The next-generation operating model for the digital world
Companies
need to increase revenues, lower costs, and delight customers. Doing that
requires reinventing the operating model.
Companies know where they want to go. They want to be more agile,
quicker to react, and more effective. They want to deliver great customer
experiences, take advantage of new technologies to cut costs, improve quality
and transparency, and build value.
The problem is that while most companies
are trying to get better, the results tend to fall short: one-off initiatives
in separate units that don’t have a big enterprise-wide impact; adoption of the
improvement method of the day, which almost invariably yields disappointing
results; and programs that provide temporary gains but aren’t sustainable.
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We have found that for companies to build
value and provide compelling customer experiences at lower cost, they need to
commit to a next-generation operating model. This operating model is a new way
of running the organization that combines digital technologies and operations
capabilities in an integrated, well-sequenced way to achieve step-change
improvements in revenue, customer experience, and cost.
A simple way to visualize this operating
model is to think of it as having two parts, each requiring companies to adopt
major changes in the way they work:
·
The first part involves a shift from running uncoordinated efforts
within siloes to launching an integrated operational-improvement program
organized around customer journeys (the set of interactions a customer has with
a company when making a purchase or receiving services) as well as the internal
journeys (end-to-end processes inside the company). Examples of customer
journeys include a homeowner filing an insurance claim, a cable-TV subscriber
signing up for a premium channel, or a shopper looking to buy a gift online.
Examples of internal-process journeys include Order-to-Cash or
Record-to-Report.
·
The second part is a shift from using individual technologies,
operations capabilities, and approaches in a piecemeal manner inside siloes to
applying them to journeys in combination and in the right sequence to achieve
compound impact.
Let’s look at each element of the model
and the necessary shifts in more detail:
Shift
#1: From running uncoordinated efforts within siloes to launching an integrated
operational-improvement program organized around journeys
Many organizations have multiple
independent initiatives underway to improve performance, usually housed within
separate organizational groups (e.g. front and back office). This can make it
easier to deliver incremental gains within individual units, but the overall
impact is most often underwhelming and hard to sustain. Tangible benefits to
customers—in the form of faster turnaround or better service—can get lost due
to hand-offs between units. These become black holes in the process, often
involving multiple back-and-forth steps and long lag times. As a result, it’s
common to see individual functions reporting that they’ve achieved notable
operational improvements, but customer satisfaction and overall costs remain
unchanged.
Instead of working on separate initiatives
inside organizational units, companies have to think holistically about how
their operations can contribute to delivering a distinctive customer
experience. The best way to do this is to focus on customer journeys and the
internal processes that support them. These naturally cut across organizational
siloes—for example, you need marketing, operations, credit, and IT to support a
customer opening a bank account. Journeys—both customer-facing and end-to-end
internal processes—are therefore the preferred organizing principle.
Transitioning to the next-generation
operating model starts with classifying and mapping key journeys. At a bank,
for example, customer-facing journeys can typically be divided into seven
categories: signing up for a new account; setting up the account and getting it
running; adding a new product or account; using the account; receiving and
managing statements; making changes to accounts; and resolving problems.
Journeys can vary by product/service line and customer segment. In our
experience, targeting about 15–20 top journeys can unlock the most value in the
shortest possible time.
We often find that companies fall into the
trap of simply trying to improve existing processes. Instead, they should focus
on entirely reimagining the customer experience, which often reveals
opportunities to simplify and streamline journeys and processes that unlock
massive value. Concepts from behavioral economics can inform the redesign
process in ingenious ways. Examples include astute use of default settings on
forms, limiting choice to keep customers from feeling overwhelmed, and paying
special attention to the final touchpoint in a series, since that’s the one
that will be remembered the most.
In 2014, a major European bank announced a
multiyear plan to revamp its operating model to improve customer satisfaction
and reduce overall costs by up to 35 percent. The bank targeted the ten most
important journeys, including the mortgage process, onboarding of new business
and personal customers, and retirement planning. Eighteen months in, operating
costs are lower, the number of online customers is up nearly 20 percent, and
the number using its mobile app has risen more than 50 percent. (For more on
reinventing customer journeys, see “Putting customer experience at the heart of
next-generation operating models,” forthcoming on McKinsey.com.)
