BUSINESS MODELS AND OPERATING MODELS

BUSINESS MODELS AND OPERATING MODELS

 A  business model appears to be a  larger concept. An operating model is a part of a business model. An operating model is the engine at the heart of the business model that helps make the business model work.

A business model defines the following

- the stakeholders with whom the organisation will interact

- the offer or promise that the organisation is making to each stakeholder segment

(customers, employees, investors, suppliers, etc both internal and external)

- the contribution that each stakeholder segment is expected to make (work from employees, money from customers, etc)

- the resulting financial models (income statement and balance sheet) taking account of size and growth ambitions

- the operating model that makes it possible for the organisation to interact effectively with its stakeholders

An operating model defines

- the core work processes that are needed to create and deliver value to each stakeholder group

- the equipment and technology needed to execute these core processes

- the information systems needed to support these core processes

- other processes needed to support the core processes, such as financial processes or HR processes or governance processes

- the suppliers and supplier agreements needed to support the processes

- the people needed to do the work

- the organisation structure, decision rights, incentives and accountabilities and culture needed to ‘govern’, motivate and support the people

- the locations, buildings and ambiance where the core and support processes will be executed

THE OPEN GROUP’S BUSINESS REFERENCE MODEL

“The BRM (Business Reference Model) is intended to facilitate description of a business model through five perspectives:

? The Environment perspective addresses the context within which an organization must operate. It describes the external factors, such as the competitors, regulation, and customers for an organization, in addition to the overall strategy possessed by the organization for market positioning. This perspective is intended to describe why an organization is motivated to undertake particular courses of action.

? The Value Proposition perspective describes the offering produced by the organization in terms of products, services, brand, and shareholder value. This perspective is intended to describe what impact an organization wishes to generate and how that will generate value for stakeholders.

? The Operating Model perspective describes the resources at the disposal of the organization that will be deployed to generate the value proposition. This perspective is intended to describe how an organization will be able to deliver on its value proposition. Capabilities can be thought of as combinations of people, process, information, and technology that can be internally or externally sourced.

? The Risk perspective identifies the uncertainties that may surround an organization in its delivery of the value proposition. This perspective is intended to describe the threats that face an organization from within and without.

? The Compliance perspective represents the set of criteria that the organization must adhere to in order to assure that the value proposition is delivered using an acceptable standard of business practice. This perspective is intended to describe the constraints that prevent an organization from acting in negative, destructive, or inappropriate ways and the corresponding opportunities that can be exploited from a differentiated compliance position.”

The visual is five boxes with arrows between them. The operating model box is in the middle. Each of the five boxes contain more boxes. The operating model box, for example, has six boxes in it – value chain, capabilities, governance, partners & ecosystem, finance and assets.  Compare this to my PILOS model (processes, information systems, locations and buildings, organisation and people, suppliers and business partners) and you get some differences. The Open Group’s model gets at processes through “value chain”, information and organisation and more detailed processes are contained in “capabilities”.  Locations and buildings may come under “assets”.  “Ecosystem” is an interesting descriptor, but has some overlap with suppliers and business partners.  “Finance” for me is the result of the operating model and the value propositions, so is better considered outside the operating model concept. “Governance” is a separate box in the EA framework, but for me is part of organisation and people.

So the Business Reference Model is another attempt to define what is meant by the terms business model and operating model.

There are a couple of other elements here that are worthy of comment – the risk perspective and the compliance perspective.  The risk perspective includes four boxes – financial, operational, strategic and controls.  It is not clear to me how this overlaps with or is separate from “governance” within the operating model box.  Risk is important. Operating models deal with risk by controlling some decisions and imposing policies and constraints. From my perspective Risk is a subset of “governance”.

Compliance contains five boxes – commercial, legal & regulatory, quality, safety and social responsibility. Interestingly “ethical” risk/compliance (getting people to behave with integrity and avoiding the reputation damage that can be caused by sexual harassment or inappropriate sourcing) does not appear in either list. Since I have just been involved in some research on “Tone from the Top”, I am rather sensitive to this compliance and risk issue.  It also demonstrates that there is a good deal of overlap between compliance and risk. There also seems to be some overlap between environment and these two, since the law is part of the environment.

Having nibbled away at the five perspectives view, I do, however, think that the Open Group may be surfacing some perspectives that get too little attention in normal operating model work.  So my thought is this – compliance issues should surface when you take a full stakeholder view of the business. Compliance is about living by rules set by stakeholders. In fact a typical value proposition between a company and society is that the company will be compliant with the meaning of the law, not just the letter, and with normal good practice: this is part of getting a license to operate.

Risk is about uncertainties. Maybe an operating model needs to be “risk tested”: define some typical uncertainties, consider what the range of possibilities is on each, and see if the operating model still works at the extremes of these uncertainties.

                   Reference

     ashridgeonoperatingmodels.com