[Updated to cover ‘How a TOM with business agility can deal with disruption’, including economic crisis like COVID-19 as well as the long term strategy taken by Amazon]
The term Target Operating Model (or TOM) has been used a lot in many of the organizations that I have worked for all around the world, from London, to Mexico City, to Moscow, to New York, to Sydney, to Johannesburg, to Singapore, to Shanghai and Hong Kong, and in Sao Paulo too. Many 100s of millions of dollars in business change budgets 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 organizations. 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 and highlight:
- What is the Operating Model?
- What is a Target Operating Model (TOM)?
- Different Types of Target Operating Models
- How an organization can really reap the benefits of a successful business transformation program, or project, that is designed to deliver a TOM?
AND I will also provide examples of why and how a strong TOM with business agility, is how a business will be able to pivot and reinvent its services in times of uncertainty and instability, such as the economic crisis caused by the COVID-19 pandemic.
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 organizations.
The Business Model delves into an organization’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 organizations 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 organization. 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 that year, 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, that year (since he went on to win more championships in the following years). At the time, it was clear Lewis also had some organizational 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. And in this subsequent years, he has learned from his experiences, improved and delivered even better results.
An Agile Operating Model, that is an Operating Model with business agility also provides the means for a business to pivot from disruption especially in times of economic crisis.
Because the Operating Model is comprised of all the business activities that make a business run, and keep it running, it is what will get your business through tough times as it gets disrupted both from our fast changing digital economy, as technologies involving robots and AI begin to replace what people do, and from economic crisis caused by shutdowns or lockdowns from a health pandemic like COVID-19.
An Operating Model focus on capabilities that allow it to ‘pivot’ its Business Models to change how it operates quickly, is what makes it agile, or to operate with business agility. This can make all the difference, as we have seen how Business Models can become disrupted, very quickly, and overnight in some cases.
Learn the 5 step process to build business agility your Target Operating Model including success story examples from our article on ‘How to shape your Business and Career with THE STRATEGY JOURNEY Framework’.
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 program 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 program 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 organization 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 Organizations
In many of the larger incumbent organizations that I have worked for and with, change and innovation, if it exists, is unfortunately rather slow. Most larger organizations 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 organizational 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.
The ‘Value Model’ is what constitutes as value to the customers and different stakeholders of a business in the services that it delivers both internally between different functions or departments and externally to customers, users and partners. Today, many customers are changing their behaviors and driving their own Value Models in what sort of services they will adopt, how and when from different service providers along their own self-directed customer journeys. Service design is key to all of this and this starts with understanding customers’ Value Models in order to design and then build the TOM that will deliver this.
Amazon is the best example of a company that focus on the customer journey and the Value Model, having invested heavily to collect, mine and analyze over 500 data attributes that describe the behaviors of its customers, and the capabilities in their technology infrastructure in their web services business (AWS) including cloud hosting and other Software as a Service (SaaS) applications which not only serve Amazon itself but other third party businesses too, their Alexa Voice Service which works with different Internet of Things (IoT) devices, and their AI algorithms within the Amazon Marketplace with its Omnichannel network.
There is a full case study of HOW the Amazon ecosystem works around its Alexa Voice Service in THE STRATEGY JOURNEY book.
Simply put, if a business and its transformation programs were to jump straight to solutions without a proper strategy or game plans, there will be misalignment and thus a lack of any other potential benefits, which would form part of a more holistic strategy, that will deliver bigger and better things in the longer-term. Worse still, the short-term gains may also lead to longer-term problems and pain.
TOMs in Government Organizations
In government organizations 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, and who has invested heavily to build its TOM.
In the UK, it remains uncertain even in 2020, 4 years after the vote to ‘leave’ what the TOM looks like for Brexit, and exactly how long that will take to achieve and what are the full repercussions. I suspect it could be a whole decade, so it will be interesting to see when a proper plan is announced and the projected outlook of that plan.
