This is a common question, or should be if you’re in the business of designing operating models. And we are. At Davies we spend a lot of time with clients designing operating models for their businesses.
In truth there are many answers to this question but before I dive in I should point out that the question is not ‘What does a good operating model document or diagram look like’? That’s also a valid question and one I’ve addressed before (and will probably do so again). Fundamentally the answer to that though is one of communication, clarity and completeness of information.
Anyway back to the question of what makes an operating model ‘good’?
This often depends on the objectives of the business. Does the business want to be able to extend or flex their model in response to a changing product strategy or client strategy? Does the business need to reduce overall operating costs? Or do they seek to operate in different markets (location or jurisdictions). Occasionally they do just want to understand what they’re doing today – maybe they’ve been through M&A activity, but that’s back to the documentation question, understanding what they do now before they change the model.
I’ve listed below several key measures that define a good operating model.
Coverage of essential capabilities
Fundamentally an operating model should enable the business to run. I appreciate that this is a relatively obvious and vague statement but if the operating model does not support the business then it’s not doing its job. Consider an investment management business operating model that does not include the capability to make investments, or more specifically to make investments in a specific asset class. The operating model must cover all essential functions for the business it pertains to.
Knowing what those capabilities are is key. At Davies we carefully maintain a number of reference models depending on a number of key factors, cascading from the type of business e.g. investment manager, fund manager, pension scheme, wealth manager etc but also based on asset class coverage e.g. private market investments; investment strategy, client type and jurisdiction to name but a few.
Capability alignment
A good operating model carefully matches the capabilities of the teams, companies or business groups to the functions of the business. It may be easy to consolidate functions within a single team and tempting to do so because the functions may sound the same. However understanding the true nature of the functions, the systems employed, the processes involved is key to ensuring that the model is efficient.
Similarly deploying the right system, technology is equally important, especially in a service industry such as the ones Davies focusses on.
Operational efficiency
This is effectively keeping operating costs to a minimum, whilst also ensuring that the model is not overly sensitive to expected changes in volume, up or down. This is a much more difficult measure to determine. An efficient model clearly keeps operating costs low – automating where necessary, removing redundant processes, centralising or capabilities where appropriate.
Scalability
Providing scalability in an operating model is very closely linked to operational efficiency. It is ensuring headroom in the model as well as enabling the model to add further capacity without changing it’s structure. Technology often plays a part in the solution here and a good model deploys it appropriately without over complicating the architecture.
Flexibility
A strategic-level operating model tends to ‘live’ for a long time; or least the basic structure does. Changing technology or responsibilities can be expensive. However the drivers of an operating model do not tend to stand still; businesses launch new products; they use new suppliers; adjust to client demands, or branch out into new markets for example.
Consequently an operating model must be flexible but building in flexibility that will never be used can be costly. Over-engineering an operating model is always a possibility. The art is to determine the amount of change up front that the target business anticipates and precisely where that change might be. Using this information flexibility can be built into the operating model to accommodate the future change.
For example flexibility might be ensuring that a system is able to cope with particular capability in the future that is not required right now – that’s a relatively simple solution. Considering investing in asset classes again, it is ensuring that a system can manage future asset classes that are not managed today.
More difficult is providing an ‘extension point’ in the operating model; providing extensibility without compromising the overall model itself. A good method involves separating functions ‘horizontally’ so that components can be delegated to individual specialist groups or systems. In the Investments industry this might be acknowledging that financial asset classes are managed differently but must be combined elsewhere in the model to provide a consolidated view. However, there is a trade-off here – introducing a boundary between functions (and associated teams or systems) that may not be necessary and that may compromise efficiency.
In many cases the priority of each of the above measures is dependent on the situation and strategy of the business.
This is a short essay on a complex topic; the headline measures by which we critique our own operating model designs. There are many more drivers and objectives that our clients expect us to cover – and we do. If you would like to find out more, please contact us.
