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{{Short description|Abstract model of organizational processes}}

Operating Model is a term that is used in many contexts. An Operating Model is the abstract representation of how an organisation operates across process, organisation, technology domains in order to deliver value defined by the organisation in scope.

An '''operating model''' is both an abstract and visual representation (model) of how an organization delivers value to its customers or beneficiaries as well as how an organization actually runs itself.

==Definition==

Any organisation is a complex system consisting of several different interlinked logical components. An Operating Model breaks “this complex machinery” down into its logical components and deploys the appropriate analysis and design techniques for each component in order to deliver better value.

There are different ways of defining the elements that make up an operating model.

:''People'', ''process'' and ''technology'' is one commonly used definition,<ref>{{cite web |author=Daniel E. Williams and Jay Leask |title=People, Process, Technology Strategy for Enterprise 2.0 |publisher=Booz Allen Hamilton |date=1 July 2011 |url=http://www.boozallen.com/media/file/People-Process-Technology-Enterprise2.pdf |access-date=2015-11-29 |archive-date=2015-11-22 |archive-url=https://web.archive.org/web/20151122232441/http://www.boozallen.com/media/file/People-Process-Technology-Enterprise2.pdf |url-status=dead }}</ref> ''process'', ''organization'' and ''technology'' is another.<ref>Marne de Vries, Alta van der Merwe, Paula Kotze and Aurona Gerber. (2011) A Method for Identifying Process Reuse Opportunities to Enhance the Operating Model, and 2011 IEEE International Conference on Industrial Engineering and Engineering Management</ref>

An organization is a complex system for delivering value. An operating model breaks this system into components, showing how it works. It can help different participants understand the whole. It can help leaders identify problems that are causing under performance. It can help those making changes check that they have thought through all elements and that the whole will still work. It can help those transforming an operation coordinate all the different changes that need to happen.

An Operating Model can be used as a framework for formulating Operations Strategy – explicit choices about the best deployment of organisation’s elements to achieve the business goals. It is usually informed by the Business Model. In some cases, an Operating Model can become the source of competitive advantage and can inform the Business Model.

An operating model is like the blueprint for a building. It is more dynamic than a building blueprint, with changes occurring regularly. Also, an operating model is not usually just one blueprint. There are likely to be blueprints for each element: processes, organization, decision making, software applications, locations and so on.

The Operating Model can be a vehicle product to describe how the organization does business today - the "as-is" Operating Model. This can be the foundation for an organization that wants to transform its business. New business drivers can be translated into requirements that can lead to a new "to-be" or "Target" Operating Model. The Target Operating Model represents the high level requirements that drive the future Business and IT Architecture design.

An operating model can describe the way an organization does business today – the ''as is''. It can also communicate the vision of how an operation will work in the future – the ''to be''. In this context it is often referred to as the [[target operating model]], which is a view of the operating at a future point in time. Most typically, an operating model is a living set of documents that are continually changing, like an organization chart.

==Operating Model in Context==

An operating model describes how an organization delivers value, as such it is a subset of the larger concept 'business model'. A ''[[business model]]'' describes how an organization creates, delivers and captures value and sustains itself in the process. An operating model focuses on the delivery element of the business model. There are plenty of disagreements about the use of the words ''business model'' and ''operating model''.<ref>Amit, Raphael and Zott, Christopher "Creating value through business model innovation", MITSloan Management Review, Spring 2012</ref><ref>Zott Christopher, Amit Raphael and Massa Lorenzo, "The Business Model: Recent developments and future research", Journal of Management May 2011</ref><ref>{{cite web |url=https://ashridgeonoperatingmodels.com |title=Ashridge on Operating Models |access-date=2024-11-30}}</ref>

Several related terms are often used interchangeably to describe a business but are actually quite different as illustrated in Figure 1:

The term operating model may have been first used in corporate-level strategy (see ''[[#History|History]]'' below) to describe the way in which an organization is structured into business divisions, what activities are centralized or decentralized and how much integration is required across business divisions. The term is most commonly used today when referring to the way a single business division or single function operates, as in 'the operating model of the exploration division' or 'the operating model of the HR function'. It can also be used at a much more micro level to describe how a department within a function works or how a factory is laid out. The section below titled ''[[#Business/IT dialogue|Business/IT dialogue]]'', explores one framework for thinking about the IT implications of different corporate strategies.

