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Redefining the Imperative in Mergers and Acquisitions – The Target Operating Model

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When organizations go into Mergers & Acquisitions (M&A), its future operating state changes. A fundamental question will arise as to what the Target Operating Model (TOM) of the resultant organization will look like.

What is TOM?

The Target Operating Model (TOM) represents a clearly defined target structure in which the relevant unit should operate in the future. It consists of the structural and process organization as well as the assets needed and the contractual regulation required both internal and external.

The Mission Statement of the Target Operating Model (TOM) is to provide a clear overview of the changes in the course of the Transformation related to the organizational structure and business processes, as well as the assets and contract.

The Target Operating Model is your blueprint. While the design process for Merger and Acquisition may be the same, the approval process is different. For Joint Ventures, the approval process is more extensive due to the issues of governance as well as revenue/cost-sharing. Hence, it is essential for organizations to have a good understanding of the 6 Core Issues essential in developing the Target Operating Model.

The 6 Core Issues in Developing a Target Operating Model

Each core issue must address specific key questions that are raised. Likewise, each issue involves specific types of analysis that should be performed. This is essential for an organization to make when going through the Integration process. As a purview, let us look at the key questions that may be raised.

  1. Vision, Integration Principles, and Critical Success Factors (CSFs)
    Is there a comprehensive understanding of the vision and deal strategy/rationale, as well as the Integration Principles and their critical success factors?
  1. Organizational Structure
    What is the current organizational structure and that of the target organization?
  1. Process Organization and Core Processes
    How are the process organization and core processes currently set up and how will they be in the target organization?
  1.  Systems and Technology
    What technologies/systems are currently and will be required in the future?
  1. Property Rights and Contracts
    What important property rights and contract do currently exist and will be required in the future?
  1.  Assets
    What assets do currently exist and will be required in the future?

Organizations must take a closer look at the key questions and the analyses behind each of the  6 Core Issues. Each core issue has an analytical framework that serves as its guidepost in going through the process. This is to ensure that the core issues are well analyzed before the organization takes on the final step of constructing its Target Operating Model. When this is properly defined, only then will an effective and strategic Target Operating Model can be constructed and put into operation.

Albeit it to say, however, the development of the Target Operating Model is not an easy task. Organizations will encounter several pitfalls as they go through the process of Transformation. It can be a lack of clear and coherent vision and deal rationale with regard to the future business model. This can be a deterrent to the success of a TOM and the target value generation.

Interested in gaining more understanding of the Target Operating Model? You can learn more and download an editable PowerPoint about Mergers and Acquisitions (M&A): Target Operating Model (TOM) here on the Flevy documents marketplace.

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M&A is an extremely common strategy for growth. M&A transactions always look great on paper. This is why the buyer typically pays a 10-35% premium over the of the target company's market value.

However, when it comes time for the Post-merger Integration (PMI), are we really able to capture the expected value? Studies show only 20% of organizations capture projected revenue synergies and only 40% capture cost synergies. Not to mention, the PMI process is typically very painful, drawn out, and politically charged, often resulting in the loss of key personnel.

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About Joseph Robinson

Joseph Robinson is the Vice President of Strategy at Flevy. Flevy is the marketplace for best practices in business management. Learn how the Fortune 100 and global consulting firms do it. Improve the growth and efficiency of your organization by leveraging Flevy's library of best practice methodologies and templates. The documents at Flevy (https://flevy.com) are of the same caliber as those produced by top-tier management consulting firms, like McKinsey, BCG, Bain, and Accenture. Most were developed by seasoned executives and consultants with 20+ years of experience. Flevy covers 200+ management topics, ranging from Digital Transformation to Growth Strategy to Lean Management. You can peruse a full list of management topics available on Flevy here. Prior to Flevy, Joseph worked as an Associate at BCG and holds an MBA from the Sloan School of Management at MIT. You can connect with Joseph on LinkedIn here.

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