Developing a Target

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Developing a Target Operating Model

you dont know where you are going, you might wind up someplace else. Yogi Berra

When an organisation embarks on radical change, a representation of how the organisation is proposedto operate in the future may be required in the form of a Target Operating Model (TOM). Developing a

TOM is a cross functional team effort with, for example, the finance function describing how financialprocesses and systems support the business and its regulatory obligations. A fully developed TOM wiusually comprise a graphical representation with supporting explanatory documentation.

This article provides some ideas from practical experience of how to develop a TOM and the particularissues for finance. Furthermore, it considers why TOMs often have a completely different look and feefrom each other despite using a common development framework. This development framework isstructured around the various dimensions that comprise any organisation, rather like the musicalinstruments that form an orchestra.

TOM dimensions

The TOM and supporting documentation will seek to cover all the dimensions that show how anorganisation is structured, operated and managed to deliver its strategy. These dimensions are depictein the graphic below and expanded upon as follows:

TOM dimensions

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1. Process describing the grouping and scope of activities, customers, products, controls and rule setin support of the customer lifecycles and value propositions. The customer value propositionsdescribe each type of customer, what they value and are prepared to pay for.

2. Operating Units describing the objectives, scope and locations, where relevant, for each type ofoperating unit. The operating units may, for example, be call centres in differing geographiclocations, manufacturing plants, shared service centres or outsourced facilities.

3. Technology the systems and other technologies required to support the business processes anddeliver the customer value propositions.

4. People profile of the resource requirements, characteristics of desired attitudes and behaviours,skills and competencies.

5. Organisation structures legal and operating units, divisions, functions and reporting lines.6. Implementation Road Map setting out the timescales, risks, phasing and programme managemen

required to implement the TOM.7. Performance Management uniquely blends all the dimensions together, enabling the organisation

to be coherently managed to meet its objectives. This is similar to the way a conductor will leadmusicians in an orchestra and rehearse to play either Bach or Gershwin.

Finance problems

There are many issues that the finance team will need to address as they contribute to the TOM,including for example:

o The scope of finance activities?

What is a finance activity and where does finance begin and end? This will not be obvious asactivities that will have a financial impact, may be carried out by business operational staff. Such staffwill not report to the finance function and may be unaware of the accounting impact of their activities,for example, insurance claims processing, customer account opening, credit underwriting and control.

o Dependencies between finance and business systems and processes

Development of a TOM may also highlight the dependency of finance on the seamless flow oftransactional data between business and financial systems. It is not unusual to discover that a largeproportion of finance resources are consumed in reconciling accounting transactions with real worldtransactional events recorded on the business systems. For example, reconciling claims recorded aspaid by the accounting system with those recorded on the claims insurance system. Such reconciliationactivities merely highlight the air gap and lack of integration between systems. Such air gaps may beeasy to design out of the logical TOM but will need to be followed through in the physical TOM interms of investment in changes to systems and processes.

Depending on the purpose of the TOM and the constraints of time and complexity, it may be that not athe dimensions need to be addressed at the same time. A phased approach can be taken, in order todevelop a representation that is fit for purpose, that is when enough has been achieved in order to maksome progress.

Despite the use of a common framework in developing the TOMs, the resulting look and feel of eachTOM can be very different. On reflection, this should be no surprise as TOMs are an outcome of thetype of organisation, the design principles, the primary driver for change and the point at which theTOM is considered to be fit for purpose.




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Why change?

The ultimate driver for change is to improve business performance but organisations will usuallyprioritise their perceived greatest weakness or business imperative as the start point, which may be:

o To deliver customer service and value:o Front line personnel often confuse working hard and conformance with procedures as evidence

of customer service. The more difficult challenge is to work out customers real needs and what

they truly value and are prepared to pay for.o The start point for the TOM is, therefore, likely to be focused on the process dimensions with th

development of differentiated customer value propositions, customer lifecycles and supportingprocesses.

