The modern business environment is more complex than ever before. With the increasing role of the remote workforce, increasing potential risk issues, and more challenging customer needs, it’s becoming more and more difficult to successfully navigate through the ever-evolving marketplace.
For companies to continue to thrive and operate efficiently in these conditions and be capable of quickly adapting, it’s necessary to create some sort of strategic plan for managing change. While each business shares a common goal of expanding and growing, each of them has its own, unique set of goals and objectives.
To successfully accomplish these goals and develop a plan for moving forward, the organisation must be capable of properly defining its current state as well as the driving factors behind it. Target operating model, or TOM, provides businesses with a tool that can help them focus on working towards their objectives without putting their current work environment in danger.
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What is a Target Operating Model (TOM)?
Target operating model is the high-level representation of a company’s business vision that helps drive and steer the organisation to a new and optimised way of working. The structured approach of TOM allows for a better understanding of what the organisation is at its core and helps create the methodology needed for implementing a change.
Using the target operating model as a blueprint for its vision,
the company can successfully align its strategic goals with operating capacities. Plus, TOM provides an overview of the organisation’s key business capabilities, strategic and operational levers, organisational and functional structure, available technology, internal factors and external drivers that push the change, and the information resources available to the company.
All of this helps organise the company in a way that allows it to operate with efficiency and effectiveness when it comes to delivering and executing the overall business strategy. In the modern business environment, it’s necessary for the organisation to be able to develop a strong target operating model so it can define what’s next and achieve the desired target state.
TOM is there to bridge the gap between day-to-day business operations (current operating model) and the strategic vision for transformation, expansion, development, and growth.
By following the approach laid out on the TOM, companies can better understand their own business processes and more efficiently prioritise needs and requirements. With the help of TOM, they can create a methodology for change that is shared across the enterprise and is more unique and effective than a standard piecemeal model of business change.
However, target operating model shouldn’t be confused with the company’s strategy. A business strategy, as well as a company’s priorities, can change depending on internal factors and external drivers. On the other hand, TOM equips the organisation with the necessary foundation and flexibility needed to execute initiatives.
They are mutually codependent though, as a strategy helps the realisation of the target operating model, and TOM influences the strategy principles.
How is a Target Operating Model Implemented?
Creating a target operating model requires a significant amount of effort and expertise. However, an even bigger challenge is to develop and implement TOM in a way that will deliver the strategic goals and make your business stand out from the competition.
The implementation of TOM needs to take into account several important factors. It should consider the implications of designs and development processes, additions of new staff and their training and motivation, building up and acquiring new knowledge, and systems selection, customisation, integration, and implementation.
The target operating models will determine what every employee and every team in the company should be working on and how it adds value to the organisation. The proper implementation of TOM will help them streamline their working process and improve their performance.
Most companies implement one business-wide target operating model, as designing one for each department or each person would be impractical and too much for every individual to take on. However, each department or team will commonly have their variation of the company’s TOM and use it as a guideline for their operations.
How to Build a Target Operating Model?
While it’s challenging, creating a target operating model isn’t necessarily too complicated. Still, there are several steps that shouldn’t be skipped no matter the type and scope of business, if TOM is to be well-aligned with the company’s strategy and successfully steer the organisation through changes of the target operating model development.
Developing Design Principles
Design principles serve as high-level guidance pointers on how the entire organisation should operate. They should properly identify the priorities of both the business and the customers, as well as user needs and desired experiences.
These principles need to include information acquired through high-quality customer insight and be well-aligned with the broad vision and strategic goals of the company.
When properly developed, design principles help guide the creation of the target operating model and help team members make informed design decisions along the way. The ability to lean on set design principles leaves less room for potential mistakes.
Mapping the Journey of Target Audience
The experience customers have with the company can be represented in form of a diagram through customer journey maps. They detail every step a customer goes through in their interaction with the organisation and show how each step makes them feel.
The mapping should start with the current user experiences and identify any potential pain points. Ideally, the journey map will be designed so it that offers a way around those pain points. This should be repeated for every segment of the potential audience.
