Operating model

Operating model is a term that is used in many contexts. An operating model is the abstract representation of how an organization operates across process, organization, technology domains in order to deliver value defined by the organization in scope.

Any organization is a complex system consisting of several different interlinked logical components. An operating model breaks this "complex machinery” down into its logical components and deploys the appropriate analysis and design techniques for each component in order to deliver better value.

An operating model can be used as a framework for formulating operations strategy – explicit choices about the best deployment of organization’s elements to achieve the business goals. it is usually informed by the business model. In some cases, an operating model can become the source of competitive advantage and can inform the business model.

The operating model can be a vehicle to describe how the organization does business today - the "as-is" operating model. This can be the foundation for an organization that wants to transform its business. New business drivers can be translated into requirements that can lead to a new "to-be" or "target" operating model. The target operating model represents the high level requirements that drive the future business and IT architecture design.

Operating model in context

Several related terms are often used interchangeably to describe a business but are actually quite different as illustrated in Figure 1:

• A business model describes the rationale of how an organization creates, delivers, and captures economic, social, or other forms of value. The process of Business Model design is part of business strategy.
• An operating model describes the necessary level of business process integration and data standardization in the business and among trading partners and guides the underlying business and technical architecture to effectively and efficiently realize its business model. The process of operating model design is also part of business strategy.
• A capability model describes the capabilities necessary to execute the Operating Model. The process of Capability Model design is part of operations planning.

Figure 1: Relationship between Operating Model and Capability Model

Operating model defined

An Operating Model for a business is a strategic schematic which illustrates the relationships among the operating units and trading partners and provides a set of guidelines for both the business architecture and technology infrastructure that enable a company to grow its business either organically or through acquisitions.

• Strategic: an operating model is a strategic choice as to the extent of process standardization and data integration desired to achieve business results.
• Relationships: refers to the degree of cooperation across business units including customers, suppliers and trading partners, required for efficiency or leverage.
• Guidelines: clarify what is important for the organization today and the rationale for investments so that leaders are aligned. When the operating model is changed, the "to-be" model sheds light on the transformations required for future success and the decision process for investments among the units.

History of operating model development

Origins in corporate strategy

Operating model as defined here is similar to corporate strategy: "the relationships among the businesses in the corporation's portfolio and the process by which investments will be determined among them."^[1]

Corporate strategy grew out of the research of Harvard Business School professor Bruce Scott who developed a model of the stages of corporate development."^[2] This model traced the evolution of a firm from a Stage I firm with a single product (or line of products) to a Stage 3 business with multiple lines of business, markets and channels. Following on this work, Leonard Wrigley"^[3] and Richard Rumelt."^[4] developed ways of classifying company structures and comparing their strategies. They identified four different operating models."^[5] (1) a single line of business where most of its revenue coming from a single business; (2) related businesses where diversification is achieved by adding related businesses, (3) a dominant business firm, diversified to a degree with unrelated businesses such as an oil company with a fertilizer business and (4) unrelated business firm or conglomerates - diversification is achieved without regard to the current business portfolio.

These basic operating models have evolved somewhat in nomenclature but carry the same meaning:

• Integrated: single business, requiring a single business strategy for competitive advantage. Important business issues are formulated centrally and tailored for local needs to optimize the entire business. Success is measured by adding up the global numbers (e.g., McDonalds or Harley Davidson).

• Allied-Related: each business contains the core work required to create advantage autonomously. Issues of common interest are identified and worked among businesses. Support organizations develop uniform policies and practices across geographies, tailor them to meet the needs of each business and help achieve synergies across businesses where desired (e.g., access to customer, product files, needs to have own accounting tied to corporate). Some support work may be shared across businesses (e.g., Canon or Procter & Gamble)

• Allied-unrelated: each business contains the core work required to create advantage autonomously. Some customer may be shared. Issues of common interest are identified and worked among businesses such as capabilities/enabling processes that can be shared for efficiency. In some cases, capabilities that are unique, valuable and portable to other businesses are shared for leverage. (e.g., Avery Dennison has pressure-sensitive technology and self-adhesive base technologies that are used in Roll Materials and in its Medical group for single-use medical products).

• Holding company: made up of many different businesses, with many different business strategies, related or not."^[6] Each business has wholly self-contained brands/businesses with dedicated core and support work. The businesses are tied together only by a common funding source and financial requirements (e.g., Tyco International

Following are some of the operating implications of the choice^[7]:

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

This "large grain" view informs many decisions about how to design and build the capabilities that make up the organization. For example, the first choice for a holding company such as Tyco Industries would not be to try to run all of the companies in its portfolio on a single configuration of the same financial management business applications. However, the "large grain" view insufficiently informs decisions within each model. For example, the Allied model suggests common IT systems. However it is common that the corporate/home office company shares little with its divisional companies. MIT's Center for Information Systems Research presents a useful model which provides a way of thinking about the need for multiple operating models for a given corporate strategy.

