Operating model

Operating model is both an abstract or visual representation (model) of how an organization delivers value to its customers or beneficiaries as well as how an organisation actually runs itself.

Definition

There are different ways of defining the elements that make up an operating model.

People, process and technology is one commonly used definition,[1] process, organization and technology is another, and [2] Process, Organization and people, Locations and buildings, Information systems, Suppliers and business partners, Management system yet another.[3]

An organization is a complex system for delivering value. An operating model breaks this system into components, showing how it works. It can help different participants understand the whole. It can help those making changes check that they have thought through all elements and that the whole will still work. It can help those transforming an operation coordinate all the different changes that need to happen.

An operating model is like the blueprint for a building. It is more dynamic than a building blueprint, with changes occurring regularly. Also, an operating model is not usually just one blueprint. There are likely to be blueprints for each element: processes, organisation structure, decision making, software applications, locations and so on. There are also likely to be some integrating blueprints.

An operating model can describe the way an organization does business today – the as is. It can also communicate the vision of how an operation will work in the future – the to be. In this context it is often referred to as the target operating model, which is a viewpoint of the operating at a future state point in time. Most typically, an operating model is a living set of documents that are continually changing, like an organization chart or the capability model or functional model.

An operating model describes how an organization delivers value, as such it is a subset of the larger concept 'business model'. A business model describes how an organization creates, delivers and captures value and sustains itself in the process. An operating model focuses on the delivery element of the business model. There are plenty of disagreements about the use of the words business model and operating model.^[4][5][6]

The term operating model may have been first used in corporate-level strategy (see History below) to describe the way in which an organization is structured into business divisions, what activities are centralized or decentralized and how much integration is required across business divisions. The term is most commonly used today when referring to the way a single business division or single function operates, as in 'the operating model of the exploration division' or 'the operating model of the HR function'. It can also be used at a much more micro level to describe how a department within a function works or how a factory is laid out. In the section below titled Business/IT dialogue, this article explores one framework for thinking about the IT implications of different corporate strategies.

'The Strategy Journey' framework^[7][8] lists the operating model as one of five models that need to be strategically designed and executed along the journey of any organization as its navigates through different stages or phases from leadership and motivation, business design, value creation, business architecture and business transformation. In this framework, which has undergone extensive studies with many organisations from global tech giants, automotive innovators and start-ups, the operating model is responsible for implementing the strategies and tactics that have been defined in the mission model, business model and value model. It is the home to an organization's capabilities which change continuously through the transformation model.

When designing a business or functional operating model, Ashridge Executive Education recommends that the work starts with creating a 'value-chain map'.^[9] This is a way of laying out the work that needs to be done to deliver value to customers. It shows the different delivery chains and how they are linked together or need to be kept separate.^[10] The second step is to create an 'organization model' based on the value chain map. The organization model shows how the different value chains are structured into an organization and includes the support functions, such as Finance, HR and IT.^[11] The value chain map and the organization model are the core diagrams of the operating model.

Additional maps and charts are often needed. For example, an operating model will typically include an IT blueprint, locations maps, a supplier matrix, people models, decision grids and other elements such as a performance management score sheet. The particular set of documents created will depend on what the operating model is being used for. There is no generally accepted set of charts or at least there is no agreement yet about what charts make up an operating model. The Operating Model Canvas is a tool that displays an operating model on one page ^[12][13]

When considered as a system for delivering value, the operating model naturally undergoes continuous change or business transformation. Business architects who typically take responsibility for designing the target operating model must ensure that change is managed sustainably and in cohesion with the strategic objectives of the organisation, including any key performance indicators. Today's operating models must also learn how to be data intelligent and be in the position to leverage the power of data along with managing the process activities in an organisation. With data science or big data, and where the organizational culture is highly innovative, the operating model can become truly agile and operate at its highest level of maturity with predictive analytics, that allow it to change proactively rather than reactively, and deliver the best possible services to customers. This is what defines as organization as having an 'agile operating model'.^[14]

History

Origins in corporate strategy

Operating model as defined here is similar to the definition from Lynch, et al., of corporate strategy: "the relationships among the businesses in the corporation's portfolio and the process by which investments will be determined among them."^[15]

