Business models are a lynchpin of success, central to both a company’s creation and to its continued existence.
A well-articulated business model is also vital for attracting investment. But what’s too often overlooked is an equally critical concept — the operating model.
What’s the difference? In the simplest terms, a business model lays out what a business does in order to deliver value to customers (and thus generate profit), whereas an operating model defines how the business does it.
For any good operating model, that “how” is comprehensive, touching all aspects of a business: customer experience, product or service offering, value creation, structure, compliance, metrics, people processes, culture, ways of working, and so much more. A company’s organization design is, in essence, its competitive advantage. If your company isn’t competing as it should, it might be time to look at a top-to-bottom operating model transformation.
Looking Over All Aspects
So, if operating models are so essential, why are they ignored? Why aren’t we making the right changes when issues related to organization design occur? There are a few common pitfalls.
Disjointed improvements across the organization
One is that leaders tend to inject improvement activities like Six Sigma, restructurings, de-leveling, or other new programs into areas of the business — but wind up doing so in a disjointed way. The unique quirks of different departments or product needs get ignored in favor of a buzz-worthy initiative. But without a holistic approach, this only results in greater fragmentation. In a modern economy that thrives on highly cross-disciplinary work, increasing silos within the company is anti-strategic and extremely costly.
Another reason is internal politics. Leaders are motivated to protect their little pieces of the pie, resisting even the idea of sweeping changes. Focusing on power and control — instead of committing to the fundamental changes best for the business — is all too human. The small changes leaders do implement, like tweaking organization charts, are really no better than shuffling the same chairs around a kitchen table.
Lack of knowledge
Finally, leaders often fail to realize that they aren’t already experts in organization design. It’s not just that they don’t know how best to approach an operating model transformation; too often, they don’t even realize they need one. And if they do, they default to what they already know. In other words, they don’t know what they don’t know.
This last trap is understandable. Modernizing an operating model is not a simple task easily completed in a one-hour meeting. It takes real commitment, effort, time, resources, discipline, and informed decision-making. Without these, it can be easy to lose focus amid the day-to-day demands of running the business.
To Remodel or Not to Remodel
Given the central role a quality operating model plays in viability, how can business leaders identify whether they need to modernize theirs?
1. Ask the hard questions. Knowing whether to begin crafting a new operating model starts with hitting pause, stepping back from the fray of your company, and asking: Are we still fit for our purpose? That basic question will inevitably kick off others: about value creation, competitive differentiators, leveraging expertise and intellectual property, and more.
It all comes down to whether you would design your business the same way if you could restart the company from scratch. If not, that’s a good indicator that an operating model transformation is due.
2. Take stock. Do an inventory of all planned, ongoing, and recently completed internal improvement projects. Align them around all the relevant elements of the business. OTM uses an Applied STAR model, where every point is necessary to ensure a model is fit for purpose. The greater number of affected points, the greater the need for redesign.
3. Determine the scope. By defining the scope, you immediately gain clarity. What needs to be done? Where? How much work will it entail? Scope could refer to physical locations, end-to-end value streams, business units, or even sets of functions. It will vary with the particular needs and objectives of each company.
When determining your scope, start by working backward. Begin with the service or product you’re offering to customers, and loop back to day-to-day operations. And don’t be afraid to think big. In some cases, the scope could be global — a total revamp from one end to the other.
4. Determine performance targets. Before you can take action, you must determine how you’re defining a successful remodel. In what can be called the “foundation phase,” the leadership team should establish requirements, parameters, targets, and constraints for any proposed redesign.
This phase is critical, because it’s your chance to assess current performance assumptions — and whether they’re accurate. Questions about whether the company is hitting current performance targets, or likely to hit future ones, should be gone over very deliberately.
5. Consider the time and effort. As critical as operating models are, it serves no one’s interests to rush them — except maybe those of your competitors. Though efficient improvements can be an advantage, it’s important to be realistic about the time required to do it well. Knowing the time and effort investment will determine whether the company is ready to begin — or whether the gains are worth the investment.
6. Get all hands on deck. Operating models are comprehensive in nature, so it only makes sense to have a diverse team of stakeholders work together toward a common goal. They will provide a variety of insights and solutions to plug in to the redesign process. They will also experience head-and-heart engagement and ownership like few do in the workplace. This will have positive consequences for years. So even before committing to a redesign, make sure you can meaningfully commit to and support your team’s involvement in this significant undertaking.
If, after going through these steps, you and your team decide that an operating model transformation is in order, it’s time to get to work on an appropriate template. That’s an exciting opportunity for implementing long-considered changes and a chance to see the positive change that enhanced operations will bring.