With this post, I explore the third element of the Organisation Design Blocks that we have mentioned, and that constitutes a foundational element of the Organisation Evolution Framework. Conceptually, the Operating Model comes after the definition of Strategy. Not a new idea. Business historian Alfred Chandler laid this out in 1962 in his book Strategy & Structure (Chandler, 1969). But is this entirely true also today? And how does the Operating Model relate to the other building blocks we have seen already: Business Model, Strategy and Organisation Model?
Note: Article updated after the original publishing date:
– April 22nd added Value-Driven Operating Models
– August 30th, typos and review of the post.
Setting the Operating Model through literature is not easy. The word is widely used, especially by consulting companies and in many corporate reports. There seems to “an implicit understanding of the term Operating Model” (Bateman, 2017). However, often the term is referred to many different things, adding to confusion on the concept which often is overlapping that of Operations Management. One of the issues is that academic sources that have dealt with the idea of the operating model have often approached the topic from an Information Technology discipline point of view.
One of the first definitions came in a paper issued by Accenture in 2000, where the term was used as Operating Business Model (Linder and Cantrell, 2000) and defined as the organisation’s core logic for creating value. It also introduced a Framework to check the different components of the Operating Model, who would render the company unique. As you can see from the figure shown, this already seems a pretty complete model, highlighting many of the elements that are genuinely key into an Operating Model.
In 2005 Jeanne Ross at MIT defined the Operating Model as the necessary level of business process integration and standardisation for delivering goods and services to customers (Ross, 2005). Her view is very much derived from an Information Technology perspective, as confirmed by a subsequent book that she co-authored with Peter Weil and David C. Robertson, where the concept of Operating Model is brought near that of Enterprise Architecture (Ross, Weill and Robertson, 2006). We will come back to Ross’s model as well as to the parallel with Enterprise Architecture later in this post.
One of the most prominent experts on Operating Models is Andrew Campbell, who defines the Operating Model as follows:
An operating model is a visualisation (i.e. model or collection of models, maps, tables and charts) that explains how the organisation operates so as to deliver value to its customers or beneficiaries.Andrew Campbell (2016)
Bain suggests a different definition: how a company organises and manages its resources to achieve its strategic ambitions (Garton, 2017). As such, it looks at creating the bridge between Strategy and execution, in a model that we will be detailing later.
There is generally no consensus on how to document an Operating Model (Hammond, 2014). Too often, many managers react by merely showing an Organisation Chart, but this, of course, is not sufficient. Depending on the definition we use and the model we apply, we might be forced to use different documents jointly to ensure a full picture of the whole.
In this section, I will try to detail as much as possible the critical theories on Operating Models. I will start with a somewhat chronological order for what concerns the academic world, then leaving to a second section the models developed by large consulting companies.
One of the first appearance of the term Operating Model in academic literature comes from an article by Jeanne W. Ross from MIT under the title Forget strategy: Focus IT on your operating model (Ross, 2005). In this article, she introduces a taxonomy of Operating Models based on a four quadrants matrix organised on two axes: Business Process Integration and Business Process Standardization.
Rather than presenting a methodology to define an Operating Model, Ross provides a taxonomy of choices that existing companies had taken, and that would allow for the definition of an Operating Model within an organisation. This work has given the possibility to trace a classification of organisations depending on their position on the matrix, as well as studies on which model is more suitable for a specific market or situation.
Also, the model is derived explicitly from studies in Information Science and has expressly built a strong tie with the concept of Enterprise Architecture that we’ll examine later on.
CCPPOLDAT is an almost unintelligible acronym “for a cross-functional set of views used to represent an enterprise without functional, structural bias” (Winders, 2012). This model was developed and enhanced in Centrica Plc. (British Gas) from the original POLDAT framework initially created by the Computer Science Corporation CSC.
Its elements are:
Mostly with a focus on customer-centricity. This model can be used to describe Operating Models, although it can also be used for gap analysis and project or change impacts and baselines.
