Architecting an operating model: A platform

for accelerating digital transformation

August 05, 2019

Anne Kwan. Maximilian Schroeck. Jon Kawamura

Many transformation efforts begin with reinventing the operating model. How to keep such
a big project on track? This article, fourth in a series, explores how successful
transformations align models with clear strategies. Across a broad spectrum of sectors,
artificial intelligence (AI), digital, the Internet of Things (IoT), process automation, and
other technologies are shifting value from manufacturers and distributors to companies that
operate end-to-end platforms and provide outcomes as-a-service. For many enterprises, that
means constant change and disruption—and a growing threat of market obsolescence.

Leaders, revising their five-year plans every quarter, are seeking ways to constantly
reinvent their companies to stay ahead of the pack, with competitors of varying capabilities
and scale and customers who expect more for less. And for many companies, the answer is
large-scale global transformation. Indeed, 80 percent of CEOs in one study claim to have
transformations in place to make their businesses more digital; 87 percent expect to see a
change in their operating models within three years.1

But leaders see establishing those operating models as their top challenge in achieving
digital transformation.2 So how might they move forward? Reviewing transformations
across industries reveals a common theme: Successful transformations realign the
organization to a singular vision; failed endeavors typically do not. In short, an organization
has a far better chance at succeeding when an operating model—or how an organization
creates value—is aligned to the strategy. And this means that, for transformations to
succeed, leadership teams should examine and possibly revise their organizations’
operating models. (See figure 1.)

What makes a strategic transformation succeed—or fail?

Balancing growth and risk

Given the pace of change—and the volatility in the impact of potential disruptors—
executives may struggle to determine where to place bets, how much to invest, and when to
do it. Wait too long and they risk seeing market value quickly erode; invest inefficiently or
ineffectively and they could face a cash crunch or investor backlash. Management teams
must increasingly balance growth and risk. We consistently see executives try to solve for
six questions—each of which can fundamentally pull the organization in a different
direction, all of which are critical in the effort to “win” in the digital economy.

Executives often ask themselves, How do we:

 Grow amid increasing market and customer expectations

 Respond faster to market and competitive disruptions
 Simplify organizational processes, both internal and external
 Maximize returns on limited financial and human capital
 Incubate and test new products and technologies
 Pivot to competitive business models

The good news for companies born before the digital era is that they often quickly
understand the value in transforming to agile, adaptive, and responsive enterprises because
they already have the other intangibles in place: strong brands, an entrenched customer
base, established sales methods, and partners—suppliers, distributors, and technology.

Successfully driving these changes, though, depends on executives addressing a range of

organizational barriers and risks—particularly functional silos, incomplete enterprise data,
and a product-out (versus a market-in) philosophy of value creation. In our experience, a
well-designed and purposefully executed enterprise operating model can help companies
balance growth with risk and overcome organizational barriers.

At one global consumer technology company, executives set out to unify the organizational
vision across AI and machine learning (ML) technology. The company made a strategic
decision to bolster its capabilities through acquisition of a startup and hiring new talent,
combining teams dealing with ML and voice-assistant technology. The changes resulted in
unified leadership and aligned incentives across development functions and product lines;
the company has since embedded its AI offering into new products, extended the reach of
the operations performed, and launched new software centered around AI and ML.

Target operating model

Before addressing the value of an operating model, we must first acknowledge the potential
for widespread confusion and disagreement: Poll any number of executives, and you’ll
likely find yourself with as many definitions of operating model. But most commonly,
operating model transformations are associated with cost takeouts or organizational
redesigns—“box and wire diagrams.” While these can be byproducts of an operating model
shift, the common associations are myopic and discount the full value.

Our definition of an operating model is simple but comprehensive: An operating model

represents how value is created by an organization—and by whom within the organization.
To better illustrate this, figure 2 depicts an example of an operating model; each box
represents a unique set of capabilities aligned to the enterprise’s strategy, with skilled
leadership teams, tailored metrics, unique investment profiles, and tight coordination across
the value chain.

