by Michael Poulin & Kirill Derevenski
European Journal of Business and Management (EJBM), ISSN 2222-XXXX (Paper) ISSN 2222-XXXX (Online) Vol X, No.X, 2011
This paper describes a comprehensive – and revolutionary – approach to effective organisational adaptation to change in a dynamic market environment. Disruption is all around and even the most established players are no longer guaranteed relevance. Business and operating models are in constant change and in order to prosper, not just survive, companies are looking for innovative, agile and market responsive solutions, one of which we offer in this work. It is based on the concept of Architecture of Business of any business organisation and its methodology of designing solutions for the target operating model that combines strategic objectives and agility to the market dynamics. We describe 5-step framework for creating optimised target operating model for the company.
Keywords: business, architecture, target, operating, model, optimisation, framework, concept, system
MOST BUSINESS LEADERS we know agree with the famous Darwin-inspired quote that, “in the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment” (T. W. Wallbank). They also agree that the rate of market change we are witnessing is unprecedented and complex. Disruption is all around – in politics as well as in economic trends – and even the most established players are no longer guaranteed relevance. Business and operating models are in constant change and in order to prosper, not just survive, companies are looking for innovative, agile and market responsive solutions to offer to their customers and partners today and tomorrow.
This is why countless projects are started every year by nearly all companies in the attempt to catch up with the evolving market, both product- and organisation-wise. Some of them are a success, and many more fail or are abandoned. The sad truth is that attempts at ad-hoc adaptation without looking into the core of how the business is organised, why it is run the way it is, and how it should be optimally structured to support innovation and service delivery – may be hurting more than they help and are not going to be sustainable in the long term.
Instead, to facilitate effective adaptation to change, it is infinitely more helpful to ask ourselves three key questions: Is the architecture of our business change-aware and in sync with the market trends? What target operating model will help us achieve our objectives and maximise what we intend to do? How do we transform the organisation successfully? Answers to these questions will be important in every transformation initiative, and even more so in a ‘pivot’ – changing the company direction completely, much like Nokia moving from paper manufacturing to mobile phones, or Flickr transforming from online role-play gaming to a photo sharing platform.
2. Architecture of business and its operating model
EVERY BUSINESS HAS ITS ARCHITECTURE. The term has been used extensively in the IT community, yet it is not exclusive to networks and infrastructure alone. As in life where architecture is all around us in buildings, business architecture forms the backbone of every company through its organisation, capabilities, functions and processes. Business architecture is born at the moment of business creation and continues to be intrinsic to this business for as long as it exists. At times, it is not even written down and exists in the guise of ‘the way things are done around here’. This is why deep down, while containing similarly sounding activities, all businesses are different in the same way as buildings are different. They may have similar departments and functions – Finance, Operations, IT, Sales etc. – yet are connected in a variety of ways and have a number of different responsibilities from one company to another.
The natural embodiment of architecture of business in every organisation is its operating model, or the interplay of its organisational (human and structural), technological (systems, information and networks) and processes (responsibilities and delegations) building blocks. The operating model is that crucial machinery, which delivers value to business customers, clients and beneficiaries, and ultimately earns returns for financial (and non-financial) stakeholders. The stronger this operating model’s connection with the overall business strategy and market dynamics, and the more agile it is in adapting to change and delivering expected objectives, the higher stakeholder return is going to be.
The intrinsic architecture of the business system is shaped by the role of a Business Architect. In small-to-medium sized companies, this role is usually played by the company’s executives; in bigger organisations, special teams of business architects or strategy planners perform an architecture of business practice. This practice serves the dual purpose: up-stream, it assists executive decision-makers in formulating the corporate strategy and, down-stream, it defines business capabilities, and business transformation plans, which should be realised in the form of a strategy-centric operating model of the company.
Right from the start, architecture of business and related operating models fairly accurately reflect that business’ objectives. However, as time passes and the company grows, its architecture practice runs ahead while the operating model falls behind and ineffectively delivers expected returns. The tell-tale signs of this gap are: disconnection between declared top-level corporate strategies and operational plans, employee concerns of not understanding the company direction, and a high rate of improvement initiative failures, to mention but a few. When this happens, it is time to review and realign the architectural practice and your business operating model with the present and future realities of your marketplace.
3. Bringing ‘target’ to the operating model through architecture of business
ARCHITECTURE OF BUSINESS relates the overall corporate business model to the business strategy and bridges it into the target operating model. It enables two crucial products: 1) modified intrinsic or organic architecture of the business system (M. Poulin AT AL) and 2) target operating model optimised for the chosen corporate strategy. Both products are delivered through a process of conceptualising, designing, implementing and maintaining optimal target operating models to maximise business value.
