Enterprise Target Operating Model

By: A Staff Writer

Updated on: Sep 06, 2023

Here is everything you want to know about the Enterprise Target Operating Model.

What is an Enterprise Target Operating Model?

An Enterprise Target Operating Model (TOM) is a comprehensive blueprint for how an organization will operate to achieve its business objectives and strategy. It encompasses various elements such as organizational structure, governance, business processes, technology landscape, and customer engagement. This model serves as an aspirational goal and a roadmap, charting out the necessary transformations across multiple dimensions. For example, a financial services firm’s TOM may articulate a shift from traditional banking to digital channels, stipulating changes from IT architecture to skillsets. The goal could be to increase digital transactions by 50% and reduce operational costs by 20% within two years.

Why is an Enterprise Target Operating Model (ETOM or TOM) Important to Corporations?

The Target Operating Model is indispensable for organizations for several reasons. Firstly, it aligns the company’s strategy with its operational capabilities. It’s not uncommon for businesses to have high-level strategic goals but lack a concrete operational plan. A TOM bridges this gap. Secondly, it brings coherence and unity in operations across departments, ensuring that different units are not working at cross-purposes. According to a report by PwC, companies with well-defined operating models are 30% more likely to achieve their strategic objectives. Finally, it acts as a guidepost for decision-making, ensuring that every operational change or investment is aligned with the model’s directives.

What Exactly is an Operating Model?

An operating model is the organizational setup through which a company delivers value to its customers and differentiates itself in the market. It includes the business processes involved in creating products or services and the organizational structure, policies, and technology that enable these processes. For instance, a retailer like Walmart operates on a model of cost leadership supported by an intricate supply chain and logistics technology. They invest heavily in data analytics to understand consumer behavior and manage inventory, offering their customers low prices and convenience.

What are the Components of an Enterprise Target Operating Model?

A Target Operating Model typically comprises six key components:

1. Organizational Structure: This outlines the hierarchy, roles, and reporting lines. For example, moving towards a flatter organizational structure may improve communication and decision-making speed.
2. Processes and Operations: The core workflows, procedures, and protocols are designed to create and deliver products or services. For example, adopting Six Sigma processes to improve manufacturing quality.
3. Technology Architecture: This includes the IT systems, applications, and infrastructure required to support the business. For instance, migrating to cloud-based solutions for better scalability.
4. Governance and Management: This framework ensures that the organization adheres to regulations and follows best practices. It also defines how decisions are made, monitored, and measured.
5. People and Talent: Talent management strategies to ensure the right skills, culture, and workforce planning align with the organizational needs.
6. Customer Engagement involves how the organization will interact with its customers, including the channels used and the level of service provided. For example, implementing an omnichannel customer service approach.

What are the Steps in Defining and Implementing a Target Operating Model?

The process of defining and implementing a Target Operating Model typically occurs in a series of organized steps:

1. Assessment Phase: The first step is to assess the existing operating model and organizational strategy comprehensively. This includes a gap analysis, SWOT analysis, and financial review. For example, a retail business might find its existing operating model highly fragmented, causing inefficiencies and costing millions annually.
2. Design Phase: In collaboration with stakeholders, a new TOM is designed to close the identified gaps and align with the organizational strategy. This often involves cross-functional teams and potentially external experts. For example, creating a central procurement system to streamline purchasing and cut costs.
3. Validation Phase: Before full implementation, the TOM is typically tested through pilot programs to assess its viability and potential for success. These pilots often focus on critical components and are closely monitored for performance against predetermined metrics.
4. Implementation Phase: Once validated, the TOM is rolled out across the organization. This is often done in phases to mitigate risks and allows for adjustments as necessary. McKinsey estimates that major corporations’ implementation phase often takes 18-24 months.
5. Monitoring and Adaptation: Post-implementation, continuous performance monitoring is essential to ensure that the TOM remains aligned with organizational goals and adapts to changing conditions.

What are the Benefits of a Fit-for-Purpose Target Operating Model?

A fit-for-purpose TOM offers multiple benefits. It provides a structured framework to align strategic objectives with operational capabilities, enabling efficient resource allocation and process optimization. For example, a fit-for-purpose TOM in a healthcare setting might integrate telehealth solutions, thereby reducing costs and extending reach. According to a study by Bain & Company, businesses with highly aligned operating models and strategies can achieve up to 40% higher return on investment (ROI) compared to those that don’t.

How Will We Know it is Time to Transform Our Operating Model?

Determining the right time to transform an operating model can be challenging. Typical indicators include a consistent decline in financial performance metrics like revenue or profit margins, failure to meet KPIs, or increased customer attrition. Market shifts, like regulatory changes or disruptive technologies, can also necessitate a review. For instance, the advent of digital streaming services signaled to cable companies that their traditional operating models were becoming obsolete.

