How To Design A Target Operating Model (TOM) That Delivers

The concept of a Target Operating Model (TOM) encapsulates a strategic blueprint for an organization’s future operations, outlining the desired “how, where, and when” of its functioning. It serves as a bridge between strategic intent and operational execution, encompassing processes, data, people, and systems orchestrated to achieve overarching goals. A TOM guides transformative efforts by aligning capabilities with strategic vision, ensuring resilience and adaptability in the face of evolving market dynamics and internal shifts. As AI (artificial intelligence) continues to advance, the evolution of digital operating models and digital transformation agility will be pivotal in navigating the near future, enabling organizations to harness AI’s potential for enhanced efficiency and innovation.

Having worked with businesses using TOMs all around the world and 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 chain propositions) and how to effectively commercialize 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

Corporate strategy for Target Operating Models (TOMs) involves a meticulous evaluation of the current operating model’s effectiveness, employing key performance indicators (KPIs) to gauge its performance. This assessment, often facilitated by tools like the Operating Model Canvas, helps organizations identify areas for improvement and optimization. By aligning the TOM with strategic objectives, companies can ensure operational excellence and agility, positioning themselves for sustainable growth and success in a dynamic business landscape.

Within established organizations, the pace of change and innovation is often sluggish. These companies typically allocate 3-5 years for strategic transformation, especially when reevaluating specific business lines and models. Occasionally, Target Operating Model (TOM) adjustments occur within 1-2 years, driven by short-term cost-cutting goals rather than comprehensive TOM initiatives focused on long-term value.

However, when cost reduction is the primary objective, TOM projects can inadvertently trigger to their management system and organizational shifts leading layoffs, offshoring, remote service strategies and changes to adapting more stringent policies. Yet, implementing these changes without considering the need for fundamental Business Model shifts or the implications for the ‘Value Model‘ risks achieving only short-term balance sheet adjustments. The ‘Value Model‘ signifies the value perceived by customers and stakeholders, both within departments and externally. Presently, evolving customer behaviors shape their own Value Models, driving service preferences and interactions with providers.

Amazon exemplifies value-centricity by meticulously analyzing customer behaviors and leveraging a sophisticated technology infrastructure through services like AWS and Alexa Voice. Ignoring strategic groundwork in favor of quick solutions can result in misalignment, missing out on holistic benefits and potentially yielding long-term complications. This reinforces the importance of a well-structured strategy and game plan in transformation efforts, paving the way for enduring success.

There is a full case study of HOW the Amazon ecosystem works around its Alexa Voice Service in THE STRATEGY JOURNEY book.

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 contrast, the UK faced uncertainty in 2020 regarding Brexit’s TOM implementation and repercussions even 4 years post the ‘leave’ vote. The COVID-19 pandemic redirected the UK’s attention, leading to a chaotic transition post-Brexit. In such scenarios, agile TOMs prove invaluable, offering scalability through their flexible framework.

For instance, an agile TOM would have been apt for managing the societal shift caused by COVID-19, enabling rapid adjustments to healthcare and public service operations in response to evolving circumstances. We can further expand on value of using agile TOMs in this situation where COVID was a new virus which had uncertain elements to what it could have evolved into justifying the need to use an agile approach to adapt to this situation.

Responses to the pandemic showcase strengths and weaknesses in Operating Models, evident in countries like New Zealand, South Korea, Taiwan, and Germany. Notably, the UK’s COVID vaccination effort demonstrates the National Health Service’s (NHS) operating model strength, vaccinating over 20 million citizens by February. While the vaccination program succeeded, testing and tracking services remain weak, revealing an operating model deficiency.

The evidence is in the data as illustrated below in the UK daily summary taken from 6th March 2022

The big multi-billion dollar question is:
The challenge is whether the UK can replicate its vaccination program success across diverse sectors and services during economic recovery. Victory in one service model doesn’t guarantee triumph in all, as complexities differ. Updates will be shared through the year, presenting case studies of service models worldwide for insights and awareness.

I’ll be posting updates during the year including new case study examples of ‘Service Operating Models’ from the UK and across the world, in this blog and via our social media feeds (on Instagram, Linkedin and Twitter) so subscribe to stay updated.

Start-up TOMs

In the high-stakes environment of startups, the focus on survival often limits future planning to a mere 1 to 18 months. Rapid and unpredictable changes seem to discourage the establishment of a comprehensive Target Operating Model (TOM). However, securing investor funding demands a TOM that maps the startup’s strategic journey, aligning Mission and Vision with exit goals. The five models within THE STRATEGY JOURNEY Framework, encompassing the TOM, are essential components of a Business Plan, instilling investor confidence and support.

Essentially, a startup requires a TOM to steer its efforts. Without it, valuable resources—time and money—are squandered on misguided pursuits, hindering progress. A versatile TOM, adaptable to the volatile startup ecosystem, should be structured in short, logical phases spanning a few months, summing up to 18 months.

Consider Google’s early days from 1998 to 2003, contrasting with Yahoo’s dominance. Google’s strategic focus on perfecting its Operating Model empowered exponential scaling, ultimately outpacing Yahoo, which grappled with unsustainable investments, neglecting security. Similarly, Netflix’s success against Blockbuster’s downfall exemplifies how distinct Value Models shaped their Operating Models, steering one towards prosperity and the other towards ruin.

For deeper insights into these scenarios, explore our article delving into the divergent paths of Google and Yahoo, as well as  the downfall of Blockbuster vs Netflix, and how their choices regarding Value Models influenced the success or deterioration of their businesses.

TOMs in High-Performance Sports & Gaming Organizations

Formula One (F1) serves as an innovation hub due to its rapid changes. Regulations shift frequently, prompting architects like Adrian Newey and engineers to design new cars and engines annually. Tracks’ variations necessitate diverse setups for optimal race speed. Changing weather conditions can affect car balance mid-race, demanding adaptable strategies. In F1, a Target Operating Model (TOM), if present, endures about a year, adapting continually due to its agile nature.

In sports, such as football, TOMs align with yearly seasons or multi-year cycles like the Olympics or World Cup. Athlete injuries may affect performance, highlighting the need for flexible, agile Operating Models. France’s 2018 World Cup triumph was propelled by a data-driven strategy hinged on Target Operating Models (TOMs). Their streamlined approach optimized player positioning, ball distribution, and cohesive teamwork, all orchestrated within a TOM framework. . This method facilitated quick adjustments, enhancing their adaptability to their opponents and ultimately leading to their championship victory.

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 from home.

The gaming industry gained traction as a substitute for live sports entertainment. In F1, teams transitioned online, hosting Virtual Grand Prix events to sustain fan engagement and driver activity, anticipating revived demand post-crisis. The gaming sector flourished during the pandemic, with companies like ESPORT witnessing surges in signups.

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, and to deliver the best possible services. 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 utilize TOMs to manage its transformation journey, comprising its transformation programs, to give it the best possible chances of fighting, overcoming and even thriving from disruption, such as the digital transformation of AI.