Example operating model

This illustration lays out the characteristics of this example’s operating model:

 Centralized strategic planning functions to set a unified direction for the enterprise
 Emphasis on customer experience with consolidated marketing, account
management, and customer experience functions
 Independent business lines (consumer, small/medium businesses, enterprise)
responsible for product, operations, etc.
 Close partnerships between product and sales teams using product-aligned sales
teams, with some overlap
 Separate product and business incubator with end-to-end responsibility and direct
access to C-suite
 Managed services overlay for SMB and enterprise customers
 Digital enablement center of excellence (CoE) to drive companywide adoption of
tools and technologies
 Centralized business ops teams—likely offshore—to drive economies of scale
  Robotics and AI CoE to drive operational efficiencies in mid- and back-office
operations

Most critically, an organization’s operating model must be inextricably linked to the

corporate and business-unit strategy and varying business models. The operating model is
the anchor for the enterprise and is critical to the strategy’s effectiveness and longevity.
And understanding how your organization maps onto the model is key to an effective
digital transformation.

Digital industrial transformation

framework

Operating model design

Leaders should develop a clear sense of their strategic ambitions—where to play and how
to win—and the business models they wish to employ, including target customer segments,
channels, pricing, and delivery models, since both the strategy and business model directly
influence the operating model design. Organizations that try to short-cut their way to a new
operating model may find the design to be ineffective and the implementation lacking
employee traction—or, worse, dilutive to value.

A global entertainment company aimed to share technology across its business units to
improve customer experience. In 2013, for the first time in nine years, the company
effected a large reorganization: combining console and handheld divisions. The change was
driven by criticism about a “lack of a unified vision” related to previous launches.
Executives intended the new structure to promote sharing of technology across groups, and
thus far it has worked, with the company launching its most successful console to date.

Operating model design

What work needs to be done?
In moving forward with a digital transformation, the first step is to identify the holistic set
of capabilities required to meet the enterprise’s strategic ambitions. The capability set
should include both existing capabilities and new ones (as needed) and address front-, mid-,
and back-office functions across all product lines.

A capability represents a discrete set of objectives, processes, technologies, and talent that
collectively generate value for an organization.

For example, product strategy is a capability that creates product road maps to realize
customer requirements; campaign management is a capability that launches, measures, and
reports on the success of marketing campaigns. When brought together, capabilities
comprise a capability map, representing the collective set required to execute against the
strategy and business model.

A capability map represents where an

organization generates value
A capability map provides a foundation on which organizations can build their target
operating model. Moreover, capabilities serve as building blocks for the organization—they
can be used to determine skill set requirements, hire talent, set performance metrics, build
teams, and identify partnership opportunities.

Where does the work get done?

Once leaders have established the capability map, the next step is sourcing capabilities.
Several capabilities will likely already exist—some mature or fit-for-purpose, others recent
arrivals. This step is often the most difficult to execute, as companies can be resistant to
change their existing ways of working when instead they can leverage the opportunity to
untether themselves from legacy processes and technologies.

Enterprises typically have four sources for capabilities: They can develop, transform, or
mature them internally (use as is); they can acquire capabilities through targeted hires, or
outright M&A; they can partner to access them; or they can outsource the capabilities and
have them delivered as-a-service. The decision to develop, acquire, partner, or outsource is
a critical one, since each lever provides organizations unique advantages. Executives
should consider the following in making decisions:

 Speed. How urgently do we need this capability?

 Control. How important is it that we control the outcomes?
 Specificity. To what degree do we need to tailor this capability to our business?
 Competitive advantage. To what extent does this capability provide us an edge
over competitors?
 Operational leverage. How much do we want to take on in fixed/on-balance-sheet
commitments?

Each of the four sourcing options varies widely across this spectrum and has different use
cases (see figure 6).

How should an organization acquire its

capabilities?
The choice is distinct for every organization. Take the case of an industrial products
company: The management team may decide to own manufacturing capabilities because
the company’s processes and technologies give it a competitive advantage, even though this
means operating with a higher base of fixed costs and regularly investing in talent and
technology upgrades. On the other hand, a technology company may choose to outsource
manufacturing—the same capability—given the variety of low-cost providers available in
other countries.

Among the toughest decisions leaders can make is to decommission an owned capability
and opt to partner or outsource it.