The disruptions caused by the COVID-19 pandemic have diverted the UK government’s attention aways from its Brexit issues, possibly for at least the whole of 2020, and Brexit is supposed to take place officially by December 2020. Will will there be a plan and when will it before… 2025? Or even further into the future?
The ways in which various governments (in first world countries) have handled things or responded to the COVID-19 pandemic crisis, also reflects the strengths and weaknesses in their Operating Models and whether they have invested in solid Target Operating Models in their healthcare systems and their economies too.
The data in the number of deaths versus the testing processes, infrastructure, and decision making by leaders is clear for all to see. New Zealand, South Korea, Taiwan and Germany have performed way better because of their Operating Models, and in navigating their strategy journeys, compared to the countries with the worst records relative to their populations, such as the UK and the US.
It seems the UK government has too busy arguing and dealing with Brexit, while also cutting public services for decades, along with an overfocus on the Financial Services industry compared to investments in medical science and biomedical engineering manufacturing. This has left the UK with the worst numbers in testing and availability in Personal Protective Equipment (PPE) for its medical staff and other health and social care workers.
The Trump Administration has certainly taken many questionable decisions and at the beginning of the Coronavirus outbreak – we don’t need to delve into his discussion with his distraught Chief Medical Officer on injested disinfectant into people’s bloodstream as a means to combat the virus. But the lack of investment in health care, for minority groups, and the closing down of President Obama’s pandemic management function, are clear mistakes and a sign of what kind of Operating Model the United States has. Would the us handle COVID-19 much better under President Obama? Well, we don’t know for sure, but at least an Obama led US would have been more prepared, as highlighted in President Obama’s speech from 2014, on the need to prepare for a pandemic.
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 Framework, 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 a TOM with business agility, 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.
Netflix too was once a start-up in a world dominated by Blockbuster. How did it grow to what it is today, compared to the poor transformation decisions taken by Blockbuster that led to its demise? Learn more in our article comparing these two competitors and the Value Models that they chose to focus on which led to the development of their Operating Models or the destruction of their Business Models as was the case with Blockbuster.
TOMs in High-Performance Sports & Gaming Organizations
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 organizations, 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 organizations 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. Consider what kind of Operating Model exists at the European and Club World Champions, Liverpool, as implemented by coach Jurgen Klopp supported by Liverpool’s very patient American Investors… You need only read Sir Alex Fergunson’s book, titled ‘Leading’, to find out what kind of strategies football club’s really need to succeed.
During the COVID-19 lockdown situation, sports organizations and management companies are hit hard of course even if some of them might have big cash reserves, but customers are turning to the gaming industry, to fulfill their need for sports entertainment form home.
In Formula One, drivers, sponsors and teams moved online to support a Virtual Grand Prix, to keep customer engagement going, and their drivers active in some cases, so that demand for their services will resume as soon as the crisis is over, even if their form may change, given we don’t know how social distancing will work with live spectator sports. We have certainly seen the online gaming industry thrive from the COVID-19 crisis with signups to companies like ESPORT rocketing.
Target Operating Models (TOMs) That Deliver
A TOM will deliver whatever you ask it to do, and we have highlighted what are the 4 priority capabilities to build, so it comes down to ‘what is the game plan?’ The most important step to developing a good TOM is to ensure it is being formulated for the right outcomes, based on the right context or problems. The problems and outcomes need to clearly state both what the root causes and the goals are, and how, when and where they will occur and be achieved. If the mission, goals and objectives are compromised to begin with, and not properly aligned to the strategy of your organization, 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, with a good flexible roadmap that sets out the gameplay in steps, 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 business agility to cater to unforeseen changes, such as those caused by disruption including health pandemics, then an enterprise is in the position to successfully navigate its journey to deliver the outcomes in the TOM and the benefits sought.
This is how a business or enterprise of any shape or size can and should manage its transformation journey, comprised of its transformation programs, to give it the best possible chances of fighting, overcoming and even thriving from disruption, whatever the causes.