Why You Need an Operating Model: To Align Your People and Deliver You Strategy

Putting a new strategy into effect is always difficult. Andrew Campbell and Mikel Gutierrez provide a practical solution to designing the necessary changes: the Operating Model Canvas. They describe how they applied it to the merger between Siemens and Gamesa, demonstrating how this framework, along with its supporting tools, can help leaders to design changes in their organization and operations.

---

We all know that slippage occurs between the strategic plans we develop, the actions we take and the results we achieve. Few leaders say “Execution is the easy bit. Once we have decided what to do, it’s no trouble to make it happen.” 

There are three parts to the implementation of any new strategy: 

• designing changes to the current organization so that it will be capable of implementing the strategy 
• transforming the organization, guided by the design, so that it becomes capable of implementing the strategy
• leading the transformed organization so that it delivers the strategy.  

Many authors have focused on the second and third parts of the journey: managing the transformation and leading the organization. Don Sull and Rebecca Homkes,¹ for example, looked at barriers to transformation, and Kaplan and Norton² looked at how to convert strategy into performance metrics (the balanced scorecard) for leading the organization. But less attention has been paid to determining what changes are needed in the organization and its operations and to how this design work should be done.³ This is where an operating model is invaluable. 

Just like the blueprint for a building, an operating model captures the high-level decisions of the design team, allowing others to conveniently refer to those decisions during the transformation. 

An operating model is a blueprint of the new operational design. It can be a one-page document but is more often ten to twenty pages. Just like the blueprint for a building, an operating model captures the high-level decisions of the design team, allowing others to conveniently refer to those decisions during the transformation. It lays out the strategy in terms of high-level operational choices, providing a map for the more detailed work which will be necessary throughout the journey of transformation. You would expect to see those working on a new building – the heating engineer, the foundations expert, the roofing contractor, the project manager – with well-thumbed and marked up copies of the architect’s blueprints. Likewise, during a corporate transformation, you should expect to see the head of transformation, the IT architect, the senior HR business partners, the senior operations officers, the head of property, and the head of supply chain with well-thumbed and marked up copies of the organization’s operating model. 

Who Should Design the Operating Model? 

A high-level operating model is the first step towards enacting a new strategy, so it should be designed by the top team: the team who developed the strategy. Strategies rarely say much about specific operations. In fact, when a strategy is complete, there are usually many questions left to be answered: what do you want me to do? by when? how much will this cost? do we have the budget? do I have clearance to hire extra people? what IT changes are needed? what can be outsourced? what new skills will we need? and so forth. Rather than delegating all these choices to lower levels, top teams should provide some broad answers to guide the functional specialists, who make the more detailed choices. 

If the top team try to make all the choices, they can easily become overwhelmed. The sheer volume of decisions (see sidebar “What do you need to decide before you implement your strategy?”) makes delegation to lower levels essential. Moreover, leaders recognise that many of the decisions should be made by managers with close knowledge of the operations, which can mean pushing some decisions three, four or five levels down the hierarchy. 

Unfortunately, managers further down the hierarchy will not necessarily grasp the nuance of thought that lies behind the strategy; making it hard for them to align their choices with it. Moreover, the perspectives of individual members of the top team will vary according to geography, product focus, or function. They may give slightly different interpretations to their teams. Without a blueprint guiding these operational choices, the result can be a patchwork quilt of decisions rather than a single weave aligned with the strategy. Imagine a heating engineer or an electrician deciding where to place ducts and cables without a blueprint of the rooms and their intended uses. 

There are, of course, traditional mechanisms through which organizations do try to bring these disparate views into alignment. These methods include: repeated explanations of the strategy, a transformation office set up to coordinate the transformation projects, executive team meetings to discuss the progress of the changes and, importantly, the personal influence and involvement of the leader. 

Unfortunately, these alignment mechanisms often prove to be quite weak compared to the forces they hope to control. Repeating the overall strategy often does not help managers lower down with the specific dilemmas they face. Knowing that China is a priority or that new product development is the prime driver of growth does not help an operations team decide 

where to put a new factory or help an HR team choose between a matrix structure and a geographic structure. 

Transformation offices are typically tasked with delivery rather than alignment. They focus on ensuring that projects are completed on time, rather than on aligning the detailed choices being made within each project. 

