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Target Operating Model

Updated on March 27, 2024
Article byAswathi Jayachandran
Edited byAswathi Jayachandran
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Target Operating Model (TOM)?

A target operating model (TOM) is a statement of action declaring how an organization will be operational in the future to deliver the organization’s vision. The purpose of this model is to provide a clear vision and framework of how an organization should operate to achieve its strategic objectives.

Target Operating Model

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TOMs help coordinate changes and prevent them from conflicting with each other. In addition, it aids in aligning the restructures with the organization’s demands and delivering value to customers. It ensures that the organization makes investments in areas that propel it forward and maximizes its utilization. Therefore, it encompasses following the required procedures, possessing the necessary knowledge and skills, employing appropriate technology, and determining where the task will take place.

Key Takeaways

  • A target operating model (TOM) is a statement of action declaring how an organization will be operational in the future to deliver the organization’s vision. 
  • TOM helps determine where the business stands, what it should do next, and form steps for achieving the goal. It encompasses covering the procedures that one must follow, acquiring the necessary knowledge, abilities, and technology, and determining where the task will occur.
  • TOM’s performance depends on several crucial elements, including people, processes, and technology.
  • It provides a broad perspective of what the future can hold for the business and helps its growth.

Target Operating Model Explained 

The target operating model (TOM) refers to a blueprint of the organization’s vision. An operating model can be considered a value delivery chain in its basic form. It is a series of actions that outline the organization’s primary tasks. Similarly, this model aims to align the operating capacities and provide an overview of the core business capabilities by aligning them with the strategic objectives. Hence, it also gives a general overview of the company’s internal and external drivers, operational and strategic levers, organizational and functional structures, and information technology resources.

Moreover, a reliable target operating model template helps in determining where the business stands and what it should do next and form steps for achieving the goal. Hence, TOM is a transition from COM (Current Operating Model). Thus, the Target Operating Model (TOM) illustrates a future state that the organization should be heading toward to realize its strategy. On the other hand, the Current Operating Model describes how an organization is set in the present time.

Besides, any TOM’s performance depends on a number of crucial elements, including people, processes, and technology. Additionally, it fosters a shared understanding of the organization by enabling individuals to visualize it from various angles throughout the value chain because every key aspect of company activity is represented. Furthermore, designing a target operating model involves a systematic and collaborative process to develop a framework that aligns with the organization’s strategic goals and objectives.

Hence, implementing a finance target operating model involves aligning the finance function’s processes, systems, and talent with the defined framework. Besides, numerous crucial considerations must be made before using this model. It must consider the effects of designs and development procedures, the hiring of new employees and their training and motivational strategies, and the addition of new staff.

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Components 

People, processes, and technology are vital components underpinning any TOM and are critical to ensuring its success. However, other companies may include elements such as a service delivery model, performance insights, governance, etc.

#1 – People

The workers and the talents among them drive the enterprise to success. To envision a steady future, certain things, such as who does what, their job’s role, and the associated responsibilities, will be laid out. Hence, the reporting lines and the skill sets required for each position will also be decided. Thus, this is important, as planning without ways to execute it properly will render the plan useless.

#2 – Process

The actions or operations that occur as part of the plan laid out belong to the process. Every function in the business area, be it procurement, product manufacturing, supply chain management, finance, human resources, customer support, security, etc., is defined. Everything under this contributes directly to the business’s goals and objectives.

#3 – Technology

In this digital age, everything inside the organization is connected through technology. Cloud architecture, integration tools, and connectivity are all integral parts that create an environment for ideas to grow and be executed.

Examples  

Companies draft their TOMs based on a few criteria. However, this includes outlining their vision and strategies for achieving it, recognizing their existing core capabilities, imagining how they can transform their current operating model, and so on. These vary from company to company, and two such basic examples are given for illustration purposes.

Example #1

Let’s assume a restaurant in the US wishes to transform into a restaurant with vegan and vegetarian options.

  • Vision: To introduce delectable vegan meat substitutes.
  • Strategy: To sell the ambiance of a tropical place and create a sense of doing a good deed. It plans to introduce dairy alternatives in drinks, and after 4-5 months, it plans to introduce meat substitutes such as burger patties made with tofu or pea proteins.
  • Core capabilities: Research and analysis, service, food and beverage management, brand management, etc.
  • Processes:  Seating arrangements, taking orders, preparing food, billing, etc. They are all separate processes in themselves.
  • Current operating model: The restaurant currently provides vegetarian options.

Example #2  

Let’s assume a clinic that wants to transform into a big hospital with modern amenities, especially robotic assistance. 

  • Vision: To introduce robots into surgery and other modern medical interventions.
  • Strategy: As a first step, replace human nurses with robots in medical assistance, then introduce teleradiology and, later, robot assistance in surgery.
  • Core capabilities: Research, analysis, and service.
  • Processes: Necessary programming details as inputs into the robots, supervision, and taking precautions against damages
  • Current operating model: Currently, it operates with a human workforce.

Benefits 

 Some of the benefits of having a TOM are listed below:

  • It, first and foremost, helps the growth of the business.
  • TOM provides a broad perspective of what the future can hold for the business. Therefore, this highlights the potential for specific areas of the company to thrive.
  • Moreover, this model allows the company to get ahead or at least be competitive.
  • This model focuses on structures, systems, hiring talents, improving culture, efficiency, etc. Hence, this invariably focuses on all aspects influencing the company’s growth.
  • The target operation model lays down structures that are clear and concise and that help in deriving value.

Frequently Asked Questions (FAQs)

1. How to create a target operating model?

Businesses base the creation of their TOMs on a few factors. Thus, this includes laying out their goals and plans for accomplishing them, identifying their core competencies, visualizing how to change their current operating model, and other such things. But, of course, these vary from business to business.

2. What is included in a target operating model?

It is an expression of a vision for a company and the use of a corporate strategy to fulfill them. It contains a basic framework for a future steady-flow business model and value drivers. The framework is, in fact, a blueprint of required operations.

3. What are the target operating model design principles?

Target operating model design principles are declarations about how a company should run. They outline the company’s goals, customers’ expectations, and the experiences they hope to have. The guidelines must align with the business’s overall goals and objectives and be supported by solid insights.

This has been a guide to what is a Target Operating Model. Here, we explain the topic with its examples, components, and benefits. You can learn more about it from the following articles –

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