07/26/2024 | News release | Distributed by Public on 07/26/2024 00:25
In brief
Most digital transformation effortsfail to reach the set objectives. In banking, only 30% of banksstate that the transformation was a success.
Across industries, the success rate isn't much better. McKinsey found that although nine out of ten organizationsgo on a transformation journey, they manage to capture less than a third of the expected value. Even the top performers in digital transformationscapture only around half of the potential revenue benefits, according to the same report.
Of course, the root causes behind a failed or less-than-fruitful digital transformation journeydiffer from one organization to another. That said, the lack of a target operating model(TOM) - or the presence of an unrealistic one - as the organization goes into digital transformation is a guaranteed recipe for disaster.
The same way you can't start booking a flight without specifying your destination, you can't set out on a digital transformation journey without defining the target state- i.e., your destination. Here's how a target operating modelwill help you determine your destination - and how to flesh it out.
A target operating modeldescribes how your organization shouldoperate in an ideal setting to deliver value to your customers. It represents the desired future statefor all the processesthat make up your operations, in specific areas, or overall. The target operating modelcan be defined for the business as a whole or a part of it (e.g., customer service).
Together with the current operating model (COM), the target operating model is a part of the organization's operating model. The two are inextricably linked: think of the COM as your departure point (your operations as they are now) and TOM as your destination (the vision of your operations in the ideal future).
Getting from COM to TOM is, ultimately, what business transformationis about.
Keep in mind that the target operating modelisn't the same as the business model:
The target operating modelis also different from the business strategy:
While mapping out a TOM can be a resource-intensive undertaking, it's worth the effort. Here are the four main benefits you stand to reap from target operating models.
The target operating modelis the guiding star for any business transformation. It provides a comprehensive overview of everything that needs to be changed in order to deliver greater value and increase efficiency. This will help you avoid the trap of seeing the solution in a single action, such as introducing a new platform solution without transforming the underlying business processes.
Outlining the target operating modelwill do more than allow you to set the relevant strategic objectivesto power qualitative change across a function or the whole organization. It will help you identify when you've reached your goals. To that end, however, you need to describe the target state using quantifiable key performance indicators.
Beyond merely establishing the right goals, a target operating modelserves as a strategic blueprintfor the whole organization - and all key stakeholdersacross the value chain. This is crucial to secure the buy-in at all levels andensure efforts across teams and departments remain aligned with the corporate strategy.
Once you take stock of your current operating model and outline the target state, you will have a more comprehensive, holistic overview of your business processes. This view, in turn, is a prerequisite to pinpointing inefficiencies themselves and their root causes, as well as identifying what could be better - and how to make it so.
Achieving such an overview of your business processes is impossible without clear messaging and communication. So, engaging key stakeholders from the ground level to top management in outlining the path to operational excellence is a must.
Target operating modelscome in many shapes and forms; they can be as short as one page or as long as 10 or even 50 pages. On top of that, there's no one-size-fits-all framework for outlining a target operating model.
That said, here are four TOM frameworks you may want to consider.
Created by Ashridge Executive Education, POLISM is an acronym that stands for:
POLISM is one of the most commonly used TOM frameworks. For example, the Operating Model Canvasuses it for defining the target operating model.
In enterprise architecture, a target operating model consists of the following three key components:
In certain cases, governanceshould be considered on par with these three components. For example, if the target operating modelis part of your data strategy, governance should involve data quality control, data controls, management policies, compliance with privacy regulations, etc.
Governance mechanisms can also be used to establish a feedback loop and achieve operational excellence through Continuous Improvement of the TOM over time.
Another approach to defining a target operating model, recently outlinedby Peter Brodie, focuses on:
At Luxoft, we take a six-dimensional approach to defining a target operating model. It involves:
Where do you start with a target operating model? Here are five steps towards creating one that will set up your transformation for success.
Before you can think of the future state for a TOM, you need to have a grasp on your current state of operations. Unless you're designing a target operating modelfor a specific function, you'll need to assess your organization's processes and capabilities across the enterprise architecture:
To gather all the information on the current processes and capabilities, you'll need to turn to everyone, from the management teamto frontline workers for input. Strive to not just understand howthey work but also what needs they have, what doeswork in their workflows, and what challenges they encounter.