While this may be painful in the short term, these decisions can accrue long-term value by
freeing up cash and receiving best-in-class service. For example, one company trying to
establish a digital gaming platform chose to partner with established hardware providers
rather than build its own controllers. Executives chose to control and focus on their core
value (customer experience) while partnering for scale (labels, platforms, devices).

Who does the work?

Simply said, this step involves allocating work to the most efficient parts of the
organization.

Capabilities (see figure 7) typically provide one of two types of value: demand-side or
supply-side. Demand-side advantages drive increased attention toward a company’s
offering, driving up pricing, revenues, and margins. Typically, these include capabilities
such as sales, product engineering, recruiting, branding, and corporate strategy, where
processes and skill sets are less repeatable, and where talent is a significant driver of value.
Supply-side advantages allow a company to operate more effectively and get the most out
of resources. These usually include areas in which value is related to scale, such as sales-
quote capabilities, self-service, accounting, and manufacturing.

Similarly, the relationship to the business is twofold. Capabilities significantly tethered to

the line of business often rely on some expert ability such as localization, R&D, product
marketing, or technical sales. Those with limited relationship to the business—for instance,
M&A, e-commerce, and supply chain management—rely on generalist skill sets and play
across the enterprise.

Based on the type of value generated and

the relationship to the business,
capabilities can be configured in four ways
In our experience, each capability has a different place within the operating model. For
example, shared capabilities are often offshored, or even outsourced. Steering capabilities
are delivered close to the headquarters (and executives) given decision-making velocity,
while specialist capabilities can be structured as centers of excellence.

More importantly, companies can opt for different ways to deliver similar capabilities—and
those decisions should be closely linked to the strategy. For example, a ride-hailing
company with comparatively simple customer support requirements may choose to
automate most functions in a shared service, offering specialized support or premium
support only as a supporting capability. On the other hand, a cutting-edge electric-car
maker might structure customer support as a specialist capability, with highly trained and
available staffers who can solve a variety of problems, become product advisers, and
potentially even upsell customers.

How can organizations drive better outcomes?

Operating models are ever-evolving, driven by feedback from employees and customers,
the effectiveness of business processes, and evolving competitive landscapes. Leading
organizations augment their capabilities through simple cross-functional processes, hyper-
focused incentives, and best-in-class tools to drive simplicity, clarity, and speed in
execution.
When assets—people, processes, and technologies—cease to deliver value, leaders should
consider taking steps to upgrade or replace them. We have observed that companies whose
execution embodies three evergreen principles are often successful at getting the most out
of their operating models. (See figure 8.)

Three principles to continually strengthen

operating models
Building a functioning model
Given the challenges of effecting a digital transformation—particularly the intangible
benefits—having in place an optimized and strategy-aligned enterprise operating model can
be a tremendous help. When executed well, an enterprise operating model can improve
resource utilization and efficiency, reinforce an outcome-based culture and mindset, and aid
communication, collaboration, and knowledge-sharing. But the potential challenges in
designing and implementing an operating model transformation are clear, from
organizational resistance and misaligned visions to poor execution and missing data.

Our research points to at least six ways to potentially increase your chances of building a
model that can help guide a successful digital transformation:

 Nominate and empower function and business leaders early on to drive the cultural
change required across the organization
 Define clear roles and responsibilities across businesses, regions, and functional
support groups
 Create complementary incentives and goals for businesses and functions to reduce
conflict and optimize resource allocation
 Establish cross-functional debriefs to keep relevant parties informed, and nominate
an owner to manage the process early
 Institute a governance model with clear KPIs for each leadership team—one that
supports quick, independent decision-making
 Standardize resource and knowledge exchange to ensure that skill sets are cultivated
and proliferated

Acknowledgments

The authors would like to thank Rohan Gupta of Deloitte Consulting LLP for his research
and dedication to bringing this article to life. The authors would like to recognize Cristina
Stefanita, Deepak Sharma, Julie Shen, Francis McManus, Rebecca Dauer, and
Violette Zhu of Deloitte Consulting LLP for their contributions to the Digital and
Operating Model Transformation practices.

Endnotes
1. Mark Raskino, “2019 CEO survey: The year of challenged growth,”
Gartner, April 16, 2019. View in article
2. Ragu Gurumurthy and David Schatsky, Pivoting to digital maturity, Deloitte
Insights, March 13, 2019. View in article