* A [[Business Model]] describes the rationale of how an organization creates, delivers, and captures economic, social, or other forms of value. The process of Business Model design is part of business strategy.

* An Operating Model describes the necessary level of business process integration and data standardization in the business and among trading partners and guides the underlying Business and Technical Architecture to effectively and efficiently realize its Business Model. The process of Operating Model design is also part of business strategy.

* A [[Capability Management in Business|Capability Model]] describes the capabilities necessary to execute the Operating Model. The process of Capability Model design is part of Operations Planning.

An operating model is one of the tools that leaders can use to help them formulate and execute strategy. Typically work on an operating model starts after some strategic plan has been proposed. It translates that plan into operating requirements and decisions and often also contributes to the plan by showing areas where the plan will be hard to implement.

:::::'''Figure 1: Relationship between Operating Model and Capability Model'''

[[File:CapabilityLandscapewithlabels.jpg]]

An operating model can also be used as a tool when an organization is facing performance challenges. The model can help with the diagnosis (what is causing the performance problems) and with the solution (what needs to change to correct the problems).

==Operating Model Defined==

An Operating Model for a business is a '''strategic''' schematic which illustrates the '''relationships''' among the operating units and trading partners and provides a set of '''guidelines''' for both the business architecture and technology infrastructure that enable a company to grow its business either organically or through acquisitions.

However, probably the most common use of the operating model tool is to get alignment between managers in different functions or divisions about how they are going to work together for the benefit of the whole.

* '''Strategic''': an Operating Model is a strategic choice as to the extent of process standardization and data integration desired to achieve business results.

* '''Relationships''': refers to the degree of cooperation across business units including customers, suppliers and trading partners, required for efficiency or leverage.

* '''Guidelines''': clarify what is important for the organization today and the rationale for investments so that leaders are aligned. When the Operating Model is changed, the "to-be" model sheds light on the transformations required for future success and the decision process for investments among the units.

Additional maps and charts are often needed. For example, an operating model will typically include an IT blueprint, locations maps, a supplier matrix, people models, decision grids and other elements such as a scorecard for assessing performance. The particular set of documents created will depend on what the operating model is being used for. There is no generally accepted set of charts or at least there is no agreement yet about what charts make up an operating model.

==History of Operating Model Development==

===Origins in Corporate Strategy===

Operating Model as defined here is similar to '''Corporate Strategy''': "the relationships among the businesses in the corporation's portfolio and the process by which investments will be determined among them."<ref>Richard Lynch, John Diezemann and James Dowling, The Capable Company: Building the capabilities that make strategy work (Wiley-Blackwell, 2003)</ref>

There are three basic models:

* '''Holding Company''': each business has wholly self-contained brands/businesses with dedicated core and support work. The businesses are tied together only by a common funding source and financial requirements (e.g., Tyco International)

* '''Federated''' or '''Allied''': each business contains the core work required to create advantage autonomously. Issues of common interest are identified and worked among businesses. Support organizations develop uniform policies and practices across geographies, tailor them to meet the needs of each business and help achieve synergies across businesses where desired (e.g., access to customer, product files, needs to have own accounting tied to corporate). Some support work may be shared across businesses (e.g., Canon or GE today)

* '''Integrated''': single business, requiring a single business strategy for competitive advantage. Important business issues are formulated centrally and tailored for local needs to optimize the entire business. Success is measured by adding up the global numbers (e.g., McDonalds or Harley Davidson).

Following are some of the operating implications of the choice<ref>Laying the Tracks for the Technology Train www.technologyevaluation.com/.../laying-the-tracks-for-the-technology-train-15640/ April 10, 2000. Adapted from original work by Novations, Inc.</ref>:

==History==

===Origins in corporate strategy===

The term operating model has been used in corporate strategy to mean what Lynch, et al., of ''[[corporate strategy]]'' describe as: "the relationships among the businesses in the corporation's portfolio and the process by which investments will be determined among them."<ref>Richard Lynch, John Diezemann and James Dowling, The Capable Company: Building the capabilities that make strategy work (Wiley-Blackwell, 2003)</ref><!-- as written, the similarity is not apparent. if strategy is about investment, it isn't about operations. Just sayin'.-->

