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Operating models: A design for digital success


PUBLISHED February 27 2020


At the dawn of a new decade, many enterprises are confronting a sometimes unpleasant truth: current ways of working no longer work.

 

A potent blend of technology-driven shifts and evolving customer demands mean nearly half of companies expect their business models to require fundamental change in the next three years - whether in the shape of new products or services that will displace old ones, or radical transformations that orient them towards entirely

Extent to which an organization’s primary business activity will transform over next 3 years

Source: Harvey Nash/KPMG CIO Survey 2019

The pressures of digital competition and the need to boost speed to market are also pushing more enterprises to explore new business models, and new operating models to support them. According to a recent survey by research firm, Gartner, 85 percent of organizations have adopted or plan to adopt a product-centric model for the delivery of new applications, a notable shift from the project-based approaches that have


Change can be traumatic, but a positive trend is emerging from this trauma. Companies are realizing in the current environment simply investing in new technologies or talent isn’t enough. They need to be intentional about their internal design, take steps to reduce organizational friction, build adaptability to change and ease the execution of groundbreaking - often challenging - visions and strategies.


Rather than embarking on yet another transformation program, enterprises have to create and embed operating models that are fit for digital business - and sustainable for the long term.



What an operating model is - and why you need a new one

An operating model can be summed up as the combination of custom talent, processes and capabilities that dictate “how the organization works, and how people within the organization work together,” says Linda Luu, Product Strategy & Portfolio Management Principal at ThoughtWorks. That means every organization has an operating model - whether it’s formalized or not. 



The issue, according to ThoughtWorks Digital Transformation Principal, David Robinson, is that many operating models are still based on the priorities of past decades - efficiency and managing risk. That makes them too prescriptive for current competitive realities.

Quote from David Robinson, Digital Transformation Principal, ThoughtWorks

“The digital economy is a highly dynamic environment, and an operating model that works in that kind of environment needs to be very different than one designed for stability,”


David Robinson, Digital Transformation Principal, ThoughtWorks




As every organization has its own capabilities, assets and strategies, each operating model is to an extent, unique. “Rather than a prescriptive formula, (a model) should be seen as a set of ‘North Star’ principles that help the company know what good looks like so it can accelerate, avoid mistakes and manage risk dynamically,” Robinson says.

 

To Luu, an operating model has similarities to company culture but is more concrete and intentional, exhibited tangibly through functions like governance and performance management. Crucially, it can’t be a one-off concern.


“Many organizations have proven they can be hugely successful with a new product offering or recruiting a handful of highly talented people, but can they do that in a reliable or sustainable way?” she says. “Often they do it once but then try to make it part of the DNA and fail. That’s why upgrading the model is really important in an environment where organizations are recognizing they have to work differently to achieve what they want.”

Perpetual motion: The digital operating model in action

Diagram - Perpetual motion: The digital operating model in action
Diagram - Perpetual motion: The digital operating model in action
Source: ThoughtWorks

Business Strategy

Customer value is often framed as the end-goal of an operating model - but in a digital-ready model, consideration of customer value permeates every process. According to ThoughtWorks Executive Consultant, Jim Highsmith, an effective operating model connects business strategy with real-world execution by explaining precisely how the organization intends to deliver value to the customer throughout its operations, from technology to governance and portfolio management.


If the operating model is to serve as an effective strategy execution mechanism, a clear and explicit strategy is critical. “That means broadly communicating and structuring your strategy in terms of a set of outcomes that are important for the customer, so you can represent the strategy as goals and measure the value that you’re going to deliver,” says Robinson. “Framed in that way, a strategy is much more useful for all the parts of the organization to make better decisions.”


Picking outcomes that bring value to the customer may sound straightforward, but according to Robinson is exactly where many enterprises fall short. “As a developer or engineer, if I have an understanding of the outcome we’re driving for, of how it will add value for the customer and what will be measured, that understanding will positively influence my design choices,” he says. “But at most organizations the strategy isn’t describing an outcome - it’s describing a specific solution, or thing to be built. In that case, it doesn’t give me any guidance at all.”

Quote -  Jim Highsmith, Executive Consultant, ThoughtWorks


“There are three big questions an operating model needs to solve or answer: How do we work? How do we invest? And how do we adapt fast enough?”


