The Art of Operating Model Design: Creating a Future-Proof Operating Model

Many organizations are in the midst of some form of transformation including defining a new Target Operating Model (TOM) and implementing change. With all this redesign, you’d be forgiven for thinking many organizations are operating sub-optimally. Some may be, but others are simply doing what they feel is necessary to prepare themselves for our uncertain world.

Having partnered with leaders across various industries (Healthcare, Financial?Services, Technology, Private Equity), I saw firsthand this desire for organizations to rethink, restructure, respond, grow, and change. And at the heart of organizational change, of course, is the operating model.

Why an Operating Model?

As anyone in business will tell you, the Operating Model acts as a link between strategy and operations. It is a blueprint for how the strategy will be executed; it executes the business model. An operating model contains many components, including Mission and Purpose, Culture & Values, Governance (Operating Mechanics), Processes, People, Technology, Org Structure, Risk Management, and Service Delivery. And anything in between depending on the nature of the business.

Without an operating model, an organization will no doubt face challenges from siloed teams and duplicated effort, leading to structural inefficiencies, unmanaged risk, and ambiguity. Whereas with a sound operating model, an organization has a clear blueprint for how to effectively address customer needs, capture market share, and sustain growth.

When we think short-term

My experience is that some organizations are thinking short-term, whereas others are taking a more strategic view and are honing the art of Operating Model Design. And it is an art knowing when to change the operating model. In fact, many leaders fall into the trap of changing their operating model too often.

The problem with regular and rapid operating model redesign is that it is either reactive to a specific, recent change, or it is proactive, but short-termist. Many organizations create Target Operating Models (TOMs) to enable them to deliver a 3- or 5-year strategy. The strategy is fixed. The operating model is fixed. But for the TOM to be rock solid, you have to believe that the strategy is perfect. You have to believe you can see the future, and of course, no one can. Life happens, as they say.?Innovation, changing market conditions, pandemics, wars, fuel shortages, and uncertain political climates all happen. This is the stuff we simply can’t predict, nor account for in 3- or 5-year strategy. We can’t possibly build a strategy for it.

Or can we predict the future?

Contrarily though, the unforeseeable is not actually unexpected. Yes, it will take us by surprise, and no, an organizational strategy can never account for these events, but an organization must be able to respond when--not if—they happen. So how can an organization create an operating model that enables it to flex when it needs to? How can it operate when the Tsunami hits?

Organizational agility is necessary to adapt to change

I believe organizations need agility and flexibility, as opposed to rigid structures. Those that have the flexibility will be able to respond quickly when there is a pandemic, will be able to change how they reach their customers when their customers move, will be able to change their products when market conditions dictate, and will be able to weather the storm of financial pressures through innovation.

But what if we could plan for the unforeseeable? What if we could design an operating model and supporting structures that not only survive an unforeseeable event but thrive in uncertain times? We do indeed live in uncertain times, and pretending we don't is no sound strategy. Organizations that fear change and try to protect themselves from it will struggle to survive. Organizations that embrace change, for whom change is natural and expected, for whom change is an anticipated opportunity, will thrive.

Learning from Art

I’m an art fan and particularly appreciate the powerful impact art can have on its audience, even hundreds of years after it was created. After all, art and innovation are very similar; great art was the innovation of its time. It has huge impact, and it endures. Take Leonardo da Vinci’s Mona Lisa; she has wowed audiences for generations; since 1503 to be precise, and is the most famous painting in the world. So how can we learn from great art? How can we apply to the business world the factors that contribute to the qualities of great art and its ability to endure over time.?

The Art of Operating Model Design

Just as great art has a huge impact now and endures for the long term, so must a great Operating Model. To achieve impact and longevity, an Operating Model must be both flexible and stable. They must enable flex when--not if-- there's an unforeseeable event or condition. And they must be stable so they can deliver enduring value. True flexibility means you have the ability to change, react, predict, and innovate. ?Instead of just surviving in a changing landscape, you must thrive.

But what do you need to be able to flex in this way? Do you need to change your operating model every five minutes? I don't think so. To be able to flex, you need stability. At your base layer, you must have solid foundation. Many organizations seem to think their operating model is a blueprint for how they do business in today’s world; how they deliver their current strategy. What I’m advocating for is an Operating Model that is a blueprint for how a business does business. A blueprint for how a business operates in a world with known unknowns, of planned disruption, of foreseen unforeseeables, of pandemics, of market crashes.