Corporate strategy grew out of the research of [[Harvard Business School]] professor Bruce R. Scott who developed a model of the stages of corporate development.<ref>Bruce R. Scott, "Stages of Corporate Development (Part I)" (Harvard Business School Note 371-294) (1970, 1977)</ref> He traced the evolution of a firm from "Stage I" with a single product (or line of products) to "Stage 3" with multiple [[line of business|lines of business]], markets and channels. Following this work, [[Leonard Wrigley]]<ref>Leonard Wrigley, Divisional Autonomy and Diversification (Thesis for Doctor of Business Administration, Harvard University, 1970)</ref> and Richard Rumelt<ref>Richard P. Rumelt, Strategy, Structure, and Economic Performance, (Harvard Business School, Boston, 1974, Revised edition published by the Harvard Business School Press, 1986)</ref> developed ways of classifying company structures and comparing their strategies. They identified four different operating models:<ref>Kenneth R. Andrews, The Concept of Corporate Strategy (Irwin, 1986)</ref>

# Single line of business firms, where most revenue comes from a single activity;

# Related businesses where diversification is achieved by adding businesses that complement the original activity;

# Diversified firms that combines unrelated businesses, such as an oil company and a fertilizer business;

# Conglomerates – diversification is achieved without regard to complementary or synergistic effects.

The nomenclature evolved, but the categories survive:

* '''Integrated''': single business, requiring a single strategy for competitive advantage. Issues are formulated centrally and tailored for local needs to optimize the business. Success is measured by adding up the global numbers. Examples include [[McDonald's]] or [[Harley Davidson]].

* '''Allied-related''': each business contains the ability to create advantage autonomously. Common interests are worked across businesses. Some support work may be shared across businesses. Examples include [[Canon (company)|Canon]] and [[Procter & Gamble]].

* '''Allied-unrelated''': each business contains the core work required to create advantage autonomously. Customers may be shared. Common interest are worked across businesses. Capabilities that portable to other businesses are shared for leverage. Examples include [[Avery Dennison]]'s pressure-sensitive technology and self-adhesive base technologies that are used in [[Roll Materials]] medical group for single-use medical products.

* '''Holding company''': includes unrelated businesses, with multiple strategies, related or not.<ref>Norman Berg, General Management: An Analytic Approach (Richard D Irwin, March 1984)</ref> Each business has self-contained brands/businesses with independent functional groups. The units are tied together only by ownership. Examples include [[Tyco International]].

Some implications of the choice:<ref>Laying the Tracks for the Technology Train www.technologyevaluation.com/.../laying-the-tracks-for-the-technology-train-15640/ April 10, 2000. Adapted from original work by Novations, Inc.</ref>

{| class="wikitable"

|-

! Component !! Integrated !! Allied-related !! HoldingAllied-unrelated !! Holding

|-

| Business Strategystrategy|| One || Many || Many || Many

|-

| Customers || Same || Shared || Some shared || Many

|-

| Corporate Rolerole || Resource allocations || Define Protocolsprotocols || Define protocols || Financial roll-ups and analysis

|-

| Human Capitalcapital || Common || Some Sharedshared || Some shared || Independent

|-

| IT Systemssystems || Common || Common || Few, interconnected || Different

|-

| Enabling Processesprocesses|| Centralized || Centralized || Some centralized || Decentralized

|}

This "large grain" view informs many decisions about how to design and build the capabilities that make up the organization. For example, the first choice for a Holding Company such as Tyco Industries would not be to try to run all of the companies in its portfolio on a single configuration of the same financial management business applications.

However, the "large grain" view insufficiently informs decisions within each model. For example, the Federated/Allied model suggests common IT Systems. However it is common that the Corporate/Home Office Company shares little with its Divisional Companies. MIT's Center for Information Systems Research presents a useful model which provides a way of thinking about the need for multiple Operating Models for a given Corporate Strategy.