A new executive team is typically formed as the transformation begins. Members are keen to work well together, rather than to point out differences or failings, so they rarely challenge colleagues who are going off-piste. Moreover, these meetings are never long enough for complex discussion. 

The leader, having delegated the work, typically focuses on motivating people or mediating disputes rather than ensuring overall alignment. 

An operating model, developed by the top team, is therefore a vital aid to alignment. It ensures that the top team share a single understanding of how to enact the strategy and provides a common blueprint that can be shared with lower levels. 

What is an Operating Model? 

The phrase “operating model” is interpreted in many ways. Every major consulting company has its own framework and often more than one. One McKinsey framework, for example, has three elements: structure, processes, people.⁴ A Deloitte framework covers people, process, and technology, elements that are commonly used by business architects.⁵ Alex Osterwalder, in his popular book Business Model Generation, lists key activities, key resources and key partners⁶ as the three operational elements in his Business Model Canvas. Despite differences in language and emphasis, all of these frameworks concern themselves with broadly similar topics. They cover work processes, people, organizational structure, information systems, locations, operating technology, supplier relationships, and more. The Operating Model Canvas (see Exhibit A)⁷, the framework we propose, emphasises the processes of work that need to be done to deliver value to customers and builds the other elements around this focus. It also works in concert with the Business Model Canvas (see sidebar Operating Model Canvas and Business Model Canvas). 

Before a company can compose a clear operating model, it must have a clear strategy: what products and services (value propositions) will be produced? for which customers? in which countries or regions? and with what advantage or excellence? The Operating Model Canvas helps leaders convert these strategy choices into operational choices: what work processes are needed, who will do the work, in which locations, etc. The mnemonic POLISM is a reminder of the six operational elements.

By thus limiting the space allocated to each element the canvas forces leaders to focus on the most important choices.

The canvas offers a visual representation of these six elements. At its heart are the sequences of work (processes) needed for the organization to deliver the products and services (value propositions) defined by the strategy. The other elements of operations are arranged around these processes, with the management system underpinning and supporting the other five. The model presents these six elements as a canvas. By thus limiting the space allocated to each element the canvas forces leaders to focus on the most important choices. This encourages them to create a high-level overview and helps them see how different elements are interconnected.  

Take the example of a European company which makes electrical transformers for the power distribution industry, and which devised a new strategy to expand into Asia and the Americas by designing products tailored to these markets. The operating model canvas to support this new strategy requires the company’s leaders to define the process steps needed to make the transformers and to sell them, both in Europe and internationally: product design, supply, scheduling, manufacturing, logistics, marketing, sales, and service. It also requires the leaders to determine whether this work will consist of one global process or a number of regional processes. For example, will product design be done globally or done separately in Europe, Asia, and Americas divisions? 

In addition to defining the core work needed and how it will be structured, the operating model also requires leaders to address, at a high level, a range of other issues such as who will do the work, how much decision authority they should have, company culture, location, supplier relationships, IT applications, and management systems. 

Two factors determine which issues should be addressed at this high-level and which can be delegated down the hierarchy: What is important to delivering the products and services?, and what are the foreseeable difficulties in executing the strategy? 

So, if developing tailored products is important to selling transformers in new markets, the operating model might address the following issues: How will the salespeople learn to understand and interpret the special needs of customers in these new markets? What IT support will the sales-people need? How will the product designers be able to quickly fulfil requests from the salespeople? How will manufacturing handle the need to produce special products alongside their standard products without losing efficiency? How will the production schedule ensure that special products are delivered to customers on time? In short, how will a range of departments, already busy with existing markets, give potentially awkward requests from new markets the attention they deserve? The canvas requires leaders to provide some top-down guidance on all of these questions. 

Likewise, if the strategy is about lower prices or superior technology or a more complete product range or superior service, the leaders will need to define the main elements in operations that will make these different drivers of success possible. The leaders might decide on high levels of outsourcing to drive low costs that will make lower prices possible or joint ventures with local servicing agents to provide superior service. The content of a high-level operating model is not pre-determined; it depends on what issues need to be addressed at the high level, before the rest of the choices can be delegated to lower levels. 