Shift
#2: From applying individual approaches or capabilities in a piecemeal manner
to adopting multiple levers in sequence to achieve compound impact
Organizations typically use five key
capabilities or approaches (we’ll call them “levers” from now on) to improve operations
that underlie journeys:
·
Digitization is the process of
using tools and technology to improve journeys. Digital tools have the capacity
to transform customer-facing journeys in powerful ways, often by creating the
potential for self-service. Digital can also reshape time-consuming
transactional and manual tasks that are part of internal journeys, especially
when multiple systems are involved.1
·
Advanced analytics is
the autonomous processing of data using sophisticated tools to discover
insights and make recommendations. It provides intelligence to improve decision
making and can especially enhance journeys where nonlinear thinking is
required. For example, insurers with the right data and capabilities in place
are massively accelerating processes in areas such as smart claims triage,
fraud management, and pricing.
·
Intelligent process automation (IPA) is
an emerging set of new technologies that combines fundamental process redesign
with robotic process automation and machine learning. IPA can replace human
effort in processes that involve aggregating data from multiple systems or
taking a piece of information from a written document and entering it as a
standardized data input. There are also automation approaches that can take on
higher-level tasks. Examples include smart workflows (to track the status of
the end-to-end process in real time, manage handoffs between different groups,
and provide statistical data on bottlenecks), machine learning (to make
predictions on their own based on inputs and provide insights on recognized
patterns), and cognitive agents (technologies that combine machine learning and
natural-language generation to build a virtual workforce capable of executing
more sophisticated tasks). To learn more about this, see “Intelligent Process
Automation: The engine at the core of the next generation operating model.”
·
Business process outsourcing (BPO) uses
resources outside of the main business to complete specific tasks or functions.
It often uses labor arbitrage to improve cost efficiency. This approach
typically works best for processes that are manual, are not primarily customer
facing, and do not influence or reflect key strategic choices or value
propositions. The most common example is back-office processing of documents
and correspondence.
·
Lean process redesign helps
companies streamline processes, eliminate waste, and foster a culture of
continuous improvement. This versatile methodology applies well to short-cycle
as well as long-cycle processes, transactional as well as judgment-based
processes, client-facing as well as internal processes.
Guidelines
for implementing these levers
In considering which levers to use and how
to apply them, it’s important to think in a holistic way, keeping the entire
journey in mind. Three design guidelines are crucial:
1. Organizations need to ensure that each
lever is used to maximum effect.
Many companies believe they’re applying
the capabilities to the fullest, but they’re actually not getting as much out
of them as they could. Some companies, for example, apply a few predictive
models and think they’re really pushing the envelope with analytics—but in
fact, they’re only capturing a small fraction of the potential value. This
often breeds a false complacency, insulating the organizations from the
learnings that would otherwise drive them to higher performance because it is
“already under way” or “has been tried”. Having something already under way is
a truism: everyone has something under way in these kinds of domains, but it is
the companies that press to the limit that reap the rewards. Executives need to
be vigilant, challenge their people, and resist the easy answer.
In the case of analytics, for example, maxing
out the potential requires using sophisticated modeling techniques and data
sources in a concerted, cross-functional effort, while also ensuring that
front-line employees then execute in a top-flight way on the insights generated
by the models.
2. Implementing each lever in the right
sequence.
There is no universal recipe on sequencing
these levers because so many variables are involved, such as an organization’s
legacy state and the existing interconnections between customer-facing and
internal processes. However, the best results come when the levers can build on
each other. That means, in practice, figuring out which one depends on the
successful implementation of another.
Systematic analysis is necessary to guide
decision making. Some institutions have started by outlining an in-house versus
outsource strategy rooted in a fundamental question: “What is core to our value
proposition?” Key considerations include whether the activities involved are
strategic or confer competitive advantage or whether sensitive data or
regulatory constraints are present.
The next step is to use a structured set
of questions to evaluate how much opportunity there is to apply each of the
remaining levers and then to estimate the potential impact of each lever on
costs and customer experience. This exercise results in each lever being
assigned an overall score to help develop a preliminary point of view on which
sequence to use in implementing the levers.
There’s also a need to vet the envisioned
sequences in the context of the overall enterprise. For example, even if the
optimal sequence for a particular customer journey may be “IPA then lean then
digital,” if the company’s strategic aspiration is to become “digital first,”
it may make more sense to digitize processes first.
This systematic approach allows executives
to consider various sequencing scenarios, evaluate the implications of each,
and make decisions that benefit the entire business.
3. Finally, the levers should interact
with each other to provide a multiplier effect.