===Service Orientation Operating Models===

==Center for Information Systems Research==

Operating models have become popular with service organisations, looking to improve processes to deliver greater value to customers and/or beneficiaries. One such operating model is the Service Operating Model Skills (SOMS) framework.<ref>{{Cite web |url=http://www.service-operating-model.co.uk/ |title=Service Operating Model |access-date=2016-12-07 |archive-date=2016-12-01 |archive-url=https://web.archive.org/web/20161201014221/http://www.service-operating-model.co.uk/ |url-status=dead }}</ref>

SOMS is an operating model focused on the service sector. SOMS stipulates the expertise needed for people creating and working with operating models. The framework consists of seven elements:

[http://cisr.mit.edu/res CISR], a research group at the MIT Sloan School of Management has defined Operating Model in terms of this lightweight method to capture the business needs for degree of Business Process Standardization and Data Integration. CISR suggests that this type of Operating Model is useful to establish requirements for reusable Core Capabilities and to guide IT Investment decisions governance. The Operating Model can be used to drive architecture and infrastructure development ensuring that business needs are met with the right IT foundation. The resulting IT systems enable the company to grow its business, without having to do deep surgery on the IT systems each time the business grows either organically or through acquisitions. The implementation of integrated business processes and IT systems is the realization of the Operating Model.

# The customer experience

# Performance management and improvement

# Demand and capacity management

# People capability

# Process context

# Delivery – process design

# Strategy, governance, and leadership

SOMS was created by the Centre for Service Management in the School of Business and Economics at Loughborough University <ref>{{Cite web|url=http://www.lboro.ac.uk/departments/sbe/csm/|title = Centre for Service Management &#124; Centre for Service Management &#124; Loughborough University}}</ref> in response to requests from trainers and instructors in the service sector; and is based on academic research from the Centre for Service Management.<ref>Radnor, Z, Bateman, N, Esain, A, Kumar, M, Williams, S (2015) ''Public Service Operations Management A Research Handbook'', Routledge, {{ISBN|9781138813694}}</ref>

The team of Jeanne W. Ross, Peter Weill and David C. Robertson summarized their research in Enterprise Architecture as Strategy.<ref>[http://www.architectureasstrategy.com/book/eas/about.htm.]</ref> They found that an organization with an explicitly defined operating model report 31% higher operational efficiency, 33% higher customer satisfaction, and a 34% advantage in new product development.

In an extension to the earlier Corporate Strategy work, they outline four operating models:

==Business/IT dialogue==

The [[MIT Center for Information Systems Research]] (CISR), a research group at the [[MIT]] [[Sloan School of Management]], suggests that an operating model is useful to guide IT investment decisions.<ref>{{Cite web | title=Homepage {{!}} MIT CISR | url=http://cisr.mit.edu/ | access-date=2025-04-27 | website=cisr.mit.edu}}</ref> IT investment must support the operating model.

Ross, Weill and Robertson found that an organization with an operating model reported 31% higher operational efficiency, 33% higher customer satisfaction, and a 34% advantage in new product development.<ref name=rwr>{{cite book |last1=Ross|first1=Jeanne|first2=Peter|last2=Weill|first3=David C. |last3=Robertson|author-link1 =Jeanne W. Ross|author-link2 =Peter Weill|author-link3 =David C. Robertson|year=2006 |title=Enterprise Architecture As Strategy: Creating a Foundation for Business Execution |publisher=Harvard Business Review Press |isbn= 978-1591398394 }}</ref> In the book ''Enterprise Architecture as Strategy'', they outline four operating models:

::::::'''Process Standardization'''

{| class="wikitable"

|+ Process standardization and integration

|-

! !! colspan="2" | Process standardization

! Process Integration !! Low!! High

|-

! Process integration !! Low !! High

| '''High'''|| Coordination|| Unification

|-

| '''LowHigh''' || DiversificationCoordination || ReplicationUnification

|-

| '''Low''' || Diversification || Replication

|}

* '''Coordination''' – businesses requiring low business process standardization but high business process integration (Comparecompare with Allied Strategyallied –strategy, where subsidiaries provide varied products to the same customers)

* '''Unification''' - businesses requiring– both high business process standardization and high business process integration (Comparecompare with Integratedintegrated Strategystrategy)

* '''Diversification''' -– businesses requiring low business process standardization and low business process integration (Comparecompare with Holdingholding Companycompany Strategystrategy)

* '''Replication''' - businesses requiring– high business process standardization but low business process integration (Comparecompare with Franchiseesfranchisees or Replicatedreplicated Facilitiesfacilities of an Integratedintegrated Strategystrategy)

Operating models inform the appropriate level of business process integration and standardization to deliver the organizations promises to stakeholders.<ref name=rwr/>

==Role in Defining the Business and Technical Architecture==

The operating model informs IT leaders about how various technical and business components should be designed and implemented to enable the chosen operating model:<ref name=rwr/>