Your personnel likely have to deal with certain challenges that are prohibiting them from being at their most productive. Those challenges result in stress and frustration - and inefficiencies in your operations.
While you're gathering information on the finer details of your processes, watch out for the signs of stress or frustration; these will signal which pain points need to be dealt with during the transformation.
A target operating modelisn't just about fixing what doesn't work: it's also about revealing the areas of improvement that would otherwise go unnoticed. While removing pain points should be your top priority, it's also worth taking a close look at your operations with a fresh perspective and asking: What could be better?
One approach to doing so is value-chain mapping. Here are its key steps:
The aggregated business processes will allow you to leverage economies of scale, while standardization will create consistency in process quality and delivery. The processes that remain separate will allow for local adaptation.
Once you have identified the pain points and their solutions, along with areas of improvement, it's time to outline them in the target operating modelitself.
For example, if your payroll employees currently have to waste time copying and pasting data into the accounting software, you can include a third-party integration to automatically import the said data in your target operating model.
Keep in mind that your employees' feedback shouldn't be the only driving force behind the target operating model. You'll also need to factor in any foreseeable changes in the enterprise architecture, your business modeland strategic goals, and available resources and market dynamics.
Be flexible and adaptable, however, as unforeseen challenges and opportunities will undoubtedly arise during implementation.
With the target operating modelcomplete, you can leverage it to create a roadmap from the current operating model to the desired future state. Make sure you sort the changes by priority, feasibility, and ROI - and start with the ones that will be the most impactful.
As it's crucial to involve key stakeholders during the TOM design, it's no less important after it's ready. As you create the roadmap and implement changes, make sure that you have the buy-in - and that the whole organization is on the same page regarding the transformation.
TOMs are used by multinational corporations, SMEs, start-ups, and even government organizations. Depending on the size of the organization, the target operating modelmay be a plan to be achieved in a matter of months, years, or decades.
Here are three examples of organizations leveraging a target operating modelto bring on change in their operations.
This e-commerce powerhouse is famous for its approach to customer experience, with data and automation driving its improvements. Here are the four components of Amazon's operating model:
Unilever shifted from its matrix structure to a more category-focused operating modelin 2022. The new target operating model reimagined the enterprise architecture as five distinct business groups, with each of them responsible for its own strategy, growth, and global profit delivery. The business groups are supported by Unilever's Corporate Center and Unilever Business Operations.
The shift allowed the company to simplify its organizational structure, making it more agile in the long run.
The story of Netflix switching from an online DVD rental business model to a streaming platform is a well-known one. But let's take a close look at how the company changed its operating modelto power the new business strategy.
At first, Netflix shifted gears to acquire as much third-party content as possible to be able to offer an expansive library to its subscribers. At the same time, the company had to build server capacity suitable for varying connection speeds and enable a comfortable viewing experience across devices.
To power the major change in the operating model, Netflix decided to invest in people with its exceptional HR policy. It focused on hiring talent from Amazon, Google, and Facebook and offered a competitive market-based salary with stock options to attract them.
Going on a transformation journey without a target operating modelis akin to driving blind: you can't be sure where to turn or even know when you've arrived. So, before you set out on it, take your time to assess your current operations and map out how they can be made better with changes in process, technology, or both.
A fresh perspective on the organization's operations can be a valuable asset in designing a comprehensive, actionable target operating model. We can lend you that fresh perspective - along with decades of experience and expertise across 15 industries, from banking and capital markets to oil and gas. Get in touchwith us to discuss all your TOM advisory needs.
Alexander Rubanov
Delivery Director, Financial Services
Based in New York, Alex has 20 years of experience in managing complex software delivery projects and programs. At Luxoft he is responsible for delivery across multiple clients, focusing on effective execution and project success. For the past 9 years Alex has concentrated on the Financial Services sector and he holds the CFA Foundation certificate.