Target Operating Model: Definition, Design, and Example

A Target Operating Model (TOM) describes the desired state of an organization’s operational capabilities and functions. It provides a vision for the future state of a business, explaining how the company needs to operate to deliver its strategy and achieve its business goals efficiently.

Creating a TOM is part of strategic planning and is typically carried out by senior management. It is a tool that helps align the organization’s strategy, business model, and operational capabilities. It can also serve as a roadmap for implementing organizational change and transformation. A TOM’s specific content and focus can vary greatly depending on the organization’s specific needs and context.

The Target Operating Model typically includes the following elements:

Organizational Structure

The organizational structure is critical to a Target Operating Model (TOM). It provides a detailed depiction of the company’s future design regarding its structure, roles, responsibilities, and reporting relationships. The organizational structure aligns with the strategic objectives and ensures that the organization achieves its goals efficiently and effectively.

Here’s a more detailed breakdown of what the organizational structure component might include in a TOM:

Hierarchical Structure: This includes details about the structure of the organization, including how many layers of management there will be (e.g., flat vs. hierarchical), which departments or teams will exist, and how they will interact.
Roles and Responsibilities: Each role within the organization needs to be clearly defined. This includes both the responsibilities that each role carries and the skills and qualifications required to fulfill these roles. These should align with the strategic objectives of the organization.
Reporting Relationships: Clear reporting relationships should be defined, detailing who reports to whom. This can include the creation of an organizational chart to represent these relationships visually.
Decision-making Processes: The decision-making process within the organization should be clear. This includes identifying who has decision-making authority and how decisions are communicated within the organization.
Communication Channels: Clear communication is critical to the smooth functioning of any organization. The TOM should therefore define formal and informal communication channels, such as meetings, reporting lines, emails, and collaboration tools.
Collaboration Mechanisms: How different teams and departments collaborate to achieve organizational goals should also be defined. This could be through cross-functional teams, project teams, or regular inter-departmental meetings.
Geographic Distribution: If the company has multiple locations, the TOM should describe how roles and responsibilities are distributed across different geographical locations. This also includes how remote and on-site workers collaborate.

Designing the organizational structure in the TOM is not a one-size-fits-all process. It needs to consider the unique context of the organization, its culture, strategic objectives, and the market environment. Also, while designing the TOM, one should consider the impact of any proposed changes on employees and plan for effective change management and communication strategies to ensure a smooth transition.

Processes and Operations

The Processes and Operations element of a Target Operating Model (TOM) focuses on how an organization will deliver its products or services to achieve its strategic objectives. It outlines how work gets done, the flow of activities, and how these activities will be transformed in the future state to enhance efficiency, effectiveness, and customer satisfaction.

Here’s a more detailed breakdown of what the Processes and Operations component might include in a TOM:

Core Processes: These are the primary activities that an organization performs to deliver value to its customers. They could include product development, marketing and sales, manufacturing, service delivery, and customer support. The TOM should describe how these processes will be designed or transformed to meet strategic objectives.
Supporting Processes: These activities support the core processes, such as human resources, IT, finance, procurement, and administrative functions. The TOM should outline how these supporting processes will be optimized to enhance the efficiency of core processes.
Process Flow: This involves mapping out the flow of activities, showing how tasks move from one stage to the next, and identifying potential bottlenecks or inefficiencies. The TOM should outline how process flow will be improved in the future state.
Process Standardization: The TOM should indicate where processes will be standardized to reduce variability, increase efficiency, and ensure consistent output quality.
Technology Integration: The TOM should describe how technology will be integrated into processes to automate tasks, reduce errors, and increase efficiency. This could involve using enterprise resource planning (ERP) systems, customer relationship management (CRM) systems, or artificial intelligence and machine learning tools.
Performance Measurement: The TOM should define how process performance will be measured, including key performance indicators (KPIs), benchmarks, and targets. This can help monitor process efficiency and effectiveness, identify areas for improvement, and track progress toward strategic objectives.
Continuous Improvement: The TOM should include mechanisms for continuously improving processes based on performance data, customer feedback, and innovations in the market or industry.