Importantly, well-conceived architecture of business ensures that the target operating model is optimised for its company to tackle the changes and challenges of its market. This is applicable to every company and, in this context, an ‘optimised’ model means three critical qualities:
- Effectiveness (the model is sensible and fit to deliver on strategic objectives)
- Efficiency (it contains clearly defined responsibilities and processes to serve its purpose)
- Responsiveness (it is flexible to rapidly adjust to internal or external changes while fully delivering on the agreed strategy).
Achieving the above sounds like a tall order, yet we have developed a straightforward five-step approach to ensure a smooth transition from inception to implementation of an optimal target operating model. It starts with an initial strategic conversation and design of the desired operating model and runs all the way through its implementation and maintenance to link back to strategic progress and further initiatives.
Figure 1. Five-step architecture of business approach
4. Step One: Corporate strategy review
THE FIRST STEP OF STRATEGY REVIEW may or may not be a time-consuming or a divisive one, depending on an organisation. In many companies stated strategies are visibly captured and are readily available, while in others some effort may be required to pin them down and formalise.
The most important, however, is to ensure that all key stakeholders of the intended target operating model are clearly aligned with what these strategies are, and what business model (outline of revenue and productivity strategies) will deliver these strategies best. Also, each strategy has to be validated against the overall corporate business model – whether the strategy fits with it or precipitates a fundamental change of the business model and repositioning of the company in the market. This is achieved through a series of interviews and workshops with key leaders after a careful examination of current strategic plans and ambitions.
Often we find that even at the top level individual leaders can misinterpret global strategies; this understanding gap gets wider the further inside the organisation one looks. The fact that these gaps are there is understandable and is not a concern per se, however, it is vital that everyone finds himself or herself on the same page and is comfortable with the intended direction of travel once the strategy alignment is complete.
5. Step Two: Conceptualisation of the target operating model
ONCE THE STRATEGY and overall corporate business model have been fully validated, the conceptualisation phase involves the practice of architecture of business. The objective of this activity would be to envision the future building blocks of the target operating model in the form of capabilities and sketch out their interplay in achieving strategic objectives, to review options and alternatives, and to define optimal architectural solutions to exposed business needs. In this context, building blocks are business capabilities (M. Poulin).
The conceptualisation phase results in a complete set of solutions to be implemented in the target operating model. Architectural solutions form a ‘model of the model’ where all building blocks are optimally combined in meaningful structures and connected with necessary information/process flows. It is not a complete operating model blueprint yet – this will come in Step Three – but it is descriptive and clear enough to enable decision-makers and involved leaders to imagine how things should work in the final model, and the degree of change involved. For example, it could show the need to adopt service-oriented architecture philosophies such as value streams as service realisations, instead of the product- or geography-centric models the company may be currently using. In this case, the large degree of ‘mental’ change required to make the target operating model a success will help select and prioritise change management actions early on.
The ‘model of the model’ review is another great opportunity to look back on the strategy and make sure that we are addressing what is important on one hand, while ensuring that all stakeholders remain engaged and understand what the revised architecture will mean for them, on the other.
6. Step Three: Solution and target operating model design
THE DESIGN PHASE covers the development of detailed architectural designs and operational blueprints of the target operating model and its intermediary states (it is highly likely that the transition to the target model will take time and so a set of staggered out, intermediary blueprints will be required). The resulting blueprints cover operational composition and functional makeup of the company, its organisation and governance, cross-dimensional processes, technology and data flows, delegations and other key policies.
Apart from the actual design activity, another main feature of the design phase is progressive involvement of larger numbers of operational managers in the target model’s development. While Steps One and Two are focused on architectural solutions and agreed with a relatively small number of top leaders (and behind closed doors, if necessary), the design phase must include the experience and collaboration of architectural, operational and functional specialists. After all, the latter is in daily contact with the business’ market and its clients, and engaging with them on design aspects will ensure the target model’s relevance and responsiveness to market needs. Additionally, as it is these managers who will be the primary implementers and future guardians of the target operating model: having their wisdom heard and captured will go a long way to ensuring its successful adoption and cultural change, if required. The design phase is therefore an important time for proactive change management actions.
The organisation of involvement of extended groups of contributors in model design will differ from company to company, according to their needs. It may range from working closely with a few nominated individuals to the organisation of a dozen work streams with over 400 participants from across the globe. What’s important is that the implementation blueprints have sufficient executive and peer authority for the rest of the organisation, else implementation progress will be slow.
The design phase culminates with a business transformation plan, containing implementation milestones and actions, as well as sequencing of implementation waves and intermediary operating models, depending on transformation complexity. Critically, the plan addresses not only the ‘hard’ side of model implementation, but also a ‘softer’ side of change management and people engagement.
At this stage it will become necessary to delineate clearly between the business transformation plan (as the plan to implement the target operating model) and a strategic business plan of the company (as the plan to extend its business further). They are not the same and can run in parallel. Depending on the complexity of the transition to the new model, elements of the transformation tasks can form larger or smaller parts of the strategic plan, but substituting one with the other would be harmful to the business.
