Leaders, revising their five-year plans every quarter, are constantly seeking ways to reinvent their companies and stay ahead of the pack, given competitors of varying capabilities and scale and customers who expect more for less. For many companies, the answer is large-scale global transformation. Eighty percent of CEOs in one study claim to have transformations in place to make their businesses more digital; 87 percent expect to see a change in their operating models within three years.
But leaders see establishing those operating models as their top challenge in achieving digital transformation. So how might they move forward? A review of transformations across industries reveals a common theme: Successful transformations realign the organization to a singular vision; failed endeavors typically do not.
An organization has a far better chance at succeeding when its operating model—or how the organization creates value—is aligned to its strategy. And this means that for transformations to succeed, leadership teams should examine and possibly revise their organizations’ operating models. Given the pace of change, executives may struggle to determine where to place bets, how much to invest, and when to do it. Wait too long, and they risk seeing market value quickly erode; invest inefficiently or ineffectively, and they could face a cash crunch or investor backlash.
The good news for companies born before the digital era is that they often quickly understand the value in transforming to agile, adaptive, and responsive enterprises because they already have the other intangibles in place: strong brands, an entrenched customer base, established sales methods, and partners—suppliers, distributors, and technology.
Successfully driving these changes, though, depends on executives addressing a range of organizational barriers and risks—particularly functional silos, incomplete enterprise data, and a product-out (versus a market-in) philosophy of value creation. A well-designed and purposefully executed enterprise operating model can help companies balance growth with risk and overcome organizational barriers.
Target Operating Model
Poll any number of executives, and you’ll likely find yourself with as many definitions of operating model. But most commonly, operating model transformations are associated with cost takeouts or organizational redesigns. While these can be byproducts of an operating model shift, the common associations are myopic and discount the full value.
Instead, leaders should think about their operating models as their unique set of capabilities aligned to the enterprise’s strategy, with skilled leadership teams, tailored metrics, unique investment profiles, and tight coordination across the value chain.
What Work Needs to Be Done?
In moving forward with a digital transformation, the first step is to identify the holistic set of capabilities required to meet the enterprise’s strategic ambitions. The capability set should include both existing capabilities and new ones (as needed) and address front-, mid-, and back-office functions across all product lines.
For example, product strategy is a capability that creates product road maps to realize customer requirements; campaign management is a capability that launches, measures, and reports on the success of marketing campaigns. When brought together, capabilities comprise a capability map, representing the collective set required to execute against the strategy and business model. A capability map provides a foundation on which organizations can build their target operating model. It can be used to determine skill set requirements, hire talent, set performance metrics, build teams, and identify partnership opportunities.
Where Does the Work Get Done?
Once leaders have established the capability map, the next step is sourcing capabilities. Several capabilities will likely already exist—some mature or fit-for-purpose, others recent arrivals. This step is often the most difficult to execute, as companies can be resistant to changing their existing ways of working when instead they can leverage the opportunity to untether themselves from legacy processes and technologies.
Enterprises typically have four sources for capabilities: They can develop, transform, or mature them internally (use as is); they can acquire capabilities through targeted hires or outright M&A; they can partner to access them; or they can outsource the capabilities and have them delivered as-a-service. The decision to develop, acquire, partner, or outsource is a critical one, since each lever provides organizations with unique advantages. Executives should consider the following in making decisions:
• Speed. How urgently do we need this capability?
• Control. How important is it that we control the outcomes?
• Specificity. To what degree do we need to tailor this capability to our business?
• Competitive advantage. To what extent does this capability provide us an edge over competitors?
• Operational leverage. How much do we want to take on in fixed/on-balance-sheet commitments?
Who Does the Work?
This step involves allocating work to the most efficient parts of the organization.
Capabilities typically provide one of two types of value: demand-side or supply-side. Demand-side advantages drive increased attention toward a company’s offering, driving up pricing, revenues, and margins. These include capabilities such as sales, product engineering, recruiting, branding, and corporate strategy, where processes and skill sets are less repeatable, and where talent is a significant driver of value. Supply-side advantages allow a company to operate more effectively and get the most out of resources. These usually include areas in which value is related to scale, such as sales-quote capabilities, self-service, accounting, and manufacturing.
Similarly, the relationship to the business is twofold. Capabilities significantly tethered to the line of business often rely on some expert ability such as localization, R&D, product marketing, or technical sales. Those with limited relationships to the business—for instance, M&A, e-commerce, and supply chain management—rely on generalist skill sets and play across the enterprise.
Each capability has a different place within the operating model, and companies can opt for different ways to deliver similar capabilities. Those decisions should be closely linked to the strategy.
How Can Organizations Drive Better Outcomes?
Operating models are ever-evolving, driven by feedback from employees and customers, the effectiveness of business processes, and evolving competitive landscapes. Leading organizations augment their capabilities through simple cross-functional processes, hyper-focused incentives, and best-in-class tools to drive simplicity, clarity, and speed in execution.
Our research points to at least six ways to potentially increase your chances of building a model that can help guide a successful digital transformation:
• Nominate and empower function and business leaders early on to drive the cultural change required across the organization.
• Define clear roles and responsibilities across businesses, regions, and functional support groups.
• Create complementary incentives and goals for businesses and functions to reduce conflict and optimize resource allocation.
• Establish cross-functional debriefs to keep relevant parties informed, and nominate an owner to manage the process early.
• Institute a governance model with clear KPIs for each leadership team—one that supports quick, independent decision-making.
• Standardize resource and knowledge exchange to ensure that skill sets are cultivated and proliferated.
Transformation demands that leaders develop a clear sense of their strategic ambitions—where to play and how to win—and the business models they wish to employ, including target customer segments, channels, pricing, and delivery models. There are many questions to be answered. Both the strategy and the business model directly influence the operating model design.
Organizations that try to short-cut their way to a new operating model may find the design ineffective and the implementation lacking employee traction—or worse, dilutive to value.
Most critically, an organization’s operating model must be inextricably linked to the corporate and business-unit strategy and varying business models. The operating model is the anchor for the enterprise and is critical to the strategy’s effectiveness and longevity. And understanding how your organization maps onto the model is key to an effective digital transformation.