The Evolution of Operating Models in Modern Organizations

Every ambitious CEO will tell you that the way to beat the odds is to have the right strategy. That’s because a smart, actionable strategy is the foundation for how a company allocates its scarce resources, including people, capital, and materials.

Yet even the best strategy does not magically yield a strong performance. For that, companies need an effective operating model that is intentionally designed to deliver four outcomes that all organizations covet: clarity, speed, skills, and commitment. The right operating model is what can turn strategic potential into market-beating results.

Leaders understand this, which is why they frequently try to adapt their operating models. Two-thirds of the organizations we surveyed have redesigned their operating models in the past two years, and half of the organizations say they plan to embark on a redesign in the next two years.

Numbers like that highlight the ongoing challenge of creating a high-functioning organization that consistently generates value. McKinsey research indicates that even high-performing companies have a 30 percent gap between their strategy’s full potential and what is actually delivered, which can be attributed to shortcomings in their operating models.

Given the scale of this gap, we decided the time was ripe to update the best practices for operating model design. Our analysis, based on academic research, interviews with hundreds of executives, and extensive experience working on redesigns, yielded a new approach: a dynamic system composed of 12 elements (including purpose, talent, leadership, and rewards) that can be tailored to an organization’s particular circumstances and goals. We call this the “Organize to Value” system.

What’s beyond traditional organizational structure?

When rethinking their operating models, many leaders begin by focusing on structure. This made sense in the past, given the traditional hierarchical structures and more stable environment that most executives were trained to operate in. Structure matters because it gives CEOs insight into how strategy is implemented. It is also meant to create accountability and the basis for managing performance.

But structure alone will not create value. Instead, companies should evaluate structure as just one of 12 interlocking design elements, which we discuss later, that create a holistic system.

Operating model design has evolved substantially over the past decade, as organizations have had to respond to fast-moving geopolitical, technological, and societal trends. A tailored operating model, and how much change may be required to implement it, will partly depend on the way in which an organization is experiencing these trends and the design choices they imply.

As part of our research, we asked executives to assess a wide range of developments to identify both the most positive factors and the biggest challenges affecting their business and their approach to organizational structure.

Across industries, executives told us that the top opportunities relate to technology—specifically, scaling AI and automation, accelerating digitalization, and expanding the value of data. Thirty-eight percent also suggested that they would add a chief AI officer to address these opportunities. Regarding geopolitical challenges, executives cite increasing regulatory complexity and declining trust in business as their top concerns, while shifting workforce demographics, including loss of skills from aging in developed economies, tops the list of the most significant societal hurdles they face.

The 12 elements of a dynamic operating model design

When we moved our research beyond structure, we set out to refresh our understanding of the key organizational factors CEOs need to consider when designing their operating model. Decades of experience working with organizations and new data collected on high-performing operating models have yielded an updated system of 12 elements that together represent the best of modern operating model design. In addition to structure, the elements are purpose, value agenda, ecosystem, leadership, governance, processes, technology, behaviors, rewards, footprint, and talent.

These elements act together as a system that enables the organization to deliver on the strategy. By mapping current organizational choices across the 12 elements, leaders can better understand their organizations’ unique operating model fingerprint and determine whether each choice is aligned with their strategic goals. The system offers a way for leaders to either move to an adjacent fingerprint, by refining only the elements that matter most to delivering on strategy, or shift all 12 elements to an entirely new fingerprint. With either choice, they can create a unique form of competitive advantage.

Future-proofing the operating model

Leaders who become frustrated with their organizations’ performance often turn to redesigns. But again, they are focused mostly on structure rather than the 12 elements and the system they form. That is why redesigns happen so frequently—and why they tend to leave value on the table, according to McKinsey research. Four actions can help organizations avoid this constant churn.

The first step, as noted earlier, is to understand the organization’s unique operating model fingerprint, or the combination of design choices it has made across all 12 elements. Next, leaders can compare their fingerprint and outcomes to highly successful operating model fingerprints across industries. They can then choose whether the best course is to move to an adjacent fingerprint by refining select operating model elements or to move to an entirely new fingerprint. Finally, they can commit to specific performance outcomes and a path to deliver them.

Positive outcomes and performance gains

Our experience helping leaders to implement new operating models reveals that CEOs and their teams are often confused about whether their models work as well as they could. Lacking a perspective on the full range of possible structures and the 12 elements that can be used to increase performance, they can get stuck in a frustrating cycle of underwhelming redesign efforts.

Instead, it’s helpful to remember that there are many winning fingerprints, as we see in our airline and financial-services examples. The robustness of these fingerprints depends significantly on the organization’s strategy, business context, and the trends it faces. CEOs can create a unique fingerprint for the organization and what it wants to accomplish.

Ultimately, a fit-for-purpose operating model that maximizes value creation enables CEOs to achieve four measurable outcomes—clarity, speed, skills, and commitment:

• Clarity: Resources and accountabilities are aligned to strategy.
• Speed: Workflows are fast, tech enabled, and frictionless.
• Skills: A future-ready workforce is equipped to deliver the highest value.
• Commitment: Creating a performance-oriented culture.

The big picture: Practical questions for CEOs

Before embarking on an operating model redesign, CEOs should take a step back to identify the outcomes and risks of evolving or more radically redesigning their model. Many leaders overestimate the results of changing individual elements of their model, especially structure, yet underestimate the degree of difficulty in implementing a more holistic change. That’s why a practical approach to refining and evolving their model as a system starts with asking five key questions:

• What is the gap between your value agenda and delivered performance?
• What are the critical outcomes your operating model should generate to enable the value agenda?
• How does your operating model work as a system to create value?
• What are the trade-offs between refining your current operating model and moving to a new design?
• How will leaders need to engage differently to enable the operating model at scale?

Conclusion

Organizations looking to make their operating models more effective can start by identifying the causes of their strategy-to-performance gap, followed by choosing whether to redesign several of the 12 elements or all of them. Whatever choice they make, viewing the elements as a holistic system can help leaders meet strategic goals and bolster performance in a complex business environment.

FAQ

Q: How can organizations determine their unique operating model fingerprint?

A: Organizations can determine their unique operating model fingerprint by assessing their current design choices across all 12 elements, comparing them to successful operating models in their industry, and aligning them with their strategic goals.

Q: What are the benefits of a well-designed operating model?

A: A well-designed operating model can lead to increased clarity, speed, skills, and commitment within an organization, enabling better alignment with strategic goals and improved overall performance.

References

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