It’s essential to notice the sequence of this method, where the part of the Organisation is pretty late in the process. Ideally, this should allow for a lot more engagement building within the organisation itself. (Campbell, 2016c).
In the below video some more information on the approach.
The operations strategy matrix is a tool introduced by Slack and Lewis in their book “Operations Strategy” (Slack and Lewis, 2011). The way I see the different organisational elements, Operations Strategy seems almost an oxymoron. However, the Matrix is a handy alternative tool in the definition and identification of an Operating model. It looks at two dimensions: Performance Objectives which through Quality, Speed, Dependability, Flexibility and Cost, lead to Market Competitiveness. And a set of Decision Areas, which through Capacity, Supply Network, process Technology and Organisational Development define the Resource Usage.
The format of the Operations Strategy Matrix allows for a fine-grained presentation of the Value Proposition (Campbell, 2018) of an organisation (related to Customer mainly as it focuses on the Market as a critical Stakeholder area).
As such, it allows defining the critical components of what we can identify as an Operating Model, giving a fair view of the reality of a business as well as its choices.
In 2014 the Open Group presented a white paper detailing a framework of reference for Enterprise Architecture work, as it tried to bring standard definitions of the various items that compose an organisation. The model goes beyond the traditionally IT-focused domains that often affect EA work and tries to bring back a holistic approach.
The resulting BRM is (Adams et al., 2014, page 7):
As you can see from the graphic above, the Operating Model sits at the core of the BRM and is defined as a description of “the resources at the disposal of the organisation that will be deployed to generate the value proposition. [it] is intended to describe how an organisation will be able to deliver on its value proposition. Capabilities can be thought of as combinations of people, process, information, and technology that can be internally or externally sourced“. (Adams et al., 2014, page 8)
Although this model provides an advancement over the more specialised IT related Architecture approaches, it raises some concerns:
The Operating Model Canvas is derived from the work that Andrew Campbell has done at Ashridge University and crystallised in the book Operating Model Canvas (Campbell, Gutierrez and Lancelott, 2017).
The Operating Model Canvas tool is about high-level operating models and not a detailed one. The article defines the term operating model as being about six components identified by the acronym POLISM:
The objective of the Canvas is to capture thoughts about how to design operations and organisation that will deliver a value proposition to a target customer or beneficiary. It helps translate Strategy into choices about activities and organisation.
A core concept in the Operating Model Canvas is the concept of Value Delivery Chain. This includes defining the one or more Value Propositions that the organisation wants to offer, and the Value Chain for each of these. The author is very open about preferring Value Chain maps vs Capabilities Maps (Campbell, 2016a), although probably also here there is a question of definitions.
The SOMS model has been developed thanks to the work of Ian R. Hodgkinson and Rosamund Chester Buxton from Loughborough University.
SOMS uses the following definition of Operating Model:
The operating model is the operational design that makes it possible to deliver the business strategy. It is the blueprint for how an organisation operates across a range of domains to deliver its objectives (SOMS, 2017)
According to the SOMS Model, an operating model provides the architecture and framework for business operations – giving core stability with flexibility in critical areas. These are the operating model elements that need to be designed to provide flexibility, dependability and quality of service within compliance and regulatory requirements. Which is why the model is proposed as a “certification” for practitioners, a sort of toolkit that can support in the design and definition of an Operating Model itself.
The design of the operating model addresses where people and resources are located, what skills and infrastructure are required, and how the organisation monitors and improves performance. This is reflected in the seven elements comprising SOMS:
Peter Murchland has written an interesting article on Linkedin on Operating Models, where he has brought up a relatively complete but straightforward representation. He takes his view from an Enterprise Architecture perspective (more on this later). Although the tool presented is straightforward, I have decided to include it here as there are some exciting aspects to mention.
Murchland defines an Operating Model as a way “to express how an organisation:
He illustrates the concept through a simple design with four significant components.