What are the Enablers and Disablers of the TOM Process?

Enablers:

1. Strong Leadership: Executive buy-in is crucial for steering the TOM process, ensuring resource allocation, and fostering organization-wide alignment.
2. Stakeholder Engagement: A TOM requires input from various stakeholders, from frontline employees to suppliers, ensuring that the model is comprehensive and realistic.
3. Financial Resources: Adequate funding, often a significant investment, is essential for implementing new technologies or process changes.

Disablers:

1. Resistance to Change: Employees and sometimes middle management can resist changes, perceiving them as threats to their roles or work routines.
2. Insufficient Expertise: Lack of in-house skills to design, manage, and implement the TOM can lead to its failure.
3. Resource Constraints: Budget and time limitations can hinder the full implementation, causing the TOM initiative to under-deliver.

What are the Pitfalls and Impediments in a Typical Target Operating Model Implementation?

Implementing a Target Operating Model (TOM) is fraught with challenges that can derail the transformation. Some common pitfalls include:

1. Scope Creep: The tendency for the project to expand beyond its original objectives, leading to delays and increased costs.
2. Underestimating Costs and Time: Organizations often miscalculate the financial and time investment required for implementation, which can lead to resource constraints and incomplete execution.
3. Lack of Employee Buy-in: Employees may resist changes without proper communication and involvement, hampering successful implementation. According to a Harvard Business Review study, approximately 70% of organizational transformations fail, often due to lack of employee engagement and insufficient change management.
4. Inadequate Monitoring: Failing to track key performance indicators can result in the inability to make necessary adjustments in real-time, leading to poor outcomes.

What is the Process and Approach to Defining, Designing, and Implementing an Enterprise Target Operating Model?

1. Strategic Alignment: The TOM should be aligned with the overarching corporate strategy. This usually involves C-suite involvement to ensure that the model supports the organization’s long-term objectives.
2. Assessment and Data Gathering: A thorough analysis of the current operating model, processes, and systems is essential. This includes performing SWOT and gap analyses, studying competitors, and benchmarking against industry best practices.
3. Design and Development: The new TOM is designed in consultation with key stakeholders and subject matter experts. This phase often includes a series of iterative sessions to debate, design, and refine the model’s various components.
4. Validation and Piloting: The TOM is validated through a series of pilot programs, with performance closely monitored against pre-defined metrics. The learnings from this phase are integrated into the final model.
5. Implementation: This is the rollout phase, where the validated TOM is implemented across the organization. Given the complexities, this is often done in stages and monitored closely for any issues that may require course correction.
6. Review and Adapt: Post-implementation, the TOM is continuously reviewed, and adjustments are made based on performance metrics and changing organizational needs.

Do We Need to Hire a Top-Notch Strategy Consulting Firm?

Hiring a top-notch consulting firm isn’t obligatory but can add significant value, especially if internal expertise is lacking. Consulting firms bring methodical approaches, experience in change management, and industry insights that can accelerate the process and mitigate risks. For example, McKinsey & Company, Bain & Company, or Boston Consulting Group can provide strategic perspectives and implementation frameworks that have been proven across multiple organizations.

How Much Does Hiring a Consulting Firm Cost?

The cost of hiring a consulting firm to define, design, and implement an Enterprise Target Operating Model can vary widely depending on the complexity and scope. For a typical Fortune 500 company, you could expect fees ranging from $250,000 million to $5 million.

Can We Do It Ourselves? Can We Purchase a Pre-Built and Customizable TOM Toolkit?

In-house development is feasible if the organization has the requisite skills, resources, and stakeholder commitment. However, it’s a significant undertaking that requires a clear roadmap and diligent monitoring. Pre-built TOM toolkits can serve as a starting point but must be customized to suit your organization’s unique needs and challenges. CIOPages.com offers an Enterprise Target Operating Model Do-It-Yourself Kit.

What are the Best Practices for a Successful Target Operating Model Transformation?

1. Leadership Engagement: Strong sponsorship from the C-suite is vital for aligning organizational goals with the TOM.
2. Employee Involvement: Employee buy-in is crucial for successfully implementing and operating a new TOM.
3. Phased Implementation: Implementing in stages allows for iterative learning and minimizes operational disruptions.

How Will Emerging Technologies Affect Future Operating Models?

Emerging technologies such as AI, machine learning, and blockchain will profoundly impact future operating models. According to Gartner, by 2025, over 50% of all enterprise applications will have embedded AI capabilities. These technologies promise to revolutionize aspects like decision-making, customer interaction, and supply chain management, necessitating fundamental changes in TOMs to leverage these advanced capabilities effectively.

The integration of these insights will fortify the approach to defining, designing, and implementing a Target Operating Model, thereby aligning it closely with strategic objectives and operational capabilities.