Clearly, one of the major responsibilities and concerns of the transformation leaders will be finding the right balance between externally focused strategies to develop the business further and the internally focused transition efforts. There should be no detriment to the clients and the employees, and no lost opportunities that the market may present.
7. Step Four: Implementation
THE IMPLEMENTATION PHASE is by far the longest and may stretch from 12-18 months, or longer, and require intermediary stages. It may be tempting to underestimate the amount of time and effort required to transition to the optimal target operating model, yet this would be a mistake. Changes in the intrinsic architecture of the business may require shifts not only in an organisational and hierarchical sense, but also in a company collective mindset and even culture. This is why meticulous yet flexible planning, stakeholder monitoring and proactive change management actions will be crucial in achieving smooth and effective organisational transformation.
There will be several pressure areas in need of careful assessment along the implementation path. One of these is the timing of the transition and the time it takes to embed change. Relevant announcements need to come at the appropriate time to keep teams informed and reinforce their confidence in the project. The right balance needs to be found between going too fast and too slow. There is equal danger in moving too quickly, so that changes do not get sufficiently embedded, and creating a multispeed organisation by moving too slowly in some areas.
The second area of pressure is the quality of the designed implementation. Design elements will inevitably be adapted and customised in the implementation, through a combination of reasons including new market events, local realities, having different ideas or even the lack of knowledge of the big picture, to mention but a few. Keeping track of what is going on where, and having an effective governance process in place to control, escalate and resolve implementation challenges will be key to moving the target operating model from paper and into the organisation.
The third transitional challenge is its cost. This includes not only the actual cost of transformation, but also business opportunities that may be lost due to excessive focus on transition. Keeping teams focused on retaining and adding clients while also changing the way they work will be the key role of business leaders at all levels.
Finally, transition to a new target operating model is an opportunity, which also may pose risks of disruption in multiple areas, including partnership arrangements, employee retention and supplier tie-ins. All such risks must be identified, prioritised and negated in the architectural solutions and in the course of the transformational effort.
Transformation is a challenging journey. Yet the effort of changing the architecture of business and implementing a renewed target operating model is well worth it in the end. It creates an organisation that is leaner, more innovative, and agile in the face of its market dynamics – and one that delivers better results for its stakeholders and shareholders alike.
8. Step Five: Maintenance
THE MAINTENANCE PHASE follows the implementation of the target operating model. Inevitably, dynamic market conditions will require adjustments to some of the model’s elements while keeping within the agreed strategy. These changes are made possible by the architected responsive nature of the operating model and the fact that it is directly connected to corporate strategy through intrinsic business architecture.
In addition, the maintenance phase may address some ‘architectural debt’ – elements of design that are in the target model, yet have not been implemented for cost or resource reasons. Linking back to the corporate strategic planning process will help address and resolve this debt to further optimise and maximise the value of the implemented operated model.
8. Advantages of architecting the target operating model
WE DEFINED, REFINED AND TESTED the methodology and framework outlined above on a number of projects ranging from Business Unit optimisation to a complete redesign of the target operating model for a multi-billion-dollar service company. This allowed us to tackle several previously unaddressed challenges in the realisation of strategic decisions with maximum efficiency, based on the facts and expectation of results:
- This comprehensive framework clearly defines stages of translating corporate strategies into optimised operating models through flexible architectural solutions, which allows an accurate estimate of the degree of effort required.
- This is an inclusive framework covering business, organisational, and technologicalaspects of the modern enterprise. Analysis of architectural alternatives makes sure that there are no stones left unturned in search of optimisation for the target operating model.
- This is a change management-aware framework that deals not only with structures and systems, but also with the people aspects of the transformation equation.
- This is a delivery-focused framework that has governance, issue escalation, and resolution mechanisms built in to ensure the successful transformation journey.
In the words of Winston Churchill, ‘to improve is to change, so to be perfect is to have changed often’ (R.James) . Architecture of business is where this change starts and reflects – but never stops.
T. Walter Wallbank, Alastair M. Taylor, Nels M. Bailkey, “Civilization Past and Present”, 1962. Re-published by Open Library, openlibrary.org.
Michael Poulin, “How Business Architecture Enables Agility to Dynamic Market“, a chapter in “Business and Dynamic Change: The Arrival of Business Architecture“, Publisher: Future Strategies, Inc., June 2015. 230 pages. ISBN: 978-0986321429
Michael Poulin, “Business Capability for a Dynamic market”, Series: Organic Dynamic Business Architecture. Publisher: Clingstone-Troubador Publishing, July 2015. 125 pages. ISBN: 978-0957519930. “Winston S Churchill: His Complete Speeches, 1897-1963”. Ed by R.R. James. Repr of the 1974 Ed. 8 Vol Set. Previous Ed Entered Under Ed. Publisher: Atheneum. October
 In this context, architecture is a structural model of the business organisation, and is a fundamental element of its existence and uniqueness.
 To paraphrase Deal and Kennedy definition of organisational culture.