligned as to what the priorities are. Put simply, the weight and drag of the organization is reduced.
- Fewer issues get to the executive level for resolution as the organization has a clear framework for decision making, and decisions can consistently be made at lower levels of the organization and more quickly and effectively.
A Target Operating Model will always call for many people to change quite deeply engrained patterns of behavior. Engagement is one of the most powerful ways to help them do so. Significant transformation will just not happen without it. Think of engagement as the fuel of the transformation engine.
However, engagement is tricky to achieve in practice. It is a body contact sport that requires senior leaders to inspire their colleagues through their words and actions. Easily said, tough to deliver on. Too often senior executives, excited and enthused by the work they have done on developing a TOM, resort to “telling” the organization the answer without creating space for real engagement and dialogue.
So powerful is the impact of asking people to set their own targets that it can mean the difference between success and failure in delivering a strategy. Note the famous experiment where researchers ran a lottery with two groups. Half were given a ticket with numbers on it and the other half were asked to choose their own number and write it on a blank ticket. Before drawing winning numbers, researchers offered to buy back the tickets. Both groups had exactly the same odds of winning as the lottery was random. As a result one would have thought that there would be little or no difference in the price they had to pay. However, researchers had to pay at least five times more to those who had written their own number. This has been repeated in several countries with different demographic groups and different pay-outs but the results have remained similar. The power in choosing for yourself is evident1.
This is not rocket science. Similar mechanisms can be used to achieve engagement as with executive alignment. Facilitated workshops, open dialogue sessions, workout sessions, quality improvement mechanisms, feedback sessions and focus groups. We are not lacking the technologies to deliver on engagement. Executive teams need to commit to engagement as a fundamental way of doing business. If they do, it becomes a way of both extracting and developing the talent of their people.1
How do you know it’s working? Here are two things that should be evident:
- Employees talk about what they do in the context of the bigger picture, and all employees have a similar story regardless of division.
- Fewer unauthorized tactical projects spring up in the organizational silos.
Transformation efforts often fail for very mundane reasons: The information systems don’t support the new strategy. The performance objectives and incentive systems are out of sync with the new operating model. The physical locations are not conducive to the new organizing model. While some of these teething troubles are inevitable they must not be allowed to linger.
Ensuring that the systems, processes, objectives and rewards are aligned to support the transformation is central to ensuring that organizational members are enabled to deliver the TOM.
A global bank headquartered in the UK is particularly strong in ensuring the objectives and accountabilities at the top are cascaded throughout the organization to drive both accountability for their piece of the plan and joined-up behaviors to deliver the whole plan. Each employee can see how his or her piece fits into the whole both at the team and division level.
It is the organization’s responsibility to make sure the existing policies and frameworks enable reaching the target state. For example, one client changed its six-month recruitment policy to six weeks to reflect its need for business agility. Another client changed its reward systems so that employees were rewarded for selling bundled rather than individual products. This translated into significant shifts in behavior where employees were incentivized to meet all of their customer needs.
So, how do we know enablement actions are having the desired impact? Two indicators are:
- Policies and processes reinforce rather than contradict the strategic objectives.
- Success can be measured and made tangible, and people are rewarded for that success.
The ‘What’ and the ‘How’ matter equally. Getting the ‘What’ wrong is a sure and quick route to failure. The Target Operating Model needs to be firmly grounded in robust, analytical and fact-based decision making. It needs to make the difficult choices evident and create deep alignment in the executive team. Getting this right will help propel an organization to a new level of competitive advantage.
However, the ‘What’ alone is not enough. Nothing changes unless behavior changes.
The organization needs to live and breathe the TOM and doing this is most consistently achieved by emphasizing executive sponsorship, engagement and enablement.
See Ellen J. Langer, “The Illusion of Control” in Daniel Kahneman, Paul Slovic and Amos Tversky, eds., Judgement under Uncertainty: Heuristics and Biases, Cambridge University Press, 1982