Jim Highsmith, Executive Consultant, ThoughtWorks



An outcome “doesn’t describe the how,” agrees Luu. “You might want to win in a particular customer segment and may want to do that by creating a very unique digital experience, but an outcome doesn’t say whether or not you can do that through a tablet or phone or watch.”

  

Rather than a ‘thing’ an outcome should articulate the positive result the organization intends for its customers - such as providing a better experience, or enhancing levels of satisfaction for a certain demographic. From these the organization can derive more specific goals that still leave teams room to innovate and experiment.


When a goal is project or performance rather than outcome-based, by the time it cascades down to the team level, “no one really understands why they’re doing it,” Luu says. “People end up in a cycle of building a thing within the timeframe they’re given and moving on to the next. And all conceptions of value for the customer are lost.”

 

An outcome-based approach means “decisions about what you’re going to build and how you’re going to build it are pushed down to people much closer to the customer, who probably have the best intelligence available about what works and what doesn’t,” Robinson points out.

 

Yet this doesn’t diminish the role of the executive team, which has to weigh in with the overall vision. “It’s the senior management’s job to actually set the strategy,” says Highsmith. “But in outcome-based strategies and operating models, they’re looking at the customer outcome they’re trying to move towards, rather than a business strategy that says ‘we’re trying to make this much ROI and this much in revenue.’”



Portfolio management 

When strategy is oriented towards customer-relevant outcomes, decisions on which products or solutions to prioritize or invest in - that is, the structure of the enterprise portfolio - become clearer. 



“(The portfolio) is based on the outcome you want the customer to achieve, rather than the activities you do internally,” says Highsmith. “You want to fund a stream of activities related to products that evolve over time, rather than projects that have a fixed end date. This orientation provides a basis for delivering what we call a continuous stream of value.” 

“Having a clear strategic direction means understanding and making decisions about what’s not useful and where you’re not going to operate, as much as where you’re going to focus your efforts and investments,” says Luu. “It’s based on leaders aligning to what the organization wants to achieve from the customer perspective.”


Translating the strategy into an actionable portfolio can be tackled with a framework ThoughtWorks terms the Lean Value Tree.

 

“You can imagine the tree as a goal with several different approaches that you might use to achieve it - what we call bets,” Robinson explains. “Each of those breaks down further into initiatives that can actually be given to teams to carry out, all defined as outcomes with measures of success. When you give a particular team a piece of work, it’s very clear why they’re doing it and how they can test the results.”

ThoughtWorks strategy in a lean enterprise

Diagram - ThoughtWorks Strategy in a Lean Enterprise
Diagram - ThoughtWorks Strategy in a Lean Enterprise
Source: ThoughtWorks

Key to this approach, Robinson says, is that the various ‘bets’ the enterprise pursues are “not just breaking a goal down to small chunks and having them all add up to the goal. There are actually different ideas about how to get what you want.” “It’s similar to a venture capital fund investing in multiple companies,” he adds. “Most have nine fails for every winner, but nobody tells the management they’re doing a terrible job, because the one blockbuster success produces the desired returns.”

 

Highsmith gives the example of a manufacturer of hiking shoes, which rather than higher sales or profitability, recognizes providing comfort and style in the outdoor environment as the outcome that will deliver value to customers. Since comfort may have as much to do with socks or other accessories as boots themselves, the company could consider ‘betting’ on a number of new peripheral products rather than simply tweaking existing features. “You might actually come up with something different in terms of your product strategy based on this kind of analysis,” he says.


The focus on outcomes for the customer means measures of portfolio success - and the perceptions of management - need to shift to de-emphasize traditional metrics. “Customer value has to come before return on investment,” says Highsmith.


“When customer value is the objective, return on investment can be a constraint. You have to make money in order to continue making products for the customer - but you want customer value to be at the front of everybody’s mind.”

  

“The biggest problem with indicators like ROI and revenue are that they’re lagging, which means you have to wait until well after a product is actually delivered to know if you’ve achieved success,” Luu says. “There’s nothing guiding you along the way. (The portfolio approach) is about breaking things up into smaller slices of value and being able to measure them incrementally, so you can see whether you’re on the right track.”