For clarity, these high-level choices are often summarized visually, using tools like organization charts, process maps, and decision grids.8 A high-level operating model may reflect hundreds of choices, but not thousands. By creating the operating model, top managers ensure that decisions concerning different areas of the organization are interconnected and will work well together. The model also helps managers lower down to fully understand the company’s strategy and their part in it, deepening their commitment to the strategy and giving them the clarity they need to make decisions with their teams. 

An Operating Model for Siemens Gamesa 

The merger of two companies is a time of massive transformation. The newly combined management team wants to preserve the best elements of each company while eliminating duplication, creating synergy, and ensuring that the new company is poised for success. 

In 2017, the wind power division of Siemens merged with Gamesa to form Siemens Gamesa, a world leader in both onshore and offshore turnkey wind farms. Mikel Gutierrez, one of the authors of this article, was appointed head of Onshore Projects, a division responsible for constructing and commissioning about 200 wind farms around the world each year. Once a contract is signed, Onshore Projects does all the work until the new wind farm is handed over to its owner, ready to use. When the merger was completed on April 3rd, 2017, Mikel announced his team of direct reports and launched a project to establish a new operating model for his division. 

Because the new organization was a union between two successful companies, managers on both sides had strong views about how the new organization should operate, and many were reluctant to change. Mikel explained, “You have been living in two well-designed houses. Now we need to live in one shared house. It must be better than both. We need to create one super-duper new house.” 

The division’s effort to create an operating model began with a training event in London for the more than fifty managers who would lead the work. At the event, trainers explained the POLISM and Operating Model Canvas frameworks and introduced participants to tools such as value chain maps, organization models, decision grids, process owner grids, IT blueprints, location footprints, supplier matrices, scorecards and management calendars (see insert Tools that Support the Operating Model Canvas). 

The operating model project was divided into five work streams. Each was tasked with producing three documents within a ten-week period: a summary of the existing operating model for each of the “houses,” a description of the proposed operating model for the “new house,” and a list of synergies which the team expected would result from the move into the “new house.” Emily Wright led the overall project and reported to Mikel’s executive team. 

The teams were launched with a clear articulation of the strategy and value proposition: to build turnkey, onshore wind farms anywhere in the world which would cost less, be completed faster and have better safety records than those of competitors. 

By the end of July, the division had agreed upon an operating model. This model included: 

• high-level process maps for each function within Onshore Projects and, in many cases, for lower level processes as well 
• organizational models (charts that laid out roles and relationships) for the whole division and for each function 
• a decision grid for the major decisions made within Onshore Projects 
• role descriptions for central versus regional roles 
• a process owner grid to clarify who had authority over cross-functional processes 
• an IT blueprint laying out which IT applications would be retained, which would be woven into an integrated system, and which functional leader would be the “business owner” of each application 
• scorecards for Onshore Projects as a whole and for each function, listing the timeline and deliverable for each transformation project as well as performance measures for ongoing operations (it was vital that performance on existing wind farm projects should not suffer during the transformation) 
• a management calendar listing the planning, target setting, and performance review meetings that would guide the division through the transformation, the objectives of each type of meeting, the participants, and whether the meeting would be face-to-face or virtual.

Exhibit B shows examples of some of these outputs, suitably redacted to protect confidentiality. 

For example, health and safety, clearly a vital issue when building a wind farm, was controlled by another function. While Onshore Projects is responsible for ensuring health and safety during construction, the Health & Safety function is responsible for overall governance, setting standards and determining how they will be fulfilled. Because Health & Safety was developing its approach on a different timetable, Onshore Projects could not incorporate it fully within the ten-week window.  

Other issues could not be decided until more detailed work was completed. For example, the scorecards for each of the functions within Onshore Projects depended on the outcome of more detailed work and on input from Finance.

Unlike building blueprints, operating models do not describe an object that will stand still, but a process that will evolve over time, demanding changes when circumstances change. 

Other issues could not be decided until more detailed work was completed. For example, the scorecards for each of the functions within Onshore Projects depended on the outcome of more detailed work and on input from Finance. 

Some of the decisions the team made during the ten-week design period didn’t work out as the transformation progressed. Small adjustments were needed to the process framework once the transformation teams had time to do more detailed analysis and to integrate their thinking with the work done by other functions. 

