Operating model

Operating model is an abstract and ideally visual representation (model) of how an organization delivers value to its customers or beneficiaries.

Definition

There are different ways of defining the elements that make up an operating model.

People, process and technology is one commonly used definition,[1] process, organization and technology is another, and [2] Process, Organization and people, Locations and buildings, Information systems, Suppliers and business partners, Management system yet another.[3]

An organization is a complex system for delivering value. An operating model breaks this system into components, showing how it works. It can help different participants understand the whole. It can help those making changes check that they have thought through all elements and that the whole will still work. It can help those transforming an operation coordinate all the different changes that need to happen.

An operating model is like the blueprint for a building. It is more dynamic than a building blueprint, with changes occurring regularly. Also, an operating model is not usually just one blueprint. There are likely to be blueprints for each element: processes, organisation structure, decision making, software applications, locations and so on. There are also likely to be some integrating blueprints.

An operating model can describe the way an organization does business today – the as is. It can also communicate the vision of how an operation will work in the future – the to be. In this context it is often referred to as the target operating model. Most typically, an operating model is a living set of documents that are continually changing, like an organization chart.

If an operating model describes how an organization delivers value, it is a subset of the larger concept 'business model'. A business model describes how an organization creates, delivers and captures value and sustains itself in the process. An operating model focuses on the delivery element of the business model. There are plenty of disagreements about the use of the words business model and operating model.[4][5][6]

The term operating model may have been first used in corporate-level strategy (see History below) to describe the way in which an organization is structured into business divisions, what activities are centralized or decentralized and how much integration is required across business divisions. The term is most commonly used today when referring to the way a single business division or single function operates, as in 'the operating model of the exploration division' or 'the operating model of the HR function'. It can also be used at a much more micro level to describe how a department within a function works or how a factory is laid out. In the section below titled Business/IT dialogue, this article explores one framework for thinking about the IT implications of different corporate strategies.

When designing a business or functional operating model, Ashridge Executive Education recommends that the work starts with creating a 'value-chain map'.[7] This is a way of laying out the work that needs to be done to deliver value to customers. It shows the different delivery chains and how they are linked together or need to be kept separate.[8] The second step is to create an 'organization model' based on the value chain map. The organization model shows how the different value chains are structured into an organization and includes the support functions, such as Finance, HR and IT.[9] The value chain map and the organization model are the core diagrams of the operating model.

Additional maps and charts are often needed. For example, an operating model will typically include an IT architecture, a locations map, a supplier matrix, a people model, a decision grid and other elements such as a performance management score sheet. The particular set of documents created will depend on what the operating model is being used for. There is no generally accepted set of charts or at least there is no agreement yet about what charts make up an operating model.

History

Origins in corporate strategy

Operating model as defined here is similar to the definition from Lynch, et al., of corporate strategy: "the relationships among the businesses in the corporation's portfolio and the process by which investments will be determined among them."[10]

Corporate strategy grew out of the research of Harvard Business School professor Bruce R. Scott who developed a model of the stages of corporate development.[11] He traced the evolution of a firm from "Stage I" with a single product (or line of products) to "Stage 3" with multiple lines of business, markets and channels. Following this work, Leonard Wrigley[12] and Richard Rumelt[13] developed ways of classifying company structures and comparing their strategies. They identified four different operating models:[14]

  1. Single line of business firms, where most revenue comes from a single activity;
  2. Related businesses where diversification is achieved by adding businesses that complement the original activity;
  3. Diversified firms that combines unrelated businesses, such as an oil company and a fertilizer business;
  4. Conglomerates – diversification is achieved without regard to complementary or synergistic effects.

The nomenclature evolved, but the categories survive:

Some implications of the choice:[16]

Component Integrated Allied-related Allied-unrelated Holding
Business strategy One Many Many Many
Customers Same Shared Some shared Many
Corporate role Resource allocations Define protocols Define protocols Financial roll-ups and analysis
Human capital Common Some shared Some shared Independent
IT systems Common Common Few, interconnected Different
Enabling processes Centralized Centralized Some centralized Decentralized

Business/IT dialogue

The MIT Center for Information Systems Research (CISR), a research group at the MIT Sloan School of Management, suggests that an operating model is useful to guide IT investment decisions.[17] IT investment must support the operating model.

Ross, Weill and Robertson summarized found that an organization with an operating model reported 31% higher operational efficiency, 33% higher customer satisfaction, and a 34% advantage in new product development.[18] In the book Enterprise Architecture as Strategy, they outline four operating models:

Process standardization and integration
Process standardization
Process integration Low High
High Coordination Unification
Low Diversification Replication

Operating models inform the appropriate level of business process integration and standardization to deliver the organizations promises to stakeholders.[18]

The operating model informs IT leaders about how various technical and business components should be designed and implemented to enable the chosen operating model:[18]

Technical/operational model grid
Component Coordination Unification Diversification Replication
Customer data
Product data
Shared services
Infrastructure technology
Portal technology
Middleware technology
Operational processes
Decision making processes
Application systems
Systems component technology

Coordination and unification models benefit more from consolidated views of customer and data across the enterprise than do diversification and replication models.

Industry standard operating models

See also

References

  1. ↑ http://www.boozallen.com/media/file/People-Process-Technology-Enterprise2.pdf
  2. ↑ Marne de Vries, Alta van der Merwe, Paula Kotze and Aurona Gerber. (2011) A Method for Identifying Process Reuse Opportunities to Enhance the Operating Model, and 2011 IEEE International Conference on Industrial Engineering and Engineering Management
  3. ↑ http://www.ashridge.org.uk/dom
  4. ↑ Amit, Raphael and Zott, Christopher "Creating value through business model innovation", MITSloan Management Review, Spring 2012
  5. ↑ Zott Christopher, Amit Raphael and Massa Lorenzo, "The Business Model: Recent developments and future research", Journal of Management May 2011
  6. ↑ http://www.ashridgeonoperatingmodels.com
  7. ↑ http://ashridgeonoperatingmodels.com/2015/05/06/working-on-an-operating-model/
  8. ↑ http://ashridgeonoperatingmodels.com/2015/01/21/value-chain-maps-or-capability-maps/
  9. ↑ https://www.ashridge.org.uk/getmedia/e9dbb283-5a04-4079-981a-bda9a4fa9ffa/AOD_Organisation-Charts.pdf
  10. ↑ Richard Lynch, John Diezemann and James Dowling, The Capable Company: Building the capabilities that make strategy work (Wiley-Blackwell, 2003)
  11. ↑ Bruce R. Scott, "Stages of Corporate Development (Part I)" (Harvard Business School Note 371-294)
  12. ↑ Leonard Wrigley, Divisional Autonomy and Diversification (Thesis for Doctor of Business Administration, Harvard University, 1970)
  13. ↑ Richard P. Rumelt, Strategy, Structure, and Economic Performance, (Harvard Business School, Boston, 1974, Revised edition published by the Harvard Business School Press, 1986)
  14. ↑ Kenneth R. Andrews, The Concept of Corporate Strategy (Irwin, 1986)
  15. ↑ Norman Berg, General Management: An Analytic Approach (Richard D Irwin, March 1984)
  16. ↑ Laying the Tracks for the Technology Train www.technologyevaluation.com/.../laying-the-tracks-for-the-technology-train-15640/ April 10, 2000. Adapted from original work by Novations, Inc.
  17. ↑ http://cisr.mit.edu/
  18. 1 2 3 Ross, Jeanne; Weill, Peter; Robertson, David C. (2006). Enterprise Architecture As Strategy: Creating a Foundation for Business Execution. Harvard Business Review Press. ISBN 978-1591398394.
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