When designing Processes and Operations in the TOM, it’s important to involve people directly involved in these processes, as they have firsthand knowledge of the tasks, challenges, and opportunities for improvement. In addition, the design should be customer-centric, focusing on improving the customer experience and delivering value to the customer.

Technology and Infrastructure

The Technology and Infrastructure component of a Target Operating Model (TOM) refers to the technological resources and assets that an organization plans to use to achieve its strategic objectives. This includes hardware, software, networks, data centers, and other technological infrastructure.

Here’s a more detailed breakdown of what the Technology and Infrastructure component might include in a TOM:

Systems and Applications: This includes the various software systems and applications the organization plans to use. This could range from customer relationship management (CRM) systems, enterprise resource planning (ERP) systems, human resources systems, financial systems, data analysis tools, and more. The TOM should outline how these systems support the organization’s processes and operations.
Data Management: Data is a critical resource for modern organizations. The TOM should outline how data will be collected, stored, managed, and used to support decision-making and create value. This includes considerations around data quality, integration, privacy, and security.
Infrastructure: This covers the physical and virtual resources that support the operation and use of the organization’s systems and applications. This includes servers, networks, data centers, cloud services, and other infrastructure elements.
Cybersecurity: As organizations become more dependent on technology, protecting against cyber threats becomes increasingly important. The TOM should outline how the organization will protect its technology and data assets, including firewalls, encryption, intrusion detection systems, and other cybersecurity measures.
Technology Governance: The TOM should outline how technology resources will be governed, including decision-making processes around technology investments, technology standards, technology lifecycle management, and the roles and responsibilities of different stakeholders in managing technology resources.
Integration: The TOM should also outline how different systems and applications will be integrated for seamless data flow and process automation. This includes the use of APIs, middleware, and other integration technologies.
Technology Skills and Capabilities: As part of technology and infrastructure, the TOM should consider the skills and capabilities the organization needs to use and manage its technology resources effectively. This could include data analysis, software development, project management, and cybersecurity skills.

When designing the Technology and Infrastructure in the TOM, it’s important to consider the organization’s strategic objectives, the needs of its users (both internal and external), and the trends and developments in the technology landscape. A well-designed Technology and Infrastructure component can enable the organization to deliver its services more efficiently and effectively, support innovation, and gain a competitive edge.

People and Skills

The People and Skills component of a Target Operating Model (TOM) refers to the human resources the organization will need to realize its strategic objectives. This encompasses everything from the organization’s staffing needs to the competencies and skills required for various roles.

Here’s a more detailed breakdown of what the People and Skills component might include in a TOM:

Staffing Levels and Roles: This includes the number of people the organization needs and the roles they will fill. The TOM should outline how these roles contribute to the organization’s strategic objectives and the type of tasks and responsibilities they will encompass.
Skills and Competencies: Each role in the organization requires certain skills and competencies. The TOM should define these for each role and how they contribute to the organization’s strategic objectives. This could include technical skills, industry-specific knowledge, soft skills, leadership abilities, etc.
Recruitment and Retention: The TOM should outline how the organization plans to recruit people with the necessary skills and competencies, and strategies for retaining talent. This could include details about recruitment processes, career development opportunities, employee benefits, and workplace culture.
Training and Development: Given the rapid pace of change in many industries, continuous learning and development are crucial. The TOM should outline how the organization plans to provide training and development opportunities to equip its people with the necessary skills and knowledge.
Performance Management: This refers to how the organization will manage and evaluate the performance of its people. The TOM should outline performance evaluation methods, feedback mechanisms, and how performance is linked to rewards and recognition.
Culture and Values: The TOM should define the culture the organization aims to create to support its strategic objectives. This includes the organization’s values, behaviors, and attitudes contributing to the social and psychological environment.
Change Management: Any significant changes in an organization’s operating model will likely affect its people. The TOM should therefore include strategies for managing change, including communication strategies, support for affected individuals, and measures to overcome resistance to change.