The true art of Operating Model design, therefore, is in creating such strong foundation that whatever happens, your business will still operate, and operate well.?Certain structural pillars don’t change in flexible Operating Model Design. These are Mission, Culture and Operating Mechanics, which must remain constant and if designed well can enable any other elements to flex. Operating Mechanics, by the way, is a new way to approach Governance. And if you’re not aware of the term, get familiar with it; governance is synonymous with bureaucracy; Operating Mechanics on the other hand simply describes decision rights and accountability. It’s a functional way to look at the problem of governance.

Flexible Operating Models in Practice

Let’s look at some scenarios.

Imagine a company sets up Innovation Moonshots to explore new ideas but uses short-term measures of success so projects cannot get the buy-in or investment they need and so innovation is then deemed to have failed. The operating model that determines processes for success measurement would need redesigning. Or so you might think. Alternatively, however, if the operating model dictated that success measures were defined based on the strategic objective, then there'd be no need to change the operating model. This would also ensure the whole organization could think and act in a more agile way. Future-proofing at the Operating Model layer enables innovation.

On the other hand, you could imagine a company that grows through acquisition but struggles to integrate its acquisitions to realize expected value. If the Operating Model is too specific, it will not cater to new acquisitions if their operating models differ. Often, integrations fail where elements of the operating model cannot be aligned. If an organization grows through M&A it must have an Operating Model that allows for integration and must not expect the Operating Model of its acquisitions to conform to a rigid set of principles.

The Flexibility Paradox

I call this need to have both strong rigid foundations and the scope to flex “The Flexibility Paradox”. We all need flexibility, but to enable flexibility we need that strong foundation. It may sound counter-intuitive to talk about rigid foundations, but it is precisely the well-thought-through, expertly engineered foundations that enable the flexibility to respond to the unknowns.

Let's recap on the principles of this ‘Flexibility Paradox’.

1. To operate well in our world of unforeseeable events, organizations need flexibility and stability.

2. Instead of creating a new Operating Model every couple of years, organizations should create a strong foundation with an Operating Model; one that can stand the test of time and change. One that can endure – Mona Lisa.

3. The Operating Model itself allows for change and does not need to be redesigned when change happens. Because course change happens.

4. Some aspects of an Operating Model will not change: Mission & Purpose, Culture and Operating Mechanics. Because that’s the core.

5. An Operating Model designed for the future should be well understood organization-wide, and if created to endure, it will be the guiding light for the organization through all future change.

Creating organizations that endure

Having had the opportunity to work with a variety of organizations, I know that many will want to optimize their Operating Model. But the true leaders, those in it for the long term who wish to create an enduring legacy, are starting to think differently and are creating the strong foundation required for growth in uncertain times.

How to get started: With “OM Retro”

If you're keen to get started but are wondering where to start and you don't want to launch headlong into another Operating Model redesign (and potentially $350K - $750K consulting investment), I’d like to offer some guidance through a process I call “Operating Model Retrospective”, or OM Retro.

The retrospective process enables organizations to think critically about what it is that hasn't worked well with a past or current Operating Model so that structural issues can be fixed in a new TOM. It doesn’t create a new TOM but recognizes that before embarking on designing the new, we first need to address what in the old TOM worked and what didn't

The process is simple but easier said than done:

1. Appoint a Retro leader (an external facilitator to ensure impartiality)
2. Start with your CEO-1 leaders, in a comfortable setting without digital gadgets, just yellow stickies and with a clear objective (my suggestion is 8am – 12pm; anything more than 4 hours hits the law of diminishing returns)
3. Bring together a cross-organizational team; empower them to work collaboratively and challenge the status quo
4. Identify emerging themes from both the CEO-1 leaders, and the cross-functional team sessions
5. Develop an archetype based on emerging themes and have a dialogue with your CEO on the refined structure, the ‘Why’, and actionable next steps (remember, it’s a dialogue not a presentation and no one has time for an 80-slide deck; at most 5 slides)
6. If necessary, engage an external company for a half-day validation exercise to strengthen the ‘Case for Change’

The OM Retro works because it enables organizations to consider why their current operating model isn't working; this is a vital step before designing a new one. It also exposes the friction between different functional areas and enables colleagues to have uncomfortable discussions in a safe space. It’s a great exercise to do before you bring in consultants to help reshape a new TOM, and in my opinion, it’s a vital first step toward an operating model that offers both flexibility and stability--one that endures.

I hope you've found my ideas on Operating Model Design useful; please reach out and share your experience. If you’d like assistance with this process, I may be able to recommend someone to help.