How to start building your next-generation operating model
Each
company’s path to a new operating model is unique. But successful
transformations are all constructed with the same set of building blocks.
A North American bank took less than two years to
shift 30 percent of its in-branch customer traffic to digital channels and
dramatically reduce its brick-and-mortar footprint. A European cruise line
redesigned and relaunched five core products in nine months to increase digital
conversions by three to five times and sales by 150 percent.
These companies have
been able to transform because they have developed next-generation operating
models that provide the speed, precision, and flexibility to quickly unlock new
sources of value and radically reduce costs. The operating model of the future
combines digital technologies and process-improvement capabilities in an
integrated, sequenced way to drastically improve customer journeys and internal
processes.
Lean management has
already played a significant role in putting in place processes, capabilities,
and tools to improve how businesses operate. But the digital age has increased
both the opportunities for businesses who know how to react and the difficulty
of getting it right. For one thing, tasks performed by humans are more complex,
whether it’s accessing information in multiple formats from multiple sources or
responding to changing market and customer dynamics at ever-increasing speeds.
And as an increasing number of tasks become automated or are taken over by
cognitive-intelligence capabilities, companies will need to take many of the
lessons learned from lean management and update them. Like a sprinter who needs
all her muscles to be finely tuned and working in concert to reach top speeds,
fast-moving institutions must have a system to continually synchronize their
strategies, activities, performance, and health.
But how? Many
institutions understand the need to change how they work and have embarked on
numerous initiatives, yet few have been able to get beyond isolated success
cases or marginal benefits.
We have found that
companies that successfully build next-generation operating models do two
things well. They focus on putting in place the building blocks that drive
change across the organization, and they select a transformation path that
suits their situation. These practices don’t apply only to companies that have
yet to start their digital transformation. In our experience, even companies
that are well along their transformation journey can pivot to putting in place
a next-generation model that delivers massive value while significantly
reducing costs.
Building blocks of the next-generation operating model
Whatever the path
companies choose to develop their next-generation operating model, we have
found there is a set of building blocks of change that successful leaders put
in place. Think of them as the mechanics of change—elements needed to underpin
the development of the operating model. Given the dynamic nature of digitization
and the fast pace of change, it’s important not to think about perfecting the
implementation of each building block before the operating model can function.
The process is highly iterative, with elements of each building block tested
and adapted to grow along with the model through a constant evolutionary cycle.
Building Block #1: Autonomous and cross-functional teams
anchored in customer journeys, products, and services
Successful companies
constantly rethink how to bring together the right combination of skills to
build products and serve customers. That means reconfiguring organizational
boundaries and revisiting the nature of teams themselves, such as creating more
fluid structures in which day-to-day work is organized into smaller teams that
often cut across business lines and market segments. This approach includes
empowering teams to own products, services, or journeys, as well as to run
experiments. These organizations are also becoming nimble in how they build
skills across their teams by making “anchor hires” for key roles, setting up
rotational and “train the trainer” programs, and committing to ongoing (often
weekly) capability building and training for key roles.
Many insurers, for
example, are dismantling traditional claims and underwriting units and
reconstructing them to embed subject-matter experts such as lawyers and nurses
into service groups. In the best companies, these teams also work side by side
every day with technologists to design the tools and technology to improve
efficiency and effectiveness.
Iteration is crucial to
making this approach work. Leaders test various team configurations and allow
flexibility in response to changing customer needs. One credit-card company,
for example, shifted its operating model in IT from alignment around systems to
alignment with value streams within the business. Cross-functional teams were
pulled together to work on priority journeys and initiatives to deliver on the
value stream. These changes dramatically simplified the operating model, lowered
direct leadership expenses, and contributed to a 200 percent increase in
software-development productivity within three months.
Building Block #2: Flexible and modular architecture,
infrastructure, and software delivery
Technology is a core
element of any next-generation operating model, and it needs to support a much
faster and more flexible deployment of products and services. However,
companies often have trouble understanding how to implement these new
technologies alongside legacy systems or are hampered by outdated systems that
move far too slowly.
To address these
issues, leaders are building modular architecture that supports flexible and
reusable technologies. Business-process management (BPM) tools and externally
facing channels, for example, can be shared across many if not all customer
journeys. Leading technology teams collaborate with business leaders to assess
which systems need to move faster. This understanding helps institutions decide
how to architect their technology—for example, by identifying which systems
should be migrated to the cloud to speed up builds and reduce maintenance.
This approach both
accelerates development and prioritizes the use of common components, which in
turn leads to development efficiency and consistency. Another important reason
for building more flexible architecture is that it enables businesses to
partner with an external ecosystem of suppliers and partners.
Similarly, leaders are
investing heavily in DevOps and combining people, process, and technology
changes to automate software testing, security, and delivery processes as well
as infrastructure changes.