He notes that “for many years, […] I have not addressed the development management system, because I was usually part of this system“. And he is the first to include Development as a vital element of an Operating Model (although others do include “capabilities”, with varying definitions). An aspect that made me think, as I genuinely believe that the Development System is also crucial in any organisation, especially as it adds an essential directional effort (which makes me think of the concept of Deliberaletly Development Organisations we have seen, as that piece is part of the Operating Model of the organisation?)
In a famous article appeared in 2012 on HBR, Philip Kotter advocated for the necessity for organisations to adopt what he defined as Dual Operating Strategy.
Although not providing an entirely new concept of Operating Model, his article is excellent in explaining the difference between Operating Model and Organisation Model. Two types of structures coexist in the organisation he suggests establishing, one focused on change and built as a network, the other built on a more traditional hierarchy and concentrate on the execution.
Kotter does not define the components of this model; rather he builds on what he describes as eight essential attributes that the Network structure should have to sustain accelerated change. Through the article, he, however, identifies a couple of components that make it possible for good design:
I think this goes well in hand with what I have recently written about consistency in organisation design and the fact that, probably, too much flexibility is counterproductive.
In their book, ‘The Discipline of Market Leaders‘ M. Treacy and F. Wiersema (1995) argue that no company can succeed today by trying to be all things to all people. It must instead find the unique value that it alone can deliver to a chosen market. They have identified three value disciplines that a company need to assess and define to build their unique positioning.
The particular value that you decide to offer has the effect of defining your way of thinking about your business: it shapes the company’s operating model. Different value disciplines demand different operating models in order to best capture the value that is being pursued (De Bruin, 2018). In their definition, operating models are made up of core processes, organizational structures, management systems, information technologies and culture.
All the elements have to be adapted and aligned with the value discipline that the company decides to focus on. Therefore, each Value Discipline deserves a different Operating Model, as illustrated in the above illustrations.
In this section, I will try to recap the approach of the largest Consulting Companies. With one caveat, I noticed that many of these models are continually evolving in the different articles and publications that the various companies provide to their clients, showing a sort of “flexibility” in the approaches used. I list the models in alphabetical order. A few methods from smaller consulting firms are listed following the more prominent players.
Accenture portrays several different usages of the wording Operating Model on their website. Despite being one of the first organisations in using the term (as seen before), seems that today it applies multiple approaches, depending on the target function.
In a 2017 report by AccentureStrategy, they provide a vision that is aligned in terms of the critical components of an operating Model: we see again the Op. Mod. sitting between Strategy and Execution. Accenture defines the Operating Models as “how the company is structured to execute its strategy and business model”.
What is interesting to notice is the role of culture seen as a component of the Operating Model. Also, the paper focuses its attention on the idea of creating Domains within the organisation. Their role is to better capture value creation across the organisation through nimble teams that are more customer-focused. The notion of Domains seems to recognise that many organisations do not have an operating model that is aligned to its value drivers, and instead need to create a transversal model to capture this value creation.
In 2016 the same organisation had, however, given a much more detailed view (Dudler, Theofi and Wright, 2016). Interesting to notice the existence of a Business Case, and a Financial Frame.
In a more recent 2019 paper, Accenture Strategy identifies five characteristics that should be embedded in “Intelligent” Operating Model Design (Bersohn et al., 2019).
All in all, it seems that the company focuses a lot on the people dimension in its set up of the Operating Model work.
Why so much discussion about Operating Models today? according to Bain (Blenko, Garton and Mottura, 2014), there are four issues:
They define the operating model as an alignment of different elements. In essence, high-performing companies have set up their operating models so that organisational structure, accountabilities, governance and employee behaviours, along with the right people, processes and technology, all work together to support the strategic priorities. (Blenko, Garton and Mottura, 2014). They see the Operating Model as the element that sits between Strategy and Execution.
redesigning the operating model may be one of the smartest investments that executives can make to achieve profitable growthBain & Company (Blenko, Garton and Mottura, 2014)
The operating model serves as a blueprint for how resources are organised and operated to get critical work done. It encompasses decisions around the shape and size of the business, where to draw the boundaries for each line of business, how people work together within and across these boundaries, how the corporate centre will add value to the business units, and what norms and behaviours should be encouraged.