o To restructure an organisation that has evolved and lost its coherence:o It is often easier for organisations to establish new divisions, departments and functions than to

close them down when no longer adding value, which may not be obvious. This can be due to acombination of the organisational units naturally having a vested interest in prolonging the lifeof their operations, allied with budgeting systems that may challenge proposed new investmentsbut not the existing cost base. Over time, a poorly structured organisation creates frictional costs

and frustrations in trying to manage and hold it together, that can no longer be ignored.o The start point for the TOM may, therefore, be focused on the organisation structures andprocess dimensions with the development of a coherent logical process and organisationaldesign.

o To integrate following a merger or acquisition:o Obtaining economies of scale and cost saving synergies will often be a key benefit to be realised

from any business merger or acquisition. However, it will be important to ensure that there is acomplete understanding of what is critical to preserve from the old to the new integratedorganisation. This may encompass strategies for administering the current book of business,maintaining legacy systems, developing new business and preserving customer relationships.

o The start point for the TOM may, therefore, be the organisation dimension in developing thestructure for the integrated business, before moving on to the process and technology dimensionto design the supporting process and system designs.

o To reduce and simplify the number of systems and processes in order to operate a common setacross an organisation:

o As organisations evolve, they will, at some point, find they have a disparate portfolio of systemsand processes that become inefficient and costly to maintain. However, the design of arationalised system design is often easier said than done, as systems are at the heart of even thesmallest of organisations and any heart intervention can be life threatening.

o The start point for the TOM will, of course, be the technology dimension, closely followed by thprocess and people dimensions.

o To reduce costs and improve the cost/income ratios and shareholder returns:o When cost/income ratios and shareholder returns become uncompetitive and unsustainable,

action may be required as a matter of survival. Very often, this translates into a sole focus onreducing headcount or across the board cuts rather than a more considered approach across allthe organisational dimensions. Aside from the wholesale closure of a business unit, any form ofheadcount reduction based upon a selection process, must be done in a way that is seen as beingfair and equitable e.g. performance evaluation.

o The start point for the TOM will often, therefore, be the people dimensions, to determine thefuture resource requirements, culture and accountabilities.

o Business transformation to deliver a substantial performance improvement:




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9. Time is of the essence in managing expectations; have major milestones no longer than three month

10. Produce a gap analysis explaining how life will be different between the current and future TOM.Plan how this gap will be bridged.

As well as pressure for increased efficiencies, finance functions are increasingly being challenged withresponsibility for developing a finance TOM and realising the due diligence benefits arising fromacquisitions. A TOM design approach provides finance with the opportunity for fresh thinking and to

more fully integrate finance and business activities and so remove wasteful activities and associatedcosts.

Finally, of course, the development of a TOM is more an art than science so artistic flair and inspirationplays an important part in its final representation. This representation, however, can prove lessimportant than the process of collaboration, participation, challenge and consensus building createdacross the organisation in its development. Its the journey and not just the destination that oftendelivers the real benefit!

(This posting has been reproduced by the evaluation centre at http://www.evaluationcentre.com(http://www.evaluationcentre.com))

This entry was posted on Thursday, September 24th, 2009 at 11:44 am and is filed under changemanagement, finance, financial management, Target Operating Models. You can follow any responsesto this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

5 Responses to Developing a Target Operating Model

JimmyBean says:October 1, 2009 at 11:58 amI dont know If I said it already but Great sitekeep up the good work. I read a lot of blogs ondaily basis and for the most part, people lack substance but, I just wanted to make a quick commento say Im glad I found your blog. Thanks,

A definite great read..Jim Bean

ReplyJeff Herman says:February 10, 2010 at 1:17 pm

Jimmy Your comments are much appreciated. All our postings are borne of practicexperience.

ReplyEllie Gascho says:July 14, 2010 at 10:25 pmYour website offers a lot of unique insights and explanation. I have never really thought about it likthat. Please keep updating your site. I will be stopping over every time you do it .

ReplyMerle Goshi says:




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May 2, 2011 at 4:46 amI wish I would have came across this post earlier. Ive been looking for this kind of info, but its little late for my needs. Ill bookmark your blog because Im enjoying reading it! Thanks again!

ReplyDexter says:

January 25, 2013 at 2:19 amGood insight

Reply

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