Building Block #3: A management system that cascades
clear strategies and goals through the organization, with tight feedback loops
The best management
systems for next-generation operating models are based on principles, tools,
and associated behaviors that drive a culture of continuous improvement focused
on customer needs. Leading companies embed performance management into the DNA
of an organization from top to bottom, and translate top-line goals and
priorities into specific metrics and KPIs for employees at all levels. They
make visible the skills and processes needed for employees to be successful, put
clear criteria in place, and promote the sharing of best practices.
The best institutions
are evolving their management systems to create feedback mechanisms within and
between the front line, back-office operations, and the product teams that
deliver new assets. They are also using their management systems to harvest the
surfeit of data generated by day-to-day activities to create user-friendly
dashboards and reports, some of them in real time.
Performance management
is becoming much more real time, with metrics and goals used daily and weekly
to guide decision making. These metrics are supported by joint incentives—not
just for individuals—that are tailored to each level of the organization and
reinforce behaviors to support customers regardless of organizational
boundaries.
One North American
insurer struggled to make the predictive analytics models developed by central
teams relevant to its front-line claims adjusters, who therefore failed to
adopt the new capability. Knowing it was leaving significant value on the
table, the company established daily feedback sessions between the central
development team and the claims adjusters and embedded analytics specialists
into customer-service teams to develop better insights into customer issues.
The teams created shared goals based on customer value that were consistent
with the organization’s strategy and the daily work of adjusters. Under this
new management system, the analytics specialists and claims adjusters shortened
cycle times and dramatically improved the effectiveness of assignment. This
freed up time for leaders to coach, problem solve, and iterate on the next
opportunities for the teams to pursue.
Building Block #4: Agile, customer-centric culture
demonstrated at all levels and role modeled from the top
Successful companies
prioritize speed and execution over perfection. That requires agility in
delivering products to customers and quickly learning from them, as well as
willingness to take appropriate risks. The best organizations have already made
agility a cornerstone of how they work beyond IT. One credit-card company
brought together law and compliance personnel to sit in with marketing teams to
intervene early in processes and have daily conversations to identify and
resolve issues. Law and compliance functions have also begun to adopt agile
methodologies to change their own work. As functions and teams collaborate,
they are on track to reduce effective time to market by 90 percent for some
core processes while also reducing operational risk.
Critical to success is
leading the change from the top and building a new way of working across
organizational boundaries. Senior leaders support this transformation as vocal
champions, demonstrating agility through their own choices. They reinforce and
promote rapid iteration and share success stories. Importantly, they hold
themselves accountable for delivering on value quickly, and establish
transparency and rigor in their operations. Many manage the change
aggressively, often changing performance incentives, mothballing outdated
processes, assembling communication campaigns to reinforce culture, and
writing informal blogs. At one asset-management company, the top team
jettisoned its legacy budgeting process and asked leaders to be aggressive
about capturing more value. They established an ongoing process for
redistributing funding to the highest-value experiments that were working.
Defining the path for your organization
There is no one way to
develop a next-generation operating model. It depends on a company’s existing
capabilities, desired speed of transformation, level of executive commitment,
and economic pressure. We have seen four paths that leading companies take to
drive their transformation, though organizations often move to a different path
as their capabilities mature. These paths offer a guide for the first 12 months
of a transformation journey.
An innovation outpost is a dedicated unit set up to
be entirely separate from the historical culture, decision-making bureaucracy,
and technical infrastructure of the main business. It creates inspiring
products that illuminate the digital art of the possible (sometimes with
questionable economic impact), and hatches new business models in informal
settings such as over foosball tables. This path has traditionally been popular
as a first move, but is now less common.
One retailer with an
ineffective online business chose to open such an outpost. It introduced
next-gen analytics, focused on customer experience rather than technology, and
drove the mobile interface. Staying largely separate from the main business,
the outpost created a buzz around innovation, attracted better talent, and
repatriated many of its creations into the broader organization.
This path works well
when there is limited alignment among executives on the importance and value of
transformation, a need to move very quickly in response to market pressures,
and significant legacy culture challenges to overcome. However, it is less
effective as the “tip of the spear” for changing the culture or building
sustainable capabilities, and often yields a low return on investment.
A fenced-off digital
factory is a group of
groundbreakers that works in partnership with businesses and functions (such as
IT infrastructure and security, legal, compliance, and product development)
while enjoying a high degree of autonomy. It typically houses specialized
capability groups in technologies such as robotics or analytics, and deploys
them to support the development of specific journeys in concert with business
and functional partners. It both models a new way of working and integrates
developed capabilities into the main business. As such, it focuses internally
on integrating with and shifting the culture of the organization.
This is the most common
starting point, as it balances the need for incubation with that of broader
transformation. One European bank built a digital factory in a building on a
campus. Each of the lower floors is dedicated to a separate journey, while the
top floor is dedicated to creating reusable components and utilities—such as
customer identification and verification or esignature—that the other journeys
can deploy in a modular way.
