What is an Operating Model?
Every business has an operating model. Its how your business is set up to structured to meet your customers needs. It’s your people, your processes, your technology, your tools and it’s something that we review for our clients regularly. Be it as part of a detailed due diligence review using our due diligence methodology, part of a business growth project to understand how a business can scale or perhaps part of a transformation project looking at how a business can better meet customers needs.
Key Components of an Operating Model
Operating models typically look at people, processes, technology and governance however we believe that this is only part of the picture. A businesses customers, channels, products, functions, data, locations and suppliers are all essential components that make up how your business is structured and all need to be considered when reviewing a businesses operating model.
Below we’ve broken down these components to explain what they are, why they matter and why the come together to make an operating model.
Customer should be at the heart of any business. This section of the operating model should articulate who the businesses customers are and the number of them. This is important to be able to put the design of the business into context. For example, a bank with 100 thousand customers will need a very different operating model to a bank with 100 million customers.
Channels are the mechanisms through which your Customers interact with your business. Examples include your website, your stores, and your phone line. This helps us understand how your channels work and how your customers interact for both sales and servicing.
Products are what your customers are paying for. This could be a physical product, a digital product or services. Clearly articulating what your product is helps us understand how your business is set up to sell and service your customers and products. For example, a product such as a car the company will require both show rooms and garages to sell and service, with the associated salesmen and mechanics, processes for both, locations for both, customer journeys that involve both etc.
Functions are the core building blocks of your business and describe the key activities your business needs to perform to be able to operate and serve customers. Examples include areas such as Sales, Marketing, Operations, Purchasing etc. For a current state operating model analysis we develop a functional model of the business to understand how the business hangs together and how the functions work together.
Processes are central to any business. For small businesses these may just be “the way we do things” that are understood but not documented however for large corporation they should be written down and categorised (eg. business critical vs. non business critical) so that activities are performed consistently with the required level of control where required. For industries that are heavily regulated (such as financial services) it’s important to ensure that the businesses processes meet regulatory requirements.
The organisation section of the TOM explains how the people in the business are structured ie. which teams there are and how they hang together. An operating model should have a high level overview of the team structures and who does what and should be underpinned by a detailed organisational design document that articulated why the organisation is structured like it is and the detail of every team and role.
Data is often overlooked as part of a TOM. With more and more companies using digital tools to offer a better service to customers it’s essential to understand how data is managed in your business. This could be customer data, product data, pricing data and all of these needs to be maintained to provide a great service to the customer.
Every business has locations and this section of an operating model should provide details of these, who owns them and any business continuity planning that is in place. The locations should overlay with the organisation section of the document to allow the reader to understand which teams are located where and ensure the right people can easily work together.
Many businesses utilise the services of key suppliers without which they can’t operate. Typical example include things like technology infrastructure, banks and payment providers and mail providers. In this section of an operating model we identify what these key suppliers are, how’re they managed and how any risks associated with them are controlled.
Technology is critical to any company. From a builder who needs a mobile phone to speak to her clients to a digital media company who’s entire business is technology based. This section should discuss the key technologies used by the business and how they’re supported. This should include disaster recover to ensure that when something goes wrong it can be fixed fast. The scope of this chapter of an operating model will vary significantly depending on the type and scale of the company.
The final component of an operating model is the governance of the business. Governance defines how decisions are made and risks are managed in the business. The governance structure should be simple and appropriate to the size of the business and the industry it operated in.
What’s not in an operating model
It’s just as important to understand what’s not in an operating model as what is in. For us there are three things that should not be included:
- Strategy: the operating model is how the business is set up to deliver the strategy. It shouldn’t describe the strategy of the business but provide clear linkages to how the strategy is delivered by the operating model. The business should have a separate strategy document articulating and linking the vision, purpose and strategy.
- Financials: the operating model will have a cost and should link to the company’s financials however these should not be part of the document. A good operating model is a working document and confidential financials should be held separately in the companies financial forecasts.
- Detailed Organisational Design: high level organisational design should be included however there is no need to include a detailed breakdown of who does what as this makes the operating model difficult to read. This should be held in a separate organisational design document.
In a future post we’ll discuss Target Operating Models and how to define a roadmap for the delivery of a Target Operating Model.
Good luck with your ventures!
Chris Purcell @ Prussel & Co