Target operating model

What is a Target Operating Model?

The target operating model (TOM) is a blueprint that describes how an organization will operate in the future to achieve its strategic objectives. It outlines the desired future state of key business capabilities, including people, processes, technology, and governance. The TOM serves as a roadmap for transformation, guiding the organization through changes required to reach its desired performance levels.

Developing a TOM is a strategic exercise that requires a deep understanding of the business’s current state, competitive landscape, and future aspirations. It bridges the gap between current realities and future vision, ensuring that all aspects of the organization are aligned to support strategic goals. This model is not static; it evolves as the business environment and strategic priorities shift.

A well-defined TOM provides clarity and direction, enabling effective decision-making and resource allocation. It ensures that investments in technology, talent, and process improvements are strategically aligned and contribute to overall business success. Without a clear TOM, organizations risk fragmented efforts, inefficient operations, and a failure to achieve their strategic potential.

Key Takeaways

• A Target Operating Model (TOM) is a strategic blueprint for an organization’s future operations.
• It defines how capabilities like people, processes, technology, and governance will function in the desired future state.
• The TOM acts as a roadmap for organizational transformation, aligning efforts with strategic objectives.
• It ensures efficient resource allocation and guides investment decisions towards achieving future business goals.
• The model is dynamic and should be reviewed and updated as strategic priorities evolve.

Understanding Target Operating Model

The TOM is built upon a thorough analysis of the organization’s strategic goals. These goals dictate the capabilities the organization needs to possess in the future. The model then visualizes how these capabilities will be structured and integrated. This includes defining the organizational structure, key roles and responsibilities, critical business processes, the technology landscape, and the governance framework required to manage operations and decision-making.

It’s crucial to differentiate between the current operating model and the target operating model. The current model reflects how the organization operates today, often highlighting inefficiencies or gaps. The TOM represents the ideal state, free from the constraints of current limitations, and designed to meet future market demands and strategic ambitions. The transition from the current to the target state is managed through a series of projects and initiatives.

The TOM provides a common language and understanding across the organization, fostering alignment and collaboration. It helps stakeholders, from senior leadership to operational teams, understand the direction of travel and their role in achieving it. This shared vision is essential for successful change management and for ensuring that all parts of the organization are working cohesively towards the same future state.

Formula

There is no single mathematical formula for a Target Operating Model, as it is a conceptual and strategic framework. However, its development often involves assessing performance metrics and defining targets for them. These might include metrics such as:

Future Performance Metrics = Strategic Goals x Desired Capabilities x Optimized Processes x Enabling Technology x Effective Governance

While not a literal equation, this illustrates that the target operating model is an integration of various components designed to achieve future strategic outcomes. The focus is on defining the target state for each of these elements to achieve desired business results.

Real-World Example

Consider a retail bank aiming to become a leader in digital financial services. Its current operating model might be heavily reliant on physical branches and manual processes. The bank’s TOM would envision a future state where customer interactions are primarily digital, with AI-powered customer service, automated loan processing, and a data-driven approach to personalized product offerings.

This TOM would define new digital customer journey processes, the technology stack required (e.g., cloud infrastructure, advanced analytics platforms, mobile apps), the new skill sets needed in employees (e.g., data scientists, UX designers), and a revised governance structure to manage digital risks and compliance. The transition would involve significant investment in technology, employee retraining, and process re-engineering.

The TOM would provide a clear picture of what the