The more people involved in the process, the better. Finally, the journey maps should be validated directly with the customers. The result of this process should be a set of diagrams that accurately describe the experiences customers would ideally want when interacting with the company.
Defining the Required Capabilities
Drawing up a list of capabilities needed to deliver the desired user experience can be of great help when creating a target operating model. The best way to do this is to walk through the previously designed journey map and determine what the organisation needs to deliver each step.
Every capability should come with a description of the current and future state. This includes the identification of necessary channels, processes, people, and technology. Every future change may require a different operational setup and this section of TOM should describe what it should look like.
Articulating the Changes Needed
This step involves comparing the current and future state of every capability and defining the gap between them. Doing this will significantly simplify drawing out necessary changes to turn customer journey maps into reality.
Often, the direct jump from the current to the future state will not be possible. In those cases, it’s necessary to create interim stages and conduct changes incrementally. With all the needed changes identified, the next step is to prioritise them and fit them onto a change roadmap which should guide the organisational transformation.
What are the Components of the Target Operational Model?
Regardless of business structure and the type of product that is being offered, each target operating model should contain certain key target operating model components.
External Drivers
Refer to broader economic and market trends that exert their influence not just on a single business, but on the entire industry. The best way to capture this information is to perform PESTLE (political, economic, social, technological, legal, and environmental) analysis or STEEP analysis.
Internal Factors
Are different for each organisation depending on the environment the company operates in. A strong target operational model is not possible without understanding these factors and the current state of business. This understanding can be best achieved through SWOT analysis.
Competitive Dynamics
Involve identifying and accessing the state of current and emerging competitors. This assessment can be done with the help of factor-based analysis.
Culture and Core Values
Imply the morals, ethics, and overall values of the company. The way a company conducts its business and treats its customers is often a deciding factor in attracting a new audience.
Vision and Mission
Should indicate where and what the company wants to be in the future. These visions usually impact the scope of needed changes.
Strategy and Plan
Define the map the company will use to achieve its target operational model and reach its point of arrival. They should provide guidance on how, when, and where the company will implement changes.
Capability Analysis
Should elaborate on what capabilities are needed to reach the TOM. This may lead to evolving current capabilities, acquiring new ones, and phasing out ones that are not necessary.
Strategic Levers
Define conditions needed for the company to maintain or further develop its capabilities in order to attain its target operating model.
Tactical and Operational Levers
Are more specific than strategic ones and refer to particular processes within the TOM. For example, they may include implementing new management systems or expanding certain departments.
Transformation Map
Outlines incremental and sequential evolution as the organisation transforms into the target state.
Initiatives, Programs and Projects
Determine the exact types of actions, efforts, plans, and programs, an organisation needs to accomplish its target.
Governance Structure
Defines how the organisation will govern its future operations. While it’s not possible to accurately predict the future, the governance structure part of TOM attempts to establish a framework for rule-setting and enforcement.
Key Performance Indicators (KPIs)
Provide metrics for measuring success and establishing what a successful transformation is. KPIs serve to optimise performance and productivity.
Target Operating Model (TOM) Template – Operating Model Canvas
Whist, a target operating model (TOM) may vary between organisations in its depiction and content and different types of target operating model may exist, there is s very good publication, Operating Model Canvas by Andrew Campbell, Mikel Gutierrez, Mark Lancelott that provides guidance to operating model.
The Operating Model Canvas creates a target operating model that adheres to your strategy.
The authors developed the operating model canvas as a tool to help organisations to design and describe their operating models in a clear and concise way. The canvas is based on their years of experience working with organisations on improving their operations and the insights they gained from their research.
The target operating model framework blueprint in the book will teach you to:
- Define the primary work processes
- Choose an organisation structure
- Develop a high-level outline of IT systems
- As well as provide guidance on which aspects of the new operation to locate and how they should be laid out, establish supplier relationships, and design both a management system and scorecard.