Design of an operating model starts by describing the Strategy in sufficient detail that one can articulate a set of design principles—simple yet specific statements defining what the organisation must do to enable execution of the Strategy.
Based on the design principles, the operating model takes shape through choices in five areas:
Operating model transformations often involve changing an organisation’s profile of skills and experience, which is why this intense focus on Capabilities.
The model presented is fascinating as it gives a strong focus on the Governanceside also in terms of accountabilities. A detail that not many models focus on.
BCG released in 2018 a new view on its Operating Model approach. In an interesting article, that is focused on Public institutions and government implementations; they bridge this new model with Agile implementation.
The model includes eight components:
It’s interesting to notice the focus that BCG puts on Leadership, as well as on Funding. This is usually an element that does not appear in most models. Still, it should be taken into consideration as the cash flow that is necessary to sustain activities is particularly relevant when we are designing an Operating Model for one are of an organisation.
Deloitte makes the concept of defining a Target operating Model critical in most of its change approaches. This is why it is interesting to see a lengthy article published in 2019, specifically on Architecting Operating Models. I have already cited this work in my post that clarifies the critical components of Organisation Design, but we will now focus on the Operating Model dimension.
Operating Models are defined as a representation of “how value is created by an organisation—and by whom within the organisation” (Kwan, Schroeck and Kawamura, 2019). An example of an Operating Model is illustrated below.
Leaders should develop a clear sense of their strategic ambitions—where to play and how to win—and the business models they wish to employ, including target customer segments, channels, pricing, and delivery models, since both the strategy and business model directly influence the operating model design. Organizations that try to short-cut their way to a new operating model may find the design to be ineffective and the implementation lacking employee traction—or, worse, dilutive to value.Deloitte (Kwan, Schroeck and Kawamura, 2019).
The development of an Operating Model comes by answering four critical questions:
It is immediately apparent that the model focuses a lot on Capabilities as well as on the resulting execution. It is interesting to notice that most of the questions above would generally find an answer through a typical Strategic Workforce Planning exercise. But it is the Capability Map exercise which, at its core, is what we have so far defined as Operating Model. As you can see and recognise most of the components. Also, the authors define Capability as something that Creates Value for the organisation, thus bringing us back to the concept of Value Chain.
All in all, this model includes again all critical components we have seen so far and yet supports the bridging of Strategy and Execution. It is interesting to focus the role that work has in this model, in its more ample definition. Choosing how work gets done (for example, is it automated?) is a critical formal element of the Operating Model according to this approach, something interesting to consider.
KPMG has the most limited and narrow view on the concept of Operating Model, although it places it at the core of its Powered Enterprise concept. In this case, the Target Operating Model is defined as a “toolkit” that “shapes how transformation plays through every layer of your organisation” (KPMG, 2020)
The six layers that are provided as part of this toolkit reflect some of the standard components we have already seen in other frameworks. Interesting to notice the presence of a Service Delivery Model defined as “how things get done”.
In a ponderous volume published in 2017 and dedicated to the new digital organisation, McKinsey takes a defined view on Target Operating Models as part of a Digital Transformation trajectory (Dias et al., 2017). This is to be achieved through a path that goes through the adoption of a Next-generation operating model based on Customer Journeys, an interesting idea.
A framework is not fully explained, but five approaches are identified in the design process.
Although none of these items is new, it is interesting to see them in the context of Operating Model Design. And again, another focus on the key concept of Work as a component of the Operating Model.
Also, PWC has its own framework for an Operating Model. “An operating model bridges the gap between an organisation’s business strategy and its operational resources” (PWC, 2012).
