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What every company needs: Humans, their tools, and how they use them. Some strategy consultants like to throw these terms around, adding some more multi-syllable terms we learned in business school to make this seem as though you need a phd to figure this out. Here’s the dirty little secret: it’s not that complicated. *gasp*.  

At the whole of any organization there are three main areas that define and deliver what that company does. The first is its purpose or mission. Basically why it exists. The second is how they do what they do. And third is what it is they are actually providing to their customers. (If this sounds familiar, it’s because all I did here is describe the Golden Circle.) So how does operating model fit into this? The operating model is the “How”.  

An operating model is how a company creates its products and services and fulfills its mission. Basically, it is how the company plans to deliver value to its customers. It defines all the components of an organization needs and the coordination between those components. The operating model can be defined for the company as a whole (the enterprise's target operating model) or for a business unit or functional teams within the larger organization. For examples, you can define the operating model for how a surgery team performs their work within the broader hospital system. You can also look at an operating model for how a software company works. 

Core Components of an Operating Model

There are many frameworks out there and consulting firms differentiate themselves with their own take on a target operating model. Underlying all of these frameworks, there are a few key components needed to make an organization run. It boils down to humans, their tools, and how humans use their tools and work together to produce their output.  

For sake of simplicity we will categorize these as:

• People: This includes talent defined through the roles and skill sets needed and how the talent is organized (or organizational structure). When we get to detail design this also includes how people are rewarded, leader and team expectations (job descriptions), vendors and suppliers, and your overall talent strategy.
• Ways of working: This is the definition of all the business processes for performing the work, the processes for working together, the organization's governance, the definition of how decisions are made, and any procedures or compliance needed for that organization or industry.  
• Tools: Tools includes the technology, equipment, and work spaces needed to perform the work. This can include the standardization of tools and the automation of the processes and workflows outlined in the ways of working.

As you can surmise, these components are highly integrated. You cannot define the ways of doing business without understanding the stakeholders involved and the technology used to enable or differentiate the organization.

Key factors that influence the operating model

When defining an operating model, there are some key factors to consider. For instance, what type of people or talent you need and the investments you make in tools will depend on your company’s purpose and strategic direction. An innovation focused enterprise will have a different talent strategy and make different investments in technology than a company focused on operational excellence and cost. One will invest more on understanding and creating ways to deliver more value to its customer and lean more into an agile based operating model gaining autonomy to teams to be more innovative. While the other might give themselves competitive advantage more investing more in automation and standardize processes.

• Purpose: Your company's reason for existing. It’s not only what type of organization it is, but also the mission and impact you would like to make in the world. 
• Strategy: What the company will focus on to achieve its mission. This can be defined in terms of long-term horizons (5-8 years) as well as what is most important right now (6-12 months).
• Culture: The values and guiding principles of your organization both stated and unstated. This can determine what type of leaders and team members you want as well as how you treat your teams and customers. 
• Capabilities: The areas and functions the operating model needs to have to fulfill its mission. For instance, every company needs an accounting and finance capability to pay employees and vendors and accept payments. However, not every company will need research and development capabilities.
• Output: Definition of the product or service your team or the broader organization is creating for your customers or beneficiaries. If you are a functional unit, your output may be delivering a service that delivers value to another internal team. For the broader organization, the output is what is delivering value to their end customer that the customer is willing to pay for.
• Measurement: How you determine if the operations are successful in fulfilling the mission. These are the metrics in which you hold each other and teams accountable.

The integration of these key factors with the core components provides the unified blueprint of how the company works. In this light, an operating model is a visual representation of the business model. Taking the effort to define the model can help business leaders identify ways to improve their value proposition whether that be through higher operational efficiency with process standardization or better services to different customers with more innovative and agile product development. In upcoming articles, we will help outline the steps to build a target operating model for your organization, defining the different components and developing visual representations that show how it all integrates together. This will help you create a more unified business model to better execute on your strategic plan.

Why operating models matter and why you may need to evaluate yours

So why does understanding what an operating model is matter? Many times as a start-up or a new business unit or product line, people dive in and start getting the work done based on individual strengths and weaknesses. As the company or team grows, communications between people becomes more difficult. Some activity are covered by multiple people while others are neglected. Processes are hobbled together and you end up with heroes in the organization that perform many functions, almost being the spackle between broken processes and communication lines. To continue to grow or see more efficiency as you grow, you will need to take a look at your operating model.

Drivers for evaluating and redesign your operating model:

• A change in strategy: whether you are trying to enter a new market or pivot to different products and services to offer your existing market, the capabilities and talent that made you successful before won’t be the same as what will make you successful in the.
• Growth: as companies grow from start-ups, small to mid-size, or an enterprise, it will need to create new capabilities and evaluate the people, processes, and tools they need in their next phase.  
• Simplification: either an organization has grown bolting on new products or implement new tools without thinking about the overall systems, or new technology is introduced that can automate processes, the operating model will need to be evaluated to understand impacts to the people and optimize the existing processes. 
• Merges and acquisition: anytime a company acquires another the operating model needs to be evaluated at some degree to ensure an integration that will realize the investment thesis for the acquisition.
• Carveout: when a product line or service line has become successful in its own right and the organization feels that it is not aligned to its go forward strategy, carving out the business unit in preparation for a divestiture is coming. This requires a design of an operating model for the carveout as well as an evaluation of impacts to the remaining company.
• Innovation, new products: to incubate and test new products, a parallel operating model may be the best way to go.  In addition, once the new product is seen as viable it will need to be folded back into the parent organization.  Both events require a design of the capabilities needed with a redesign of the impact operating model components.
• Market disruption: competitive pressures, changes in customer expectations and preferences, new technologies, the macroeconomic climate are all constantly changing.  Organizations without the ability to pivot quickly could soon reach obsolescence This is driving the need for all enterprises to evaluate their operating model and implement elements to lead to more organizational agility. 

No matter the driver, if there is indication that your organization isn’t running smoothly or you are not getting closer to achieving your company’s strategy and goals, use the framework outlined to understand where you might need to change and redesign for the future. 

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