Business and functional
colleagues come together to work with teams in the factory. Each of these teams
develops products and services, moves them quickly from prototype to
deployment, and then transfers them into the main business. As part of the
management system, the team continues to monitor and iterate the product or
service based on economic performance and customer feedback.
This path works well
when there is a broad-based belief in and commitment to transformation, and a
need to incubate a critical mass in internal capabilities. Many organizations
have used this approach to attract digital talent, combat large-project inertia
within IT groups, and speed transformation. Culture change is slower within the
rest of the organization, but it happens over time as business and functional
specialists partner with the factory for each journey. It can, however, also create
a “have and have not” split within the business if not managed appropriately,
and can require significant initial C-suite support and funding.
A business-unit
accelerator is a scaled-down
digital factory that incubates a transformation inside a business unit to
tackle local customer journeys and business functions. The business unit builds
its own skills, such as process-redesign and robotics capabilities, and has
control over specific capabilities and investments. This means it doesn’t need
central funding or organization-wide agreement on a host of issues to get
going.
One North American bank
shifted to a business-unit accelerator model after the first few years of its
transformation. It found that this move gave it more control and a closer
connection to business strategy and the customer—benefits that outweighed
centralized scale and capability building. The bank invested heavily in talent
and tools with the aim of building a reputation among customers as a digital
business that happens to produce banking products and experiences.
This path works well
for organizations with large business units that operate independently. It’s
also a good starting point when one business unit is particularly far ahead in
its thinking and belief, or where digital services have disproportionate
value-creation potential. However, companies that choose this model must
mitigate several risks. When business units choose their own digital tools and
processes, for instance, complexity and costs increase for IT teams managing maintenance,
licensing, and enterprise architecture. This model can also make it harder to
build and share capabilities across the organization since the skills developed
are specific to the business unit.
A full-scale evolution is a comprehensive transformation
in which the enterprise reorganizes itself almost entirely around major
journeys. This is the natural operating model for many digital natives, as
technology, digital services, and product delivery are basically inextricable.
Companies focus on specific digital initiatives that deliver on business
priorities, deploying specialized talent and cross-functional teams to support
each one. The model is highly attuned to the customer, and rapidly develops,
tests, and iterates on new products or services. Team members may be managed
through a center of excellence or by business-unit leaders. This path is the
aspiration for many incumbents, especially those that deliver services rather
than physical products.
In one European bank
undergoing a full-scale evolution, agile has become the default way for people
to work, with colleagues from multiple functions including IT sitting sit side
by side. Results are measured by value streams—the sources of the value being
generated—and journeys, flowing from the customer need back to the performance
of the bank. Prioritization and resourcing take the form of active daily and
weekly conversations about the next most important thing to work on. This
approach is initially almost like shock treatment, but it offers important
benefits, allowing companies to shake up the traditional management system and
achieve culture change quickly and at scale. The organization builds agile
skills broadly, identifies high and low performers, and pinpoints valuable and
missing skills.
This path works well
when there is a broad and top-down organizational mandate for change. Given the
time it takes to move the needle, there should be no pressing near-term
economic imperative. Companies that choose this model need to mitigate several
risks, such as ensuring that best practices are shared across the operating
model rather than being confined to individual teams. In addition,
organizations must share any scarce resources across business functions to
drive impact, and ensure coordination with IT as it seeks to keep up with the
technical architecture.
No-regret steps leaders should take
Every organization’s
transformation journey will be different. However, a simple set of immediate,
no-regret steps can help leaders shape their first set of priority decisions
and provide clarity on the way forward. These often include:
·
Creating clarity on enterprise strategy and
on where digital services can quickly enable sustainable value creation.
·
Challenging the board to be explicit about
the importance of the transformation and its support for investment; or, as a
board, making this decision and challenging the executive team for a bold
vision.
·
Building top-team excitement and belief in
change through visits to leading digital natives or incumbents pursuing their
own transformation paths.
·
Assessing the maturity of the management
system using benchmarking against other organizations to identify strengths to
build on and risks to mitigate.
·
Investing in targeted capability building,
especially for the top 50 leaders in the organization. Exploring core concepts
such as digitization, agile, design thinking, and advanced analytics can create
a shared vocabulary and spur action.
·
Making an honest objective assessment of
talent and capabilities within the organization, benchmarked against peers and
cross-sector leaders. Disruption often comes from outside an industry rather
than within.
·
Surveying the cross-sector landscape for
ideas and inspiration. It’s easier than ever to learn from others, and a rapid
inventory of ideas can shed light on potential execution challenges to resolve.
·
Assessing the level of change that the
organization can realistically absorb in the near and long term given its other
priorities.
Most companies
recognize the need for a next-generation operating model to drive their
business forward in the digital age. But how well they actually develop it
makes all the difference between reinventing the business and just trying to do
so.
By Joao Dias, David Hamilton, Christopher
Paquette, and Rohit Sood
http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/how-to-start-building-your-next-generation-operating-model?cid=reinventing-eml-alt-mip-mck-oth-1703
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