The term Target Operating Model (or TOM) has been used a lot in many of the organisations that I have worked for all around the world, from London, to Mexico City, to Moscow, to Sydney, to Johannesburg, to Singapore, to Shanghai, and all the way away in Sao Paulo too. Many 100s of millions of dollars in business change budget has been invested in TOM projects all over the world. Many 1000s of people have worked in these TOM projects too.
Having run so many, I’ve seen all possible outcomes. Some have succeeded in delivering very beneficial outcomes for their organisations. Some have failed to deliver anything. There can be many reasons for this; they couldn’t raise the budget, couldn’t get off the ground, they couldn’t get the buy-in needed from stakeholders, or they were based on the wrong motivations and outcomes to begin with. With this background in mind, I thought I’d explain:
- What is a TOM?
- What is the Operating Model?
I will also describe how an organisation can really reap the benefits of a successful business transformation programme, or project, that is designed to deliver a TOM.
What is the Operating Model?
The operating model mustn’t be confused with the business model, even though this is often the case in many organisations.
The business model delves into an organisation’s customers and product offerings (or value propositions) and how to effectively commercialise the business. Its focus is on how to bring about profit through revenue streams from product offerings, while looking at some of the activities and resources that are required to deliver the product offerings, and service customers. The ‘Business Model Canvas’ by Alexander Osterwalder and Yves Pigneur is a great tool. It helps organisations big and small to evaluate if they have the right business model and pivot (if needed), especially when conditions change in the ecosystem surrounding the enterprise. At a high level, and with a 10,000 foot view from management, it describes WHAT an enterprise must do and WHAT it must change.
The Operating Model, on the other hand, is a lot less sexy because it is responsible for the HOW, WHERE and WHEN. It is part of the execution lifecycle of THE STRATEGY JOURNEY framework, while the business model is part of design. Success comes from both the design of the best strategies and then the execution of these strategies to the right degree. So a business model without an operating model is lost, and unlikely to succeed in delivering the value that it promises to a business enterprise and its customers.
The Operating Model is HOW a business functions, including what capabilities – the processes, data, people and systems it has to keep itself running – which need to be applied at the right time (WHEN) and in the right place, in different locations (WHERE).
I like to use the car analogy to describe the Operating Model as the engine of an organisation. In 2016, the fastest Formula One (F1) car, the Mercedes Silver Arrow, driven by Lewis Hamilton (arguably the fastest driver), did not win because of engine and reliability problems. Instead the World Championship was won by his teammate Nico Rosberg, who had a better functioning engine that was able to last the distance of a whole season. Nico benefited from a slightly better operating model, and that’s what led to his overall win. Nico had the processes, data, systems and the people (including himself) – the complete capability package – to win that World Championship. The mechanical failures that Lewis suffered, mostly not through fault of his own, were a result of failures somewhere within his operating model. It is clear Lewis also had some organisational problems within his management team, and we do not know what other issues lay behind the Mercedes garage or in Lewis’ own mind. Put simply, he lost because his operating model package was inferior to Nico’s.
What is a Target Operating Model (TOM)?
The Target Operating Model (TOM) is a future state version of the Operating Model at a point in time.
A TOM doesn’t exist yet, and to achieve it, the Operating Model itself must change, requiring a large transformation effort in the form of a programme of change. However, change itself isn’t good, unless it is for the right reason(s). So, what are these reason(s)?
If the point of the operating model is to execute how the business model needs to function, then as part of any transformational change programme moving towards this new TOM, it would need to be aligned to changes required in the overall strategy of the business. This would cover any changes to the goals and objectives within its overall Mission and Vision, to its business model, and the new or increased value that the organisation is set to deliver from the changes.
This is why I have described the whole strategy lifecycle as a journey, with the 5 stages of THE STRATEGY JOURNEY and the 5 models of THE STRATEGY JOURNEY Framework. A business enterprise is a living entity, that is constantly changing on its journey.
The TOM is simply a viewpoint of what that enterprise wants to change into, as it covers what all 5 models will look like at a time in the future.
Different Types of Target Operating Models (TOMs)
That future state TOM varies depending on what industry an enterprise is in, the level of innovation, and what needs to be achieved. This would be the outcomes that are sought through the strategies of that particular enterprise.
TOMs in Larger Organisations
In many of the larger incumbent organisations that I have worked for and with, change and innovation, if it exists, is unfortunately rather slow. Most larger organisations set themselves 3-5 years to change their overall strategy journey. This is certainly realistic if they are looking at a specific business line and re-evaluating their strategic goals and objectives, as well as their business model.
In some projects, TOM changes are expected in 1-2 years, but this is usually the result of a short-term tactical change, rather than a proper TOM, as the goal is usually to execute cost cutting in order to ensure the balance sheet looks good.
When the starting point or desired outcome is just cost cutting, the TOM project naturally becomes a vehicle for delivering organisational changes that are responsible for making people redundant, or relocating them to cheaper off-shore locations. It might implement new strategy to work and service customers remotely, or even move customers to a self-serve model.
