Article Detail

Our Understanding of Next Generation’s Target Operating Models

Journal 34: Cass-Capco Institute Paper Series on Risk

Andreas Andersen, Nicolas Faulbecker

The current situation in the world economics requires a re-thinking of business strategies. The worldwide crisis in the financial segment increases the pressure on every company. All companies have to lean their operational processes and their high risk activities to ensure customer satisfaction. They really have to find new ways of operating the business. Current operating models have to be enhanced and should be more innovative. The future challenges to successfully manage a company necessitate a restructuring and rethinking. In our point of view, companies have to concentrate on their key qualities and services and need to slim down their organizational and operating structure. The paper starts with describing common rationales of functional models which are essential for setting up the individual target operating model. After that, the target operating model will be enhanced with innovative aspects from the organization’s corporate governance, human resources, and lean management point of view. This consolidated mix will build a framework, which fulfills upcoming challenges. At the end of the day, our approach illustrates of how the usage of a conventional target operating model could be stepwise transformed to the next generation in order to finally establish a self-optimizing organization system. It concludes that the prospects seem to be quite promising even though there are no significant experiences in practice yet.

The reference operating model based on functions and roles and responsibilities
Many financial institutions regularly examine their operating model and operating processes to optimize trade flows and to reduce costs. This fact offers opportunities to reconsider the whole functional and technical landscape in order to rebuild the existing operating model into a new “target operating model” (TOM). The first step to implementing a TOM is to set up a “reference operating model,” in order to create a benchmark for future activities. This reference model should cover best practices from the market on the one hand and individual experiences on the other. It will outline a unique functional and organizational structure by using model definitions equivalent to market standards and descriptions using universal terminology. This will contribute to the successful usage of the reference model by ensuring group-wide applicability.

The starting point for creating this model is to describe and design the “as-is” state using functions and infrastructure. This creates transparency in the organization’s infrastructure for every unit of its current functions. In detail, each functional area can be connected to its corresponding software solutions in order to derive an application landscape. This reference operating model will provide functional and technical requirements for the development of the new TOM.

Next to these requirements, individual strategic principles and general business needs have to be defined in parallel (see steps two and three in Figure 2 in the article). Strategic principles help to provide a definition for the individual understanding of quality and efficiency. This will control the definition of general rules and guidelines for the use and deployment of resources and assets across the enterprise.

Strategic business needs reflect the definitions of the overall business strategy (i.e., volume, growth targets, and product launches). This will highlight the dependencies of the “global target operating model” (GTOM) of the company itself.

These four components will build the base of the design of the GTOM. The GTOM connects the reference model, the as-is situation, and the future requested functions to one unit. The corresponding “general reference model” is transformed through the determined parameters into a stable solution. It conveys future course of actions to realize the TOM (i.e., centralizing, sourcing options) and develops an understanding on their degree of coverage. This outcome can be used as a decision template for the implementation of the target model and delivers the basis for specifications in the proposal towards possible services or system providers.


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