  

Demands for teams to be agile, but also on time and on budget, can create a project management “iron triangle” where scope, schedule and cost are constantly constraining performance, notes Highsmith. An “agile triangle,” by contrast, recognizes the constraints of scope, schedule and cost, but also makes sure value and quality are key considerations and the ultimate way results are measured.

The "iron triangle" and "agile triangle"

Diagram - “iron triangle” (scope, schedule cost) and “agile triangle” (value, quality, constraints)
Diagram - “iron triangle” (scope, schedule cost) and “agile triangle” (value, quality, constraints)
Source: Jim Highsmith, Agile Project Management: Creating Innovative Products

As they are closely linked to desired outcomes there are no universal metrics for customer value; they will vary depending on context. As Luu explains, if the desired outcome for a health company is to empower customers to achieve their health and fitness goals, a good leading indicator could be the number of times a customer engages in physical activity per day, which would allow for a near real-time view of progress - as opposed to amount of weight lost, where results might not be evident until much later.


Product architecture and agile delivery

Reducing focus on standard benchmarks, like output and revenue, and adopting more customer-focused metrics may spark concerns about consequences for the company’s performance. But research shows customer-focused metrics are closely linked to real business results. One McKinsey study found companies that achieved above average customer satisfaction ratings generated four times the returns to shareholders over a 10-year period than



Total return to shareholders for companies with above and below average customer satisfaction scores / %


Diagram – Total return to shareholders for companies with above- and below-average customer-satisfaction scores / %
Diagram – Total return to shareholders for companies with above- and below-average customer-satisfaction scores / %
Source: McKinsey/Medallia

There’s good reason, therefore, for an operating model to create “interdependency between the product blueprint and investment,” says Robinson. “You’re deciding the features you want to include based on what you’ve learned about the customer, the things they need, the pain points you need to solve and the sequence in which you need to deliver to have maximum impact.”

 

Making these decisions with confidence typically requires the enterprise to learn much more about customers in the earlier stages of development, Luu points out. Companies equipped with data analytics capabilities could for example conduct A/B tests to gather more preliminary customer feedback. Yet even a less automated effort to run a prototype by a handful of potential users could save months of investment in a product that doesn’t end up hitting the mark.

Quote - Linda Luu, Principal, Product Strategy & Portfolio Management, ThoughtWorks

“A lot of organizations don’t get feedback from customers; they just keep adding features as the market changes. To really build a customer centered organization you have to have the capability to say: We should collect some customer data. We should try to figure out what we can learn from it so we build something that is useful in the market.”


Linda Luu, Product Strategy & Portfolio Management Principal, ThoughtWorks




When data is collected, Luu notes, it’s important that it doesn’t stay with development or customer-facing teams, remaining invisible to the executives who set the company’s strategic direction.


“Not everyone has to know exactly how to set up an A/B test or do customer research, but truly embracing the customer means every part of the enterprise understanding the needs of the customer,” she says.


Active customer-centricity means making customer viewpoints more ‘in your face’ for everyone - even senior executives. Luu cites the example of a leading international telco that has set up channels for management to view a steady stream of customer complaints. “For some leaders who aren’t used to embracing the good and bad of customer feedback, that can be really uncomfortable. But for them that’s just the way it is. They’re constantly looking at that data, and they do something about it.”


Unfortunately, Robinson notes, the technology architecture at many organizations is not designed in a way to make this possible. Monolithic code bases that serve multiple domains, often constructed over decades, can make it difficult for teams to act autonomously to source the right data or capabilities to serve customer purposes.


Platforms with a well abstracted layer of APIs can bridge these gaps by allowing teams to access data and functionalities on an as-needed basis, without leaving them dependent on an IT or platform team, or demanding fundamental change to the systems underneath.

 

Optimizing the technology aspect of the operating model is therefore always a possibility, but has to be seen as an ongoing journey. “You can’t get to perfect in one jump - so move in the right direction, start to remove dependencies, revitalize your organizational structure, and improve your capabilities,” Robinson says. “It’s not a reorg where everyone shuffles their chairs and gets a new job. It’s more likely slow, incremental steps that constantly move you towards better.”


