The Rise of the Operating Model
When an organisation changes how it does things, there will be an impact on its operating model. Small changes managed under the guise of business-as-usual (BAU) and smaller projects may have minimal impact, whereas larger scale, strategic and transformational change will have a significant impact.
Although the concept of operating models has been around for decades, it’s only relatively recently that they are being increasingly referenced in articles relating to strategic change, transformation and AI, specifically generative and agentic AI. Unfortunately, operating models have often been poorly understood, and this continues to be the case. This is a major contributor towards poor programme outcomes.
In this article we’ll discuss:
What’s an operating model
Different types of operating model
Why is important to understand operating models
Common operating model struggles (and what to do)
Why operating models are being talked about now
What’s an operating model
Before looking at operating models, we need to understand what an organisation’s business model is. Business models simply describe what an organisation does to create value, i.e. what it was established to do, so it’s:
The products and services offered
Who those products and services are aimed at, i.e. markets and customer segments
How products and services are provided, i.e. online, retail outlet, call centre etc.
In simple terms, a robust operating model describes ‘the operating environment that enables and supports the execution of the business model’. From this description, you can easily see that it’s not just about creating a new organisational structure or mapping processes. The operating environment is complex and includes:
Organisational structure
Governance framework
Leadership & management styles
Rewards, behaviours and culture
People, skills and roles
Corporate appetites, policies & standards
Workflows, processes & controls
Third parties & service providers
Data & applications
Technology & infrastructure
An operating model describes how all these components work and the interplay between them, across all functions of the business. To have a basic understanding of the operating model, none of this needs to be in any great detail as it’s more about understanding the interaction between these components and how they work together – having a big picture view, a holistic perspective – so the impact on the organisation when something is changed can easily be identified and understood.
For an insurance organisation, operating models can be defined for different departments – Underwriting, Claims, IT, HR, Finance, Operations etc – however, there should always be an enterprise level model for the lower-level models to align to. The risk of creating lower-level models first, which is often done, is that they don’t align to the enterprise model. This can result in an operating environment that doesn't effectively enable the execution of the business model, i.e. it’s clunky and doesn’t join up so that the components don’t work seamlessly together. This gives rise to workarounds and the accumulation of unnecessary technical and operational debt.
Different types of operating model
Operating models are essential to understand how an organisation functions. To see where and how they fit into an organisation, we need to consider a number of factors:
Vision and Mission
High-level statements that capture an organisation’s ultimate purpose and how it intends to achieve it. Together these provide an overall direction, a north star.
Business Strategy
Defines the strategic goals the organisation wants to achieve over various time horizons as it works towards realising its vision.
Future Business Model
Describes the desired products and services, markets and customers, and distribution channels needed to achieve its business strategy.
Target Operating Model (TOM)
TOMs describe the future state operating environment needed to enable and support the execution of the future business model as efficiently and effectively as possible.
Current Business Model
Describes the current products and services, markets and customers, and distribution channels.
Current Operating Model (COM)
Describes the current state operating environment, including points of friction, issues and constraints that prevent the organisation from moving closer to its target state.
Change Roadmap
Describes the strategic and tactical initiatives required to move the current operation closer to its target, future state.
Diagrammatically it looks like this:
When it comes to transformational change, there have been lots of articles over the years that focus on organisations radically changing their business models, e.g. Microsoft’s move away from one-off licences to a subscription model, Netflix moving from DVD rental by post to streaming and then original content production, Spotify changing from music consumption via downloads to streaming. In these examples, the radical changes to the business models also required radical changes to the operating models to ensure that the future operating environments continued to enable and support the new business models.
But many organisations won’t want or need to radically change their business models but build on what’s already there, e.g. to enable entry into new markets, develop new products and distribute them in new ways. Although this won’t be a radical change to the business model, the operating environment (and hence the operating model) is likely to undergo radical change to capitalise on new technology and new ways of working.