For example, one bank only saw
significant impact from its lean and digitization efforts in the mortgage
application journey after both efforts were working in tandem. A lean
initiative for branch offices included a new scorecard that measured customer
adoption of online banking, forums for associates to problem solve how to
overcome roadblocks to adoption, and scripts they could use with customers to
encourage them to begin mortgage applications online. This, in turn, drove up
usage of online banking solutions. Software developers were then able to
incorporate feedback from branch associates, which made future digital releases
easier to use for customers. This in turn drove increased adoption of digital
banking, thereby reducing the number of transactions done in branches.
Some companies have developed end-to-end
journey “heat maps” that provide a company-wide perspective on the potential
impact and scale of opportunity of each lever on each journey. These maps
include estimates for each journey of how much costs can be reduced (measured
in terms of both head count and financial metrics) and how much the customer
experience can be improved.
Companies find heat maps a valuable way to
engage the leadership team in strategic discussions about which approaches and
capabilities to use and how to prioritize them.
Case
example: The ‘first notice of loss’ journey in insurance
In insurance, a key journey is when a
customer files a claim, known in the industry as first notice of loss (FNOL).
FNOL is particularly challenging for insurers because they must balance
multiple objectives at the same time: providing a user-friendly experience (for
example, by offering web or mobile interfaces that enable self-service),
managing expectations in real time through alerts or updates, and creating an
emotional connection with customers who are going through a potentially
traumatic situation—all while collecting the most accurate information possible
and keeping costs in line.
Many companies have relied on Lean to
improve FNOL call-center performance. One leading North American insurer,
however, discovered it could unlock even more value by sequencing the buildout
of three additional capabilities, based on the progress it had already made
with Lean:
Digitization.
This company improved response times by
using digital technologies to access third-party data sources and connect with
mobile devices. With these new tools, the insurer can now track claimant
locations and automatically dispatch emergency services. Customers can also upload
pictures of damages, and both file and track claims online. The insurer also
allows some customers to complete the entire claims process without a single
interaction with a company representative.
Advanced analytics.
Digitization of the FNOL journey provided
the insurer with more and better data faster, which in turn allowed its
analytics initiative to be more effective. Now able to apply the latest
modeling capabilities to better data, the company is using advanced analytics
to improve decision making in the FNOL journey. For example, intelligent triage
is used to close simple claims more quickly, and smart segmentation identifies
claims likely to be total losses and those liable to require the special
investigative unit (SIU) far earlier than before. Analytics are even being used
to predict future staffing needs and inform scheduling and hiring, thereby
allowing both complex and simple claims to be handled more efficiently.
Intelligent process automation (IPA).
Once digital and analytics were in place,
IPA was implemented. Automation tools were deployed to take over manual and
time-consuming tasks formerly done by customer-service agents, such as looking
up policy numbers or data from driving records. In addition to reducing costs,
IPA sped up the process and reduced errors. IPA came last because the
streamlining achieved by digitization and more effective use of analytics had
eliminated some manual processes, so the IPA effort could focus only on those
that remained.
By combining four levers—lean plus
digital, analytics and IPA—this insurer drove a significant uplift in customer
satisfaction while at the same time improving efficiency by 40 percent. (For
more approaches to improving claims, see “Next-generation claims operating
model: From evolution to revolution,” forthcoming on McKinsey.com.)2
Bringing
it all together: Avoid creating new silos by thinking holistically
Senior leaders have a crucial role in
making this all happen. They must first convince their peers that the
next-generation operating model can break through organizational inertia and
trigger step-change improvements. With broad buy-in, the CEO or senior
executive should align the business on a few key journeys to tackle first.
These can serve as beacons to demonstrate the model’s potential. After that
comes evaluation of the company’s capabilities to determine which levers can be
implemented using internal resources and which will require bringing in
resources from outside. Finally, there is the work of actually implementing the
model. (For more on the last topic, see “How to build out your next-generation
operating model,” forthcoming on McKinsey.com.)
Transformation cannot be a siloed effort.
The full impact of the next-generation operating model comes from combining
operational-improvement efforts around customer-facing and internal journeys
with the integrated use of approaches and capabilities.
By Albert Bollard, Elixabete Larrea, Alex Singla, and Rohit Sood
http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/the-next-generation-operating-model-for-the-digital-world?cid=reinventing-eml-alt-mip-mck-oth-1703
nsey/our-insights/the-next-generation-operating-model-for-the-digital-world?cid=reinventing-eml-alt-mip-mck-oth-1703
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