New models of leadership 

No operating model can be sustained by technology alone. A lot of organizations “think they’re going to (improve the operating model) by tools or technology first,” says Luu. “But actually it’s people first.”

  

This is particularly true when it comes to how an operating model is governed. “The big stumbling block in this space is the idea of decision rights shifting to different people,” says Robinson. “Instead of the executive team describing what they want to build, or how they want to build it, we’re saying define the outcome and let the team that’s actually going to deliver be in the how business. That’s fundamentally moving a decision to another group. Obviously you’ve got to build a tremendous amount of trust in order to do that."

  

Giving teams more autonomy, Robinson notes, doesn’t mean outsourcing decisions to them altogether. “A certain amount of autonomy is helpful, but it should come with a big chunk of accountability. You get to make the decisions, but the result is on you as well. If you have that accountability, and the ability to measure the outcomes, the organization will get more comfortable with this idea, because everyone will be able to see that it works.”


Operating model transformation can prove especially challenging for middle management, which ends up “stuck between teams who are trying to do things differently and leaders who are still pushing to get things done in a traditional way,” Luu says.


It’s up to the organization’s leadership to help middle managers - and their teams - through this ambiguity by making it clear the old goalposts no longer necessarily apply. “(Leaders) have to align performance measures to what the enterprise is trying to achieve for customers,” Luu explains. “If they’re misaligned you end up with employees who are confused, or operate in a way that maximizes their benefits to the detriment of the customer.”

Quote - David Robinson, Business Transformation Principal, ThoughtWorks

“Leaders need to be able to talk about and champion value. If you walk into a room where there’s a team building something and ask when they’re going to be done, you’ve sent the message that speed is important. But if you walk into the room and have a conversation about value, the message is very different."


David Robinson, Digital Transformation Principal, ThoughtWorks



You’re changing the language that you use, the questions that you ask, and getting comfortable with a lack of control.


“One skill that’s really under-invested in and under-recognized is the ability to tell stories,” Luu adds. “How else do you bring customer experiences to life and help build empathy in employees who weren’t sitting in the customer research sessions, or who are hearing about a change in direction for the first time? The art of storytelling can override innate resistance and get people excited, and that’s really needed for a lot of leaders that are trying to make this shift.”


Ensuring operating models evolve

A revitalized operating model can do much more than digitize existing workflows and product lines, or enhance the enterprise’s ability to adapt. It can pave the way for full-scale reinvention, based on new business models and deeper levels of engagement with the customer base.

   

According to Robinson, extending the feedback loops that inform product development to the rest of the enterprise is a fundamental step in building an operating model to last.

 

“Organizations that think in an evolutionary sense get the idea of customer feedback driving decisions around the future of a product, but where things start to fall apart is the next set of loops, which is taking the results of investments and bringing them back to where prioritization decisions are made - and back to strategy, so information about the creation of value is fed all the way back to the top,” he explains. “With that you have at every level an iterative process that can get better - and then you focus on speeding it up. You essentially have continuous improvement for your operating model built into the way you operate.”

 

“Feedback loops are really important, and not just within teams,” agrees Luu. “If you walk around and you see teams doing retrospectives, if you hear leaders asking what teams learned as opposed to why something failed, that to me is evidence you’ve made a new way of working sustainable. That’s when it becomes part of the DNA.”

 

Genuine reinvention, says Highsmith, requires “changing from a plan-do mindset - in other words, we plan it all out at the beginning and then we do it - to an envision-explore mindset. We envision where we want to go in the future and then we explore into that vision. Sometimes we hit some dead ends and have to backtrack, and sometimes we move forward. But it’s an experimental, innovative kind of life cycle.”


Basing an operating model on this tolerance for experimentation and failure requires organizational grit. But as Robinson points out, in a digital economy, it’s the only real way to cultivate an edge. “The only sustainable competitive advantage an organization will ever have is their ability to learn a little bit faster than their competitors,” he says. “In the future, that’s the secret weapon.”


To read more about how your operating model can help you adapt and evolve at the speed of change, check out David, Jim and Linda's book: Edge: Value-Driven Digital Transformation

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