If these changes are implemented without first considering if a business model change is required, or the implications or impact to the business model and the value model, then that organisation is likely to only achieve that immediate short-term balance sheet adjustment. There will be a lack of any other potential benefits, which would form part of a more holistic strategy, that will deliver longer-term. Worse still, the short-terms gains may also lead to longer-term problems and pain.
TOMs in Government Organisations
In government organisations that are looking at societal changes, the TOM can be a 25 year plan. This is the case with Singapore, who have a Vision that they want to achieve for 2050. In the UK, it is uncertain at this stage what the TOM looks like for Brexit, and exactly how long that will take to achieve. I suspect it could be a whole decade, so it will be interesting to see when a plan is announced and the projected outlook of that plan. Will it be for 2020, 2025 or even further into the future?
A Startup TOM
In startups, where the fight is for survival, some would argue that it is unrealistic to look beyond just 1 year to 18months. Things are likely to change so quickly, and it may feel like there simply isn’t the time or resources to establish a proper future state TOM. However, if a startup wants to receive funding from investors, then it needs a TOM that shows exactly how it will travel along its strategy journey to achieve its Mission and Vision up to the point of exit. All the elements, or the 5 models in THE STRATEGY JOURNEY, that describe the TOM will need to go into a Business Plan to get investors excited and encourage them to open their wallets.
The truth is a startup needs a TOM if it is to have some direction. Otherwise, it can achieve very little, as it goes about its business wasting resources, including time and money, on the wrong things. But what it needs is an agile TOM, one that can be broken down into logical phases or stages that are just a few months, adding up to 18 months, while being able to flex to the changing environment that the emerging startup exists in.
While we all view Google as a tech giant today, that certainly wasn’t the case in its early years from 1998 to 2003. Back then, Yahoo was the big market player and Google was an emerging startup that bootstrapped in order to fund investments in its technology and infrastructure for the longer term. This allowed it to outpace its rivals.
At this time Yahoo was busy looking at customer acquisition strategies and marketing, to build a large market share. It decided to outsource infrastructure components to strategic partners as well as simply using more people to build its online search catalogue.
Google took a longer-term strategy and focused its efforts on getting its operating model elements right. It built capabilities so that it could scale exponentially when the time was right, to showcase its new, more disruptive, product offerings to the market. In the end, Yahoo couldn’t keep up with the cost of maintaining its business. It invested in the wrong things in order to compete, even overlooking its security, while Google swiftly found a way to entice Yahoo’s customer base over to its new, better, faster and more robust products.
TOMs in High-Performance Sports Organisations
F1 is an incubator for innovation, because change is so rapid. Changing regulations require architects, like Adrian Newey from Red Bull Racing, and engineers to design a new car and engine every year. Each track is different, requiring the car and the driver to have a different set up in order to have the fastest car possible for each race. Weather conditions can change the balance of a car on any given day, or even during a race. This affects how the drivers must adapt to race properly. In F1, it is safe to say that a TOM, if it exists, is no more than a year. It is under constant scrutiny and change, so it needs to be highly agile.
In most sporting organisations, like Football teams, a TOM can be driven by their yearly season, or an Olympic or World Cup 4-year cycle. Again, conditions and circumstances change. With athletes gaining injuries that can affect team performance, sporting organisations need flexible teams and a highly agile operating model to fight for their successes and victories. Of course, we know the Germans decided to develop a 10-year TOM spanning multiple World Cup cycles. It took that long to build and develop a team from a youth squad into the 2014 World Cup Champions.
Target Operating Models (TOMs) That Deliver
A TOM will deliver whatever you ask it to do. So, the most important step to developing a good TOM is to ensure it is being formulated for the right outcomes. These outcomes need to clearly state what the goals are and how, when and where they will be achieved. If the mission, goals and objectives are compromised to begin with, and not properly aligned to the strategy of your organisation, then naturally, the output of the TOM will reap the benefits as well as consequences of that compromise. In Big Data the saying goes: Rubbish in, Rubbish out.
When the TOM is designed to deliver in phases, and is aligned across all THE STRATEGY JOURNEY stages, with the 5 strategy journey models: Mission Model, Business Model, Value Model, Operating Model (the existing one), and Transformation Model in sync to deliver the right outcomes, with a plan to execute those phases, in the right place at the right time, while having the agility to cater to unforeseen changes, then an enterprise is in the position to successfully navigate its journey to deliver the outcomes in the TOM and the benefits sought.
THE STRATEGY JOURNEY® book is launching later this year (in November 2018)
In the meantime, if you seriously want to learn the ins and outs of Operating Model Design and develop Target Operating Models that deliver, then check out my new course:
Julie Choo is lead author of THE STRATEGY JOURNEY book (Coming in June/July 2019) and the founder of STRATABILITY ACADEMY. She speaks regularly at numerous tech, careers and entrepreneur events globally. Julie continues to consult at large Fortune 500 companies, Global Banks and tech start-ups. As a lover of all things strategic, she is a keen Formula One fan who named her dog, Kimi (after Raikkonnen), and follows football – favourite club changes based on where she calls home.