Why Every Company Needs an Operating Model [+ Steps to Build One]

If you run a business, you have probably already figured out your business model.

It’s usually the first thing business owners build as it is key to figuring out the value you bring to the market and consumers.

But what about your people, processes, systems and technologies? These are all key components of your business that should be described in your operating model.

Let’s look at what an operating model is and how it compares to a business model, and let’s cover the steps to create one today.

Many confuse business models with operating models. However, they outline different things and serve different purposes.

A business model describes how a company captures and offers value through its products / services, its value proposition, its customer segments, its most important partners, etc. An operating model, on the other hand, defines how a company is operated to deliver that value.

In simple terms, a business model looks at the What. One operating model focuses on that how.

Take the example of a fictional lifestyle company called EarthBound. Their business model will describe their sustainable and environmentally friendly approach as a value proposition, outline their various product lines and represent their customer channels via stationary and e-commerce shops.

Their operating model focuses on how they source their products, what roles they need within the company, what systems they use in each business unit, their data management plan, and much more.

Not sure why you should design an operating model? Here are the benefits:

• It helps you identify the systems and structures required to serve your customers in a way that fits your overall strategy.
• It’s a blueprint for organizing and operating resources that will serve as the foundation for scaling your business.

Operating model template

As you build your operating model, you focus on three key elements: process, people, and technology.

There are two approaches you can choose: role-based or process-based.

With the role approach, you design your operating model based on the hierarchy and roles within your company. Instead, with a process approach, you focus on the journey to bring value to your customers.

The template you follow will depend on what makes the most sense for your business based on the strategy. Suppose you are reviewing your operating model because you are considering restructuring or reallocating resources. In this case, a process-based approach can work best.

What you will need to create your operating model design

You must first ask yourself, “How do we manage our resources to effectively run our business and deliver our services as intended while meeting our goals?”

When you start to think about it, focus on each area here.

1. Strategy

To build your operating model, you first need to be clear about your strategy.

This is because your strategy and core priorities influence your operating model. Once you’ve defined it, the next step is to create a set of design principles.

Bain & Company, a global management consultancy, suggests making a list of about seven statements that set out what your company needs to do to execute your strategy. This will serve as an anchor when building your model.

Everyone on your leadership team should be able to express this succinctly and clearly in simple language. Here some examples:

• Standardize the customer experience in all regions.
• Reduce silos and align the organization with top business priorities.
• Transition to the digital-first approach.

2. Systems and processes.

For a company to function smoothly, it needs systems and processes.

Whenever you create or review an operating model, you need to fully understand the ins and outs of each business unit.

What business systems are in place in Department X? What hardware and software do you rely on?

As you ponder these questions, you should consider both internal and external tools that your organization relies on.

That means knowing what each department needs to be successful in their roles. For example, EarthBound’s finance department handles activities like invoicing, bookkeeping, payroll, and billing. In detail, this means that they can use software like Quickbooks.

The marketing team is likely responsible for lead generation and brand awareness through content, social media, paid advertising, and more. Hence, they rely on tools like Casted to help them achieve their goals.

Once you understand the systems and processes, you can figure out how they fit into your strategy and what changes can or should be made.

3. Organizational structure

Over the years, new methods have been introduced that invite business leaders to rethink their organizational structure and make changes to their operating model.

A big change in the last few years has been the way companies approach projects. In the past, companies followed the waterfall methodology, which organized projects in linear, sequential phases. Many companies today prefer the agile methodology, which is iterative and offers more flexibility.

Each framework is unique and has its own advantages and limitations. It is therefore important for a company to know which direction it wants to go in developing its operating model.

4. Talent management

No successful company without talent.

There is an important question to answer when developing your operating model: “What do your teams look like?” and “What does success look like in each role? “

At this stage, you want to understand the key roles and responsibilities required to run the business and how those roles will evolve over a period of X.

Additionally, you should have a clear culture code that outlines the norms and behaviors that you expect from your team and the values ​​that you celebrate.

These elements penetrate other areas of your business and are therefore incredibly important when working on your model.

5. Technology

As we’ve seen over the past few months, the world is constantly changing.

More teams than ever are working remotely and companies are investing in virtual tools like video conferencing and messaging. With this shift comes the need to have the technology to support growing global teams.

Additionally, there is also the business technology that is required to keep everyone updated. Too often companies suffer from silos and struggle to form cross-functional teams. By understanding how Imagine your team is working, you can look for software that meets those needs.

Building your operating model is critical to maintaining the health of your business. Whether you’re just creating one or rethinking an old one, this will help you better understand how your strategy is executing.