Operating Models drive the necessary level of business process integration and standardization to deliver the organizations proposition, goods and services to customers, shareholders and it people.<ref>Jeanne W. Ross, Peter Weill and David C. Robertson, Enterprise Architecture as Strategy (Harvard Business School Press, 2006)</ref>

On the Business Architecture side, the Operating Model informs [[Business Architect]]ure as to the number of distinct market facing entities, the number of unique value propositions, and the number Capability Models required. For example, an Integrated Enterprise would have one customer facing brand and a single core Capability Model and a Holding Company would have one for each company in its portfolio. Depending on business strategy choice (profit propositions and value propositions), a Federated/Allied Strategy may require more than one Capability Model.

{| class="wikitable" border="1"

The Operating Model also informs IT and other support services as to the value and appropriateness of shared services and related Service Level Agreements.

|+Technical/operational model grid

On the [[Technical architecture]] side, the Operating Model informs IT leaders about how various technical and business components should be designed and implemented to enable the chosen Operating Model:<ref>Derived from: Jeanne W. Ross, Peter Weill and David C. Robertson, Enterprise Architecture as Strategy (Harvard Business School Press, 2006)</ref>

{| class="wikitable"

|-

! Component !! Coordination !! Unification !! Diversification !! Replication

|-

| Customer Datadata || X{{ya}} || X{{ya}} || ||

|-

| Product Datadata || X{{ya}} || X{{ya}} || ||

|-

| Shared Servicesservices || X{{ya}} || X{{ya}} || X{{ya}} || X{{ya}}

|-

| Infrastructure Technologytechnology || X{{ya}} || X{{ya}} || X{{ya}} ||

|-

| Portal Technologytechnology || X{{ya}} || || ||

|-

| Middleware Technologytechnology || X{{ya}} || || ||

|-

| Operational Processesprocesses || || X{{ya}} || || X{{ya}}

|-

| Decision Makingmaking processes Processes|| || X{{ya}} || ||

|-

| Application Systemssystems || || X{{ya}} || ||

|-

| Systems Componentcomponent technology Technology|| || || || X{{ya}}

|}

From the table above, it is shown that Coordination and Unification models benefit more from consolidated views of Customer and Data across the enterprise than do Diversification and Replication models.

Coordination and unification models benefit more from consolidated views of customer and data across the enterprise than do diversification and replication models.

==Creating a Dialogue between Business and IT==

The Operating Model is an important tool in the dialogue between business and IT. The dialogue can take place with top management and enable them to decide which operation models best describe the way they choose to operate the company. IT can also start with individual business units to identify the models (or mix of models) are currently in place helping clarify both intent and sources of synergy and disconnect between business and IT systems.

==Industry standard operating models==

Such dialogues allow IT management to use the Operating Model as Strategy to drive design of concrete plans to enable the business in the form of IT projects.

* [[Business Process Framework (eTOM)]]

As valuable as the result of the dialogue may be in terms of aligned plans, is the organizational learning that takes place through the dialogue, choices, and translation of the Operating Model into [[Enterprise Architecture]] and [[IT Governance]] that guide and control IT investment over time.

==Industry Standard Operating Models==

* [[eTOM]] ([[Enhanced Telecom Operations Map]])

* IAA ([[Insurance Application Architecture]])

* BIAN ([[Banking Industry Architecture Network e.V. (BIAN)]])

* [[IFW]] (Information Framework)

* ITILIFW ([[Information Technology Infrastructure LibraryFramework]])

* [[ITIL]]

* COBIT ([[Control Objectives for Information and related Technology]])

* [[COBIT]] (Control Objectives for Information and Related Technology)

==See also==

* [[Business model|Business Modelarchitecture]]

* [[Business model]]

* [[Capability Management in Business]]

* [[Capability management in business]]

* [[Enterprise architecture|Enterprise Architecture]]

* [[Enterprise architecture]]

* [[Governance, risk management, and compliance|Risk and Compliance]]

* [[Governance, risk management, and compliance|Risk and compliance]]

* [[Shared services|Shared Services]]

* [[Shared services]]

* [[Target operating model]]

==References==

{{reflist}}

<references/>

{{DEFAULTSORT:Operating Model}}

[[Category:Enterprise architecture]]

[[Category:Strategic management]]

[[Category:Business terms]]