How can business leaders steer their organizations to success while navigating a storm of economic challenges, like:
- The highest inflation in 40 years
- Aggressive interest rate policy that will remain in place
- Volatile stock and bond markets
- Slowing construction and housing sectors
- Potential threat of recession
Change, uncertainty, and complexity have led some companies to take a slash-and-burn approach to cost reduction, but that doesn’t solve the problem. It misses crucial opportunities to optimize and streamline the organization.
The right solution is to strategically evaluate and adjust the structure and operations of critical functions that support your business.
Indeed, high-performing organizations are redesigning their target operating model (TOM) and report game-changing results.
For example, a large global manufacturing firm reduced costs by more than 30%, streamlined processes, strengthened governance and accountability, improved reporting, and deployed a new service delivery model after redesigning their TOM.
Similarly, a $1 billion global food service company reduced its financial close cycle from 14 to 5 days and reduced overall finance costs from 1.6% to 1.0% of revenue, among other significant improvements.
How? They embarked on a target operating model transformation program. In this article, we’ll walk you through the steps they took.
Components To Assess in Your Target Operating Model
At the onset, most organizations set out to transform their TOM in order to:
- Reduce costs
- Automate and improve processes
- Improve data management, governance, and reporting
- Create streamlined organizational structures for scalable growth
- Transform their service delivery model – both from an effectiveness and cost efficiency standpoint
- Build new skills and capabilities
A business’ strategic vision comes to life through its operating model. That’s why you must regularly assess your processes, organizational design, technologies, and competitive considerations to ensure they support your short- and long-term objectives.
Target operating models are comprised of six dimensions that should be assessed to achieve strategic aspirations while enhancing overall efficiency. They include:
- People: Organizational design, roles and responsibilities, and skills and capabilities
- Data and reporting: Master data management; data strategy, data definitions, reports, metrics, and key performance indicators; and business intelligence and corporate performance management (CPM) reporting tools
- Technology enablement: System architecture, integration and automation, enterprise resource planning (ERP) software, customer relationship management (CRM) and corporate performance management (CPM) tools, best-of-breed tech, robotic process automation (RPA), and artificial intelligence (AI)
- Governance and control: Process and service delivery governance, SOX and controls, risk management, and business resilience
- Process design: Definition of end-to-end business activity, standardized and harmonized processes, efficiency and effectiveness, and roles, actions, decisions, policies, and controls
- Service delivery model: Optimal location to provide services (insource or outsource; onshore, offshore, nearshore, or dual shore), governance, and service delivery management
Macro Economic Context
Cost reduction or cost avoidance are key themes that are top of mind in today’s economic environment. Consider the levers that could be considered during a TOM assessment to position your firm to emerge from this cycle in an improved competitive position.
Step 1: Eliminate
Complete an end-to-end process analysis to remove redundant or unnecessary activities and tasks. Identify opportunities to reduce or reallocate resources.
Step 2: Consolidate
Identify, unite, and simplify common processes and organizational resources. Standardize and/or harmonize to reduce operational redundancies, and optimize spans of control to enhance the ability to build scale and improve overall efficiency.
Step 3: Standardize
Ensure your data and systems point to a single source of truth. This reduces inaccuracies and inconsistencies, aligns understanding, and improves productivity while increasing speed to insight for your organization.
Step 4: Automate
Identify repetitive, routine tasks, especially those prone to human error or longer cycle times. Automate to increase productivity and free up time for your team to focus on higher-value activities.
Step 5: Wage Arbitrage – Reconsider Your Delivery Model
For tasks that can’t be automated, evaluate your service delivery model. Identify processes suitable for outsourcing or sending to nearshore or to offshore teams. Transforming your service delivery model can decrease costs and improve productivity, enabling your team to shift focus to more strategic, value-added activities.
Putting It All Together
Rethinking your target operating model boils down to assessing functions for improvement opportunities, understanding the activities and ownership of business processes, benchmarking against peers, and aligning stakeholders in order to create buy-in for change. From here, you can create a well-informed, prioritized implementation roadmap to activate the TOM that is part of a transformation program that includes cross-functional accountability and robust program management that will drive successful execution and optimal results.
Bottom line, your organization must run effectively and efficiently in times of economic turbulence, and rethinking your TOM is key. Using this five-step, sustainable approach will identify ways to position your company for growth when the macroeconomic environment eventually stabilizes.
About the Authors
Stephen Denman is Managing Director of Target Operating Model and Finance Transformation for MorganFranklin Consulting. Mark Woodward is the Director of their Strategy & Transformation Solution Group. Drew Shealy is Technical Director of the Strategy & Transformation Solution Group. Together, they advise business leaders worldwide on how to create a more agile, efficient, and effective organization to navigate unexpected disruptions and achieve strategic growth.