Target Operating Models - Continuous Refinement

One of the more commonly used terms in the sphere of enterprise business process and IT operations is “target operating model.”  In my opinion, one of the better explanations of an operating model was published in a 2008 Harvard Business Review paper entitled “Define Your Operating Model”.

That article defined an operating model as driving the design of the execution of a business strategy.  Thus, the operating model represents choices about what strategies are going to be supported.  The article goes on to build the case that business process standardization and integration are the two seminal dimensions of an operating model.

When companies consider the merits of outsourcing or organizing for shared services operations, they typically look to enable and accelerate the central operating model of the business.  Thus, the strategy for sourcing of services represents the “how” and not the “what” of an operating model.
The operating model concept requires that management put a stake in the ground and declare which business processes will distinguish the company from its competitors.  It’s a holistic articulation of how the business is meant to operate.

In my experience, the refresh of a company’s operating model has typically occurred only in the context of substantial change.  New leadership, new product/service offerings, or new competitive threats have been the impetus for material adjustments to the operating model.  Those changes, in turn, drive adjustments to the services sourcing strategies for front-, middle-, and back-office functions.

Because changes to the operating model happened so infrequently, companies rarely developed the internal competency to drive changes throughout the services ecosystem.  That reality spurred demand for specialized management consultants who are engaged to design the change programs to bring new operating models to reality.  These were expensive and time-consuming undertakings.

Consider the environment of today, however.  The pace of change in virtually every industry’s competitive landscape, and through technological innovations, requires that companies review and refresh their operating models much more frequently.  Innovations in mobility, for example, are one example of an impetus to reconsider how a company plans to serve its markets and enable its employees.  Those changes often lead to substantive adjustment to the operating model.  Further, the services architecture – how internal and external service providers are organized and aligned to the strategy – must similarly be adjusted.

And, the principles of “As a Service” business operations lead companies to reconsider whether build/maintain should be supplanted with subscribe/operate.  New skills and planning practices are emerging to own the responsibility for stewardship of the operating model, and alignment of the services resources employed across the business.

The name of the game is agility, and most companies seek to employ capabilities that can flex with the needs of the business at a pace that is much more dynamic than that which yesterday’s services sourcing techniques provided.  Long-term commitments are fading in favor of service models that can turn with the refresh of operating models. 

These are some of the reasons that companies in the ITO/BPO industry are challenged to redefine their own operating models to ensure continued relevance as their markets seek to leverage best-in-class services without undue drag on the imperative to adjust operating models over time.

Buyers are buying differently, and from different providers.  Providers are selling and delivering differently as well.  All driven by a more frequent, nearly continuous, refinement of operating models. Moving targets, indeed.

Peter

The Art of Layered Multi-Sourcing

It wasn’t too long ago that the term “multi-sourcing” meant that a company elected to assign responsibility to multiple providers for side-by-side responsibility for discrete service categories.  One provider for infrastructure operations, another one for applications support services, a third for customer care, and maybe a fourth for a business process like HR or F&A.

Commonly, these strategies were directed by a “vendor management” function that reported into Supply Chain or, more commonly, into a Shared Services organization.

The prevailing logic held that this sort of sourcing strategy avoided undue reliance on any one provider, and promoted a competitive tension that kept the providers on their toes. 

This side-by-side multi-sourcing still allocated unique responsibility for individual business support functions to unique providers, it’s just that no one provider had too much of the spend.  This meant that when a major issue arose, such as severe service breakdowns, performance irregularities, or the like, a “big event” resolution was required to introduce a course correction.

Alas, that was one of the benefits of having a vendor management office – to facilitate the interventions that called the parties to the table to work through the root causes and haggle over the right resolution.

The world had order to it.  Right?

Fast-forward to the emerging trend for “layered multi-sourcing”.  I don’t know whether that term will stick, but it’s the best that I can come up with to define what I am sensing as the progressive approach that companies are taking to deal with the frustration of “big event” resolution to service issues, and to promote true best-in-class performance.

Layered multi-sourcing moves beyond the side-by-side framework.  It embraces having multiple providers of common services.  Moving a piece of work to one provider over the other will be based on factors that are determined in real-time.  Spot-pricing.  Immediate Service Quality measures.  Contextual factors.

Does the processing of a workload today need to be performed by the same service provider who did that work last week?  Not always.  Think about this in the context of shopping for a hotel room.  Most of us select a hotel “service provider” based on the terms and factors associated with the immediate need, not based on having signed a 7-year contract for access to hotel rooms.  Pricing, location, past experience, loyalty rewards, rating of other customers … these all factor into our decision to choose one over another.

Users of Uber will recognize the power of ordering up a car service based on time of need, location, rating of the driver, type of car, etc.  Corporate business support processes can be provisioned similarly.

The implications are many, but one should be obvious: companies, and their approaches towards vendor management, will be increasing the number of providers with which they deal.  This is a reversal of the trend towards having a smaller number of larger service providers.  With layered multi-sourcing, those providers with best-in-class performance can find a place at the table.

Clients win by reaping the benefits of acquiring defined services when and where and how they are needed, avoiding the big bets of committing to providers in times of uncertain demand profiles or service quality experiences.  The price: companies need to rethink their architecture for engaging more providers in different ways, and must adopt a more progressive approach to governing this model.

It’s not vendor management.  It’s service management.  And, it follows the principles of category-based strategies for provisioning the right capacity in the right place, at the right cost, to meet the needs of a dynamic business.

And the Economic Game Planning gets more complex for everyone.

Peter