Corporate strategy grew out of the research of Harvard Business School professor Bruce R. Scott who developed a model of the stages of corporate development.^[16] He traced the evolution of a firm from "Stage I" with a single product (or line of products) to "Stage 3" with multiple lines of business, markets and channels. Following this work, Leonard Wrigley^[17] and Richard Rumelt^[18] developed ways of classifying company structures and comparing their strategies. They identified four different operating models:^[19]

1. Single line of business firms, where most revenue comes from a single activity;
2. Related businesses where diversification is achieved by adding businesses that complement the original activity;
3. Diversified firms that combines unrelated businesses, such as an oil company and a fertilizer business;
4. Conglomerates – diversification is achieved without regard to complementary or synergistic effects.

The nomenclature evolved, but the categories survive:

• Integrated: single business, requiring a single strategy for competitive advantage. Issues are formulated centrally and tailored for local needs to optimize the business. Success is measured by adding up the global numbers. Examples include McDonald's or Harley Davidson.
• Allied-related: each business contains the ability to create advantage autonomously. Common interests are worked across businesses. Some support work may be shared across businesses. Examples include Canon and Procter & Gamble.
• Allied-unrelated: each business contains the core work required to create advantage autonomously. Customers may be shared. Common interest are worked across businesses. Capabilities that portable to other businesses are shared for leverage. Examples include Avery Dennison's pressure-sensitive technology and self-adhesive base technologies that are used in Roll Materials medical group for single-use medical products.
• Holding company: includes unrelated businesses, with multiple strategies, related or not.^[20] Each business has self-contained brands/businesses with independent functional groups. The units are tied together only by ownership. Examples include Tyco International.

Some implications of the choice:^[21]

Service Orientation Operating Models

Operating models have become popular with service organisations, looking to improve processes to deliver greater value to customers and/or beneficiaries. One such operating model is the Service Operating Model Skills (SOMS) framework.^[22]

SOMS is an operating model focused on the service sector. SOMS stipulates the expertise needed for people creating and working with operating models. The framework consists of seven elements:

1. The customer experience
2. Performance management and improvement
3. Demand and capacity management
4. People capability
5. Process context
6. Delivery – process design
7. Strategy, governance, and leadership

SOMS was created by the Centre for Service Management in the School of Business and Economics at Loughborough University ^[23] in response to requests from trainers and instructors in the service sector; and is based on academic research from the Centre for Service Management.^[24]

Business/IT dialogue

The MIT Center for Information Systems Research (CISR), a research group at the MIT Sloan School of Management, suggests that an operating model is useful to guide IT investment decisions.^[25] IT investment must support the operating model.

Ross, Weill and Robertson found that an organization with an operating model reported 31% higher operational efficiency, 33% higher customer satisfaction, and a 34% advantage in new product development.^[26] In the book Enterprise Architecture as Strategy, they outline four operating models:

• Coordination – low process standardization but high process integration (compare with allied strategy, where subsidiaries provide varied products to the same customers)
• Unification – both high standardization and integration (compare with integrated strategy)
• Diversification – businesses requiring low standardization and low integration (compare with holding company strategy)
• Replication – high standardization but low integration (compare with franchisees or replicated facilities of an integrated strategy)

Operating models inform the appropriate level of business process integration and standardization to deliver the organizations promises to stakeholders.^[26]

The operating model informs IT leaders about how various technical and business components should be designed and implemented to enable the chosen operating model:^[26]

Technical/operational model grid

Component	Coordination	Unification	Diversification	Replication
Customer data
Product data
Shared services
Infrastructure technology
Portal technology
Middleware technology
Operational processes
Decision making processes
Application systems
Systems component technology

Coordination and unification models benefit more from consolidated views of customer and data across the enterprise than do diversification and replication models.

Industry standard operating models

• Business Process Framework (eTOM)
• IAA (Insurance Application Architecture)
• BIAN (Banking Industry Architecture Network e.V. (BIAN))
• IFW (Information Framework)
• ITIL
• COBIT (Control Objectives for Information and Related Technology)

See also

• Business architecture
• Business model
• Capability management in business
• Enterprise architecture
• Risk and compliance
• Shared services
• Target operating model

References