The paper makes a clear distinction between Business Strategy and Operating Model. It defines a path to represent each of the five identified components through a checklist of questions and actions. The goal of an Operating Model should be that of promoting adaptability of the organisation, and flexibility in achieving value for its customers.
More recently PWC has presented a new Operating Model Blueprint which delivers a somewhat evolved view. Also here, we can notice the concept of capabilities, and the definition of Tools and Technologies as Way to Play.
FromHereOn is a consulting firm specialised in Business Design. As part of their Business Design Method, they highlight a specific role and approach for Operating Model Design. I am highlighting this model here because it introduces a few interesting concepts.
The model highlights the Capabilities required by the organisation, as well as its Deployment Model, which essentially identified which business capabilities are available where.
Two components that are interesting to highlight, as we’ve not seen them before, are the Service Portfolio and the Brand Identity. The latter is considered as the personality of the business and is required for the delivery of value to the customer. The first is instead the catalogue of Services that the organisation provides.
An interesting and complete model that focuses intimately on the value delivery by the organisation as it executes its Strategy.
We have already seen that a lot of the academic research around Operating Model has been derived from Information technology, and often there is a somewhat overlap between the concept of Operating Model and that of Enterprise Architecture.
I don’t want to go too much in detail here, but it is interesting to point out that both approaches wish to describe the “architecture” of the organisation. Both want to enable execution; the sole difference is that Enterprise Architecture is focused on Information Flows across the organisation (but not only…), whereas Operating Model, as we have seen, looks at the entire Value Chain.
According to Murchland, Enterprise Architecture involves looking for:
The logic of how Enterprise Architecture works is pretty similar to the definition of an Operating Model. You usually try to map the As-Is model, plan a To-Be future model aligned with the corporate strategy, and then through a Gap Analysis, identify the steps that are necessary to achieve results.
So if there is this overlap, why is it that in some companies we both have an Operating Model and an Enterprise Architecture developed in isolation?
In an interesting article co-written by Campbell and Murchland (2015), several reasons are identified:
Many of the models of Enterprise Architecture, and the standards that underpin these, would be beneficial to be also applied to Operating Model design, as they share the ultimate intention, as well as some tools. I think it would be great to work more on aligning these two aspects, in another effort to align HR and IT as much more continuous domains that it seems. Fusing Organisation Design and Enterprise Architecture can deliver genuine added value, as illustrated from the graphic below.
We have now read much content on the different conceptual frameworks that exist around Operating Models. But how do we use them? Despite differences in content, I believe that most models can work, if applied in the correct context.
I see three main usages for an Operating Model.
After having written about Business Models and Organisation Model in detail, this article has taken a lot more time in its writing. Probably it is around the concept of Operating Model that there is more “confusion” on what it means. Strange, especially considering that any organisation has an Operating Model, it just often is not written down.
Part of the problem is linked, in my experience, to the equation Operations = Operating. In many companies that have adopted the role of a COO running all Operations, as opposed to the Business Functions, creating a cleavage in concepts that have created a distance in the understanding of this vital component.
As an HR professional that navigates organisation Design, I spend hours in letting managers understand the importance of defining an Operating Model ina change process. And I always end up having to discuss that no, it is not an organisation chart.
If the Business Model represents the unique way in which you conduct your business, the Operating Model represents the organisational DNA. Few essential components (Processes, People, Technology, Governance) that can be assembled and reassembled in multiple shapes and forms, each originating a truly unique organisation.
I’ve recently introduced a Visual Framework that allows visualising all essential building blocks of Organisation Design. Here below the representation of Operating Model with its definition and the Critical Element that derives from it: Value Delivery Chain.
It is defined as The collection of tactical components (Systems, Processes, People, Technology) to deliver the Strategy.
Introducing the Organisation Evolution Framework
Visual representation of Organisation Design building blocks and their dynamic relationships.
Now released in Version 2, open for feedback.
As usual this article is open for feedback and suggestions.
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