Remember, people are at the heart of any organization, and any changes you propose in your TOM will impact them. Therefore, it’s important to consider the human aspect when designing the TOM, involving relevant stakeholders in the process, and planning for effective change management.

Culture and Behavior

The Culture and Behavior component of a Target Operating Model (TOM) is a fundamental aspect that underpins all other areas. It’s about the shared values, beliefs, attitudes, and norms that characterize an organization and guide the behavior of its people.

Here’s a more detailed breakdown of what the Culture and Behavior component might include in a TOM:

Values and Beliefs: These core principles guide an organization’s actions and decisions. They form the basis of the organization’s culture and should align with its strategic objectives. The TOM should define the organization’s desired values and beliefs, such as integrity, innovation, customer centricity, collaboration, etc.
Behaviors: These are the actions and attitudes that are encouraged and rewarded within the organization. They are a manifestation of the organization’s values and beliefs. The TOM should outline the behaviors that are expected from employees at all levels to achieve the organization’s strategic objectives.
Norms: These are the unwritten rules that guide behavior within the organization. They influence how people interact with each other, make decisions, and approach their work. The TOM should define the norms supporting the desired culture and behaviors.
Leadership Style: Leadership plays a crucial role in shaping the organization’s culture. The TOM should outline the desired leadership style that will support the organization’s culture and behaviors, such as transformational leadership, servant leadership, or democratic leadership.
Work Environment: The physical and psychological environment can significantly impact culture and behavior. The TOM should outline how the work environment will be designed to support the desired culture and behaviors. This could include workspace design, flexible working arrangements, and wellness initiatives.
Recognition and Rewards: How the organization recognizes and rewards its employees can significantly influence culture and behavior. The TOM should define a recognition and rewards system that reinforces the desired behaviors and values.
Change Management: Culture change can be challenging and may face resistance. The TOM should include change management strategies to help transition to the desired culture, including communication strategies, training and development, and leadership engagement.

When designing the Culture and Behavior in the TOM, involving people from across the organization is important to ensure buy-in and ownership. It’s also important to remember that culture change takes time and requires a consistent and sustained effort from all levels of the organization.

Governance and Performance Metrics

The Governance and Performance Metrics component of a Target Operating Model (TOM) outlines how an organization will make decisions, assign responsibilities, measure success, and keep track of its progress toward its strategic objectives.

Here’s a more detailed breakdown of what the Governance and Performance Metrics component might include in a TOM:

Decision-making Processes: This includes identifying who has the authority to make decisions at various levels of the organization, the process for making those decisions, and how they are communicated and implemented.
Roles and Responsibilities: Clearly defined roles and responsibilities are crucial for effective governance. The TOM should outline who is responsible for what, ensuring accountability and clarity in the organization’s management.
Policies and Procedures: These provide guidelines for action and behavior within the organization. The TOM should outline key policies and procedures that will govern the organization’s operations, ensuring consistency and alignment with the organization’s strategic objectives.
Compliance: With laws and regulations impacting various aspects of an organization’s operations, the TOM should outline how the organization will ensure compliance. This includes mechanisms for monitoring changes in relevant laws and regulations and procedures for achieving and maintaining compliance.
Performance Metrics: These are measures used to evaluate and track the performance of the organization, its teams, and individuals. They provide a way to gauge whether the organization is on track to achieve its strategic objectives. The TOM should outline key performance indicators (KPIs) that align with the organization’s strategic objectives and procedures for monitoring and reporting on these KPIs.
Risk Management: The TOM should outline how the organization identifies, assesses, and manages risks. This includes operational risks (such as processes, systems, and people) and strategic risks (such as market changes, competition, and strategy execution).
Reviews and Audits: Regular reviews and audits provide a mechanism for assessing the organization’s performance, identifying areas for improvement, and ensuring accountability. The TOM should outline the frequency and scope of these reviews and audits and how their findings will be reported and acted upon.

The TOM’s Governance and Performance Metrics component provides a foundation for managing the organization effectively, accountable, and transparently. It should support the organization’s strategic objectives while ensuring compliance with legal and regulatory requirements.