A new operating model, in other words, is not a final and fully completed document, set in stone. Like an architect’s blueprint, it may require adjustment as the house is being built. Unlike building blueprints, operating models do not describe an object that will stand still, but a process that will evolve over time, demanding changes when circumstances change. 

Reflecting on the experience, Mikel and Emily drew out five lessons: 

1. Agree upon design principles at the beginning. 

As Mikel explained “We were very clear that we were making one organization out of two: we were building only one house. I made it clear to the teams that if they could not decide within the ten-week period, I would decide for them.” Design principles are always the first step in design. They limit the team’s choices and guide their work. Without clear design principles, especially in a merger situation, managers have a practically limitless opportunity for disagreement and delay. Design principles help to convert a general strategy into thoughts that are useful to the design teams. Other examples of their design principles were “The operating model must ensure that the organization can deliver projects in any part of the world” and “Safety is the most important priority.” 

2. Document the existing situation first. 

Understanding where you are starting from is key. Understanding the exist ing operating model helped teams understand which practice was best. Rather than developing a new design, the teams could adopt the best practice already in use. Documenting the existing situation also helped the teams to identify areas of frustration and inefficiency. They could then develop solutions that were better than those of either organization. Unless you are developing an operating model for a new organization or for one that is irretrievably broken, it is well worth taking the time to understand the existing operations before developing new designs. 

3. Choose and prepare the teams. 

Having the right people on the design teams and preparing them properly is essential. Team members should, of course, be experts in their field, but they also need to be open minded. New creative design solutions are easier with minds open to the possibility that an alternative way could be just as effective or even better. As Mikel explained, “They should be like children: eager to find out what the other organization is doing and willing to adopt new ways if they are better.” Many team members spent time working in the other organization to learn how the other team’s processes operated. 

It is also important to include team members who will be part of the change teams set up to implement the new operating model. Their knowledge of the discussions during the design process will help them win the support of others during the implementation. 

Training the team ensures that its members all start with the same understanding of the task, so that they can all contribute equally to the tough choices. The idea of “living in a new, shared, super-duper house” helped everyone to develop a shared focus. 

4. Use a common framework and create a lexicon of terms 

Never underestimate the benefit of speaking a common language. The training ensured that all teams were using a common framework, making it easier for them to link together. It was also important to use the same words for describing processes, capabilities, and roles. While using a common vocabulary certainly improves communication, it also makes it clear that things are moving forward and prepares the team mentally for change. One of the most valuable tools during this project was a dictionary of common terms used by all teams. “We found that the two organizations were less different than expected. We were just using different names for the same activities” explained Emily Wright. As the two organizations worked together more and more, the lexicon expanded, helping everyone to understand each other and the new model. 

5. Ten weeks, not ten months or ten days 

There is no question that the teams needed time to fully understand the operating model and to discuss alternatives. But they also needed to feel time pressure so that they would arrive at a conclusion instead of succumbing to analysis paralysis. With no deadline, managers have no incentive to find compromises, and tend to delay the tough decisions. They are likely to focus on getting it exactly right, rather than on getting it done. Mikel made it clear that, at the end of ten weeks, decisions would be made, whether the teams had reached agreement or not. 

Speed in the operating model design phase has many advantages. It energises those affected. It gives less time for people to look for other jobs before they know what their role will be in the new organization. It gives more time for making the changes that follow. The downside is that some of the choices will turn out to be wrong. So, it must be clear to team members that it will be possible to revise their choices later if necessary. 

Emily Wright reflected, “This has been a highly effective process that accelerated the implementation of our strategy. Most post-merger integration focuses on synergies. Instead, we started by creating a shared vision of our new house, so that we could start implementing our strategy alongside the detailed work on synergies, which has been ongoing for the last year. We are now working in a more connected and aligned way than would otherwise have been the case. In future integration projects, I will always begin with an operating model.”⁹ 

Leaders cannot succeed by strategy alone. The first step in implementing the strategy is to convert their strategic ideas into choices about organization and operations. By using the operating model concept, along with the framework of the Operating Model Canvas and its accompanying tools, leaders are guided to design the changes that will make the organization capable of implementing their strategy.

Authors

Endnotes