Why it's important to understand operating models
Any major change or transformation initiative will have a significant impact on the operating model and, for the projects and programmes involved to have the best chance of success, understanding the current and future operating models is key to establishing a solid foundation for change and clear direction respectively. In the insurance industry, examples of initiatives that will have a significant impact on the operating model include:
Re-platforming and replacing legacy systems to drive modernisation, e.g. implementing a new PAS, claims system or data platform
Introducing new ways of working, automation and AI to improve productivity and efficiency to both remove cost and enhance the customer experience
Designing and implementing an adaptable operating model to enable sustainable growth
Scaling post PE investment or integrating post M&A to drive value creation
In transforming an organisation, you can’t assume there will be no impact on any aspect of the operating model as it’s all connected. One of the main pitfalls that leads to programmes not being as successful as they could be is having too narrow a view, operating and thinking in silos rather than cross-functionally, and not genuinely understanding the impact of change on the organisation.
Transformation is often described as a journey and, although something of a cliché, the analogy works well as you need to know the destination (i.e. the future business and operating models) and the start point (i.e. the current business and operating models). Understanding these enables better decisions to be made regarding what needs to be done, investment, prioritisation, and risk mitigation.
There is no shortage of case studies about programmes that have not been successful, or even failed completely, resulting in huge budget and time overruns, regulatory fines, reputational damage, and loss of competitive advantage.
It’s important to get it right!
Common operating model struggles (and what to do)
Organisations can spend small fortunes documenting COMs and designing TOMs. Unfortunately this can often be of limited use and value if it’s approached in the wrong way. Some common examples include:
Thinking the TOM is about a new organisational design and being led by HR
HR will, unsurprisingly, have an HR-view of the world. There’s nothing wrong with this per se, but a new organisational design is just one component and should not be equated to a new, target operating model. Reporting lines and department composition may change but ultimately the business isn’t operating any differently with the same issues and operating friction remaining. It’s especially important for leadership to recognise this so expectations regarding the benefits of restructuring remain realistic.
Focusing on mapping processes to a detailed level
Mapping processes to a detailed level may be a good idea in theory but in practice the effort to keep them up to date and accurate is very hard to do. A process is a combination of what, why, who, where, when and how, and the more detailed they are defined, the quicker they become outdated. There is limited value in doing this and the maintenance effort isn’t cost effective. It’s far better initially to define the workflows, where the focus is on the high-level what and who, and understanding the routing rules that enable the work to flow through the organisation. Workflows change far less frequently than processes.
Having a siloed view
When documenting the COM or defining a TOM, you can’t look at things in isolation because it’s all connected. This doesn’t mean that everything will need to change, but it does mean that everything at least needs to be considered so that conscious decisions can be made about what to address and what not to. If the changes wanted are genuinely transformational, the same things need to be considered regardless of whether it’s called business transformation, digital transformation or any other flavour of transformation.
Digital transformation, for example, will of course involve technology but the technology merely enables the organisation to do things differently and better – whatever ‘better’ means for it. And if you’re doing things differently you’ll need to look at processes and how data is being used, e.g. what could be outsourced or automated or where AI could be used etc. And if you're changing processes you’ll need to look at who does them, so you have to consider departmental and team structures and how they may change. This may then impact the governance framework and how information flows around the organisation and may also change corporate appetites, policies and standards. Before you know it, you’re potentially looking at how the whole organisation works, what each function does and how it interacts with the others. It’s essential to take a step back and have a cross-functional view across the organisation. Detail is less important than creating a coherent, contextual view of how the organisation hangs together.
Why operating model design is being talked about now
AI has been in the news a lot over the past couple of years and the hype has, at times, been off the scale. However, as a result of this, there are two important topics that have previously been in the shadows but are now fully in the spotlight, and rightfully so. The first is data, and the recognition that without good data management and governance it’s not possible to effectively use AI.
The second is the operating model. For years, many transformation initiatives were undertaken where the (incorrect) assumption was:
‘Install the technology and the business will transform’.
AI though has exposed the problem with this approach. If the organisation isn’t joined up, and teams, departments and technology operate with any degree of dysfunction, problems will be amplified. Consequently the narrative changes to recognise the importance of the operating model:
"Technology changes what is possible. The operating model determines whether value is realised."
So, if an organisation is changing what work gets done by people, technology and partners, it needs to redesign the enterprise around that new reality – that’s redefining the operating model and it’s the challenge that many organisations are now facing.
If you’d like to chat about how Camelot Consulting can help with a new operating model, please contact David Clamp.
Article written by Camelot Expert, Gary Burke with input from Matt Stirland and Julianna Yau Yorgen.
