As part of the Shoreline Innovation Forum in February I presented on whether Operating Models for Investment Organisations are ready for disruption. At that time this was a hypothetical discussion, but it is amazing how much has changed in a little over a month. With COVID-19, we are now dealing with unprecedented levels of disruption to investment organisations. To that end, the question I posed at the forum is more relevant than ever, “Is the concept of a ‘Target Operating Model (TOM)’ redundant?”
A TOM is essentially an operational strategy. It ensures that all the components of an organisation’s operating model (business functions, technology and people) are all aligned towards the same objective and there is an overall common vision of the desired state.
This concept has been around for some time and the benefits of having a TOM are clear:
- It aligns decision making and helps with prioritisation of initiatives;
- It ensures the solution delivered ties back to requirements; and
- It ensures that IT solutions and organisation structures support the business functions – not the other way around
All sound eminently sensible. So, what is the problem????
Well, when you look at the experience of organisations who have gone down the TOM path, the experience is mixed. Some common complaints have been:
- By the time the TOM is delivered, it is already redundant – This stems from the fact that implementing a TOM often requires a multi-year project and over that time, impacts such as changes to technology, new business priorities or changes in market conditions (including the impact of pandemics!) result in a fundamental change in needs that the TOM cannot address.
- The TOM cannot be implemented – There is an old saying (well actually there isn’t – I have just made this up) but anything is possible when you stick to PowerPoint. TOM designs often fall into the trap of depicting an optimal solution and do not recognise the constraints of implementation. When an organisation goes down the path of implementation they are often faced with the tough realities of projects (especially technology projects) that mean that actual outcome falls well short of the original vision.
- It freezes normal innovation – Having a TOM project can slow down or freeze normal business innovation. Either there is the (often mistaken) belief that the TOM will solve the problem, or the TOM has soaked up all the budget and resources needed for normal business change. The result is that, through the period of TOM implementation, the business is actually worse off from an operational capability perspective.
- People don’t buy into the solution – The need for effective change management is almost a cliché and the reasons are obvious. Technology based projects will only be successful if people embrace the new capabilities provided and adapt their way of working to exploit these benefits. In the context of an investment organisation, this often means the investment team modifying their investment processes to leverage new tools and other capabilities delivered by the TOM. In many cases this does not happen. Due to poor change management, investment professionals may not be aware of the new capabilities being provided or refuse to alter their activities to capitalise from these. This is especially pronounced where a project is multi-year and inevitable cynicism arises about the ability of the project to deliver.
Based on all of this, is there is still merit in completing a TOM?
Well, yes… (after all we are a consultancy firm specialising in TOM design!) we believe there is still merit in completing a TOM. However, there a few practical tips that can maximise your chances of success.
Tip 1 – Deeply Understand Your Business and Investment Strategy – The whole point of a TOM is to align operational capability against the business and investment strategy of a firm. This requires a fundamental understanding of the strategy and its operational consequences (for example, operational support to new asset types or trading strategies). There should be a healthy amount of questioning to confirm the understanding of the investment processes. Drawing out the “So What” (i.e. the operational implications of the strategy) is critical.
Tip 2 – Favour design principles over planned design – To avoid the risk of ‘TOM redundancy’ there should be an emphasis on agreeing design principles that can be used to inform decision making. These principles can stand the test of time and guide decision making to ensure alignment back to the overall TOM. Importantly though, design principles should provide direction on an actual decision (e.g. involve a trade-off) instead of being a mere statement of intent (aka – a ‘Motherhood statement’). For example:
This is a design principle – “We will default to outsourcing operational functions over building internal capability”. It provides a true choice at the point of a decision.
This is NOT a design principle – “We strive for operational excellence in our operational processes”. This does not provide a choice, as who would choose not to be operationally excellent???
Tip 3 – Have a pragmatic roadmap with incremental delivery – To avoid the challenges of lack of buy in and a redundant solution, we strongly advocate the concept of an implementation approach that progressively releases value to the business and provides flexibility to manage changing circumstances. Importantly, every ‘Release’ should deliver some visible and demonstrable business value, even when the primary purpose is technical (aka – ‘behind the scenes’).
Events such as COVID 19 emphasise the need for flexibility but do not lesson the need for a TOM. To that point I recently discussed events with a client who remarked that the changes delivered by the TOM fundamentally improved their ability to deal with this crisis (better tools, scalable processes and move to cloud infrastructure that enabled remote working). Overall, the conclusion from our Innovation Forum and the COVID 19 experience is that TOM still has merits (phew!) but needs to be approached carefully with a healthy dose of investment expertise, pragmatism and flexibility.
Bruce Russell
Executive Director