What are Performance Management Strategies?

How to design a target operating model

Designing a Target Operating Model (TOM) involves a step-by-step process that helps a business define its strategic objectives, envision its future state, and map out the necessary changes in its operational capabilities. The following are some of the steps involved in designing a TOM:

Define the Vision and Strategic Objectives: Begin by articulating the organization’s future vision and strategic objectives. These will guide the design of the TOM and ensure it aligns with the overarching business strategy.
Assess the Current Operating Model: Conduct a detailed analysis of the current operating model. Identify what is working well and what isn’t. Understand the gaps between the current state and the desired state. This could include an analysis of processes, organizational structure, technology, and skills.
Identify the Desired Future State: Based on your strategic objectives, define the future operating model. This should cover all aspects of the operating model, including people, processes, technology, and organizational structure.
Design the New Operating Model: Design the TOM by laying out the changes that need to be made to achieve the desired future state. This might involve creating new processes, restructuring the organization, implementing new technology, or redefining roles and responsibilities.
Develop the Implementation Roadmap: Create a detailed plan outlining how to implement the changes. This should include timelines, resources required, potential risks, and mitigation strategies. It’s important to consider the impact of the changes on staff and stakeholders and to plan for change management.
Implement, Monitor, and Adjust: Begin implementing the changes according to your roadmap. Monitor progress against the defined objectives and key performance indicators (KPIs). Be prepared to adjust the plan based on feedback and performance data.

Throughout this process, involving key stakeholders and maintaining clear and transparent communication is crucial. Change can be challenging for an organization, and people are more likely to support the process if they understand the reasons behind the changes and their role in implementing them.

Remember that a TOM is not a static document. It should be reviewed and updated regularly to align with the organization’s strategic objectives and external environment.

Example of a target operating model

Sure, I’ll provide an example of a hypothetical company and its target operating model. Let’s take a traditional banking institution that is looking to transform into a digital bank:

Vision and Strategic Objectives: To become a leading digital bank providing customers with seamless online and mobile banking experiences worldwide. The strategic objectives include increasing customer satisfaction, reducing operational costs, and improving the speed and efficiency of service delivery.

Current Operating Model Assessment: The bank operates through a network of physical branches with limited online services. Customer satisfaction is low due to long wait times, and operational costs are high due to the maintenance of physical infrastructure.

Desired Future State: The bank envisions a future where most services are delivered digitally. The number of physical branches is significantly reduced, and the primary customer interaction channels are online and mobile platforms.

New Operating Model:

Organizational Structure: The bank plans to establish a new digital banking department and hire a Chief Digital Officer (CDO). The roles and responsibilities within the bank will shift toward digital operations, data analysis, and cybersecurity.
Processes and Operations: All banking services, such as account opening, money transfers, and loan applications, will be digitized. Customers can access these services anytime, anywhere, through the bank’s website or mobile app.
Technology and Infrastructure: The bank will invest in developing a robust digital banking platform, integrating artificial intelligence for customer service (chatbots), and leveraging big data analytics for personalized offerings.
People and Skills: The bank must upskill its workforce to manage digital operations and data analysis. It will also need to recruit new employees with cybersecurity, data science, and digital customer experience skills.
Culture and Behavior: The bank will foster a culture of innovation, agility, and customer-centricity, encouraging employees to embrace digital transformation and adapt to the changes.
Governance and Performance Metrics: New KPIs will be introduced, focusing on digital customer engagement, speed and efficiency of service delivery, and digital innovation.

Implementation Roadmap: The bank plans to achieve this transformation over five years, with specific milestones set for each year. The plan includes investment in technology, recruitment, staff training, and gradual phasing out physical branches.

This example showcases how the bank’s target operating model aligns with its strategic objectives, providing a clear path for transformation into a digital banking institution. Remember that creating a TOM is a complex process that requires a deep understanding of the business, market trends, and change management. It’s also a dynamic process that requires regular revision and adaptation as the business and market environment evolve.