Center for Information Systems Research

CISR, a research group at the MIT Sloan School of Management has defined operating model in terms of this lightweight method to capture the business needs for degree of business process standardization and data integration. CISR suggests that this type of operating model is useful to establish requirements for reusable core capabilities and to guide IT Investment decisions governance. The operating model can be used to drive architecture and infrastructure development ensuring that business needs are met with the right IT foundation. The resulting IT systems enable the company to grow its business, without having to do deep surgery on the IT systems each time the business grows either organically or through acquisitions. The implementation of integrated business processes and IT systems is the realization of the operating model.

The team of Jeanne W. Ross, Peter Weill and David C. Robertson summarized their research in enterprise architecture as strategy.^[8] They found that an organization with an explicitly defined operating model report 31% higher operational efficiency, 33% higher customer satisfaction, and a 34% advantage in new product development. In an extension to the earlier Corporate Strategy work, they outline four operating models:

Process standardization

Process Integration	Low	High
High	Coordination	Unification
Low	Diversification	Replication

• Coordination – businesses requiring low business process standardization but high business process integration (Compare with allied strategy – where subsidiaries provide varied products to the same customers)
• Unification - businesses requiring both high business process standardization and high business process integration (compare with integrated strategy)
• Diversification - businesses requiring low business process standardization and low business process integration (compare with holding company strategy)
• Replication - businesses requiring high business process standardization but low business process integration (Compare with Franchisees or Replicated Facilities of an Integrated Strategy)

Role in defining the business and technical architecture

Operating models drive the necessary level of business process integration and standardization to deliver the organizations proposition, goods and services to customers, shareholders and it people.^[9]

On the business architecture side, the operating model informs business architecture as to the number of distinct market facing entities, the number of unique value propositions, and the number capability models required. For example, an integrated enterprise would have one customer facing brand and a single core capability model and a holding company would have one for each company in its portfolio. Depending on business strategy choice (profit propositions and value propositions), a federated/allied strategy may require more than one capability model.

The operating model also informs IT and other support services as to the value and appropriateness of shared services and related service-level agreements.

On the technical architecture side, the operating model informs IT leaders about how various technical and business components should be designed and implemented to enable the chosen operating model:^[10]

Component	Coordination	Unification	Diversification	Replication
Customer Data	X	X
Product Data	X	X
Shared Services	X	X	X	X
Infrastructure Technology	X	X	X
Portal Technology	X
Middleware Technology	X
Operational Processes		X		X
Decision Making Processes		X
Application Systems		X
Systems Component Technology				X

From the table above, it is shown that coordination and unification models benefit more from consolidated views of customer and data across the enterprise than do diversification and replication models.

Creating a dialogue between business and IT

A step-by-step roadmap that describes the synergy and context between Business and IT.

The operating model is an important tool in the dialogue between business and IT.^[11] The dialogue can take place with top management and enable them to decide which operation models best describe the way they choose to operate the company. IT can start with a Stakeholder Map, a Business Modelling exercise, thereby any Operating Model Mapping also start with individual business units to identify their Operating Model (or mix of models) are currently in place helping clarify both intent and sources of synergy and disconnect between business and IT systems. This includes architectural alignment as well as business transformation and value and performance views. Such dialogues allow IT management to use the operating model as strategy to drive design of concrete plans to enable the business in the form of IT projects.

As valuable as the result of the dialogue may be in terms of aligned plans, is the organizational learning that takes place through the dialogue, choices, and translation of the operating model into enterprise architecture and IT governance that guide and control IT investment over time.

Industry standard operating models

• eTOM (Enhanced Telecom Operations Map)
• IAA (Insurance Application Architecture)
• IFW (Information Framework)
• ITIL (Information Technology Infrastructure Library)
• COBIT (Control Objectives for Information and related Technology)
• O^MMF (Operating Model Maturity Framework)

See also

• Business model
• Capability management in business
• Enterprise architecture
• Risk and compliance
• Shared services

References

1. ^ Richard Lynch, John Diezemann and James Dowling, The Capable Company: Building the capabilities that make strategy work (Wiley-Blackwell, 2003)
2. ^ Bruce R. Scott, "Stages of Corporate Development (Part I)" (Harvard Business School Note 371-294)
3. ^ Leonard Wrigley, Divisional Autonomy and Diversification (Thesis for Doctor of Business Administration, Harvard University, 1970)
4. ^ Richard P. Rumelt, Strategy, Structure, and Economic Performance, (Harvard Business School, Boston, 1974, Revised edition published by the Harvard Business School Press, 1986)
5. ^ Kenneth R. Andrews, The Concept of Corporate Strategy (Irwin, 1986)
6. ^ Norman Berg, General Management: An Analytic Approach (Richard D Irwin, March 1984)
7. ^ 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.
8. ^ [1]
9. ^ Jeanne W. Ross, Peter Weill and David C. Robertson, Enterprise Architecture as Strategy (Harvard Business School Press, 2006)
10. ^ Derived from: Jeanne W. Ross, Peter Weill and David C. Robertson, Enterprise Architecture as Strategy (Harvard Business School Press, 2006)
11. ^ von Rosing & Rosenberg, Applying Real-World BPM in an SAP Environment, SAP Press 2011