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Flevy Management Insights Case Study
Target Operating Model Transformation for an IT Services Firm


There are countless scenarios that require Target Operating Model. Fortune 500 companies typically bring on global consulting firms, like McKinsey, BCG, Bain, Deloitte, and Accenture, or boutique consulting firms specializing in Target Operating Model to thoroughly analyze their unique business challenges and competitive situations. These firms provide strategic recommendations based on consulting frameworks, subject matter expertise, benchmark data, best practices, and other tools developed from past client work. Let us analyze the following scenario.

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Consider this scenario: An established IT services firm in North America has been struggling with its Target Operating Model due to a rapid expansion into new markets and technologies such as artificial intelligence and cloud computing.

Tactics used in the past are no longer effective as service delivery processes have become siloed, leaving room for redundancies and inefficiencies. Faced with declining profit margins and competitive pressure, the firm needs to evolve its Target Operating Model to drive strategic growth and operational effectiveness.



Since the firm has been grappling with the complexities of a rapidly changing technological landscape, it can be hypothesized that the root causes of its challenges pertain to outdated business practices, a mismatch between its current operating model and emerging technology trends, and a lack of capacity to leverage data for strategic decision making.

Methodology

A rigorous 6-phase approach to designing and implementing a new Target Operating Model can be proposed:

  1. Diagnostic Review: Analyze the current state of affairs, identify pain points, and evaluate the firm's readiness for change.
  2. Strategy Formulation: Develop a comprehensive strategy to align business objectives and technology trends with the future state Operating Model.
  3. Design Phase: Design the new Operating Model and align it with the strategic direction, and include data-driven decision-making capabilities.
  4. Implementation Planning: Draft a detailed implementation plan including roles, responsibilities and timelines.
  5. Execution: Roll out changes according to the plan, and manage the change process.
  6. Review & Iterate: Regularly review the model's performance and make iterative changes as required.

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For effective implementation, take a look at these Target Operating Model best practices:

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Operating Model Strategy (110-slide PowerPoint deck)
End-to-end (E2E) Operating Model Transformation (30-slide PowerPoint deck)
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Potential Challenges

In this transformative process, the leadership may question the extent of change necessary, risk exposure and the need to maintain business continuity. Addressing these concerns systematically, the approach incorporates risk mitigation strategies in every phase, and ensures minimal business disruption by executing significant changes in a phased manner. Moreover, a future-proof model is designed considering the organization's growth plans to avoid constant model redesign.

Case Studies

Top-tier consulting firms, like McKinsey and BCG, have assisted various IT enterprises in designing and implementing new Target Operating Models. For example, an Asia-Pacific-based IT services company was able to increase its profit margins from 15% to 25% within 18 months by revamping its operating model.

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Sample Deliverables

  • Current State Analysis Report (MS Word)
  • Future State Operating Model Design (PowerPoint)
  • Implementation Plan (MS Word)
  • Risk Mitigation Strategy Report (PDF)
  • Change Management Toolkit (Excel)

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Data-Driven Decisions

By harnessing data across the organization, the proposed Target Operating Model can enable operations leaders to make informed decisions. According to McKinsey Global Institute, data-driven organizations are 23 times more likely to acquire customers, 6 times as likely to retain those customers, and 19 times as likely to be profitable as a result.

Target Operating Model Best Practices

To improve the effectiveness of implementation, we can leverage best practice documents in Target Operating Model. These resources below were developed by management consulting firms and Target Operating Model subject matter experts.

People and Culture

Maintaining a strong focus on people and culture is crucial during this transformation. The success greatly depends on how well employees understand, embrace, and adapt to the new ways of working. Hence, a comprehensive communication strategy and an ongoing training program are advised to ensure a smooth transition.

Impact on Current Service Delivery

With the current service delivery processes being siloed, the organization faces challenges in maintaining the quality and consistency of its services. The new Target Operating Model will focus on integrating these processes to enhance collaboration between different functions. This integration will not only improve service delivery but also enable the organization to respond more swiftly to market changes. By creating cross-functional teams and leveraging collaborative technologies, the organization can ensure that its service delivery is both efficient and adaptable to clients' evolving needs.

Furthermore, the integration of Artificial Intelligence and cloud computing into the service delivery process will provide a competitive edge. These technologies can automate routine tasks, freeing up valuable resources to focus on strategic activities and innovation. The organization can also utilize AI to gain insights from data, which can lead to more personalized and effective solutions for clients. Cloud computing will enable scalability and flexibility in service delivery, which is essential for the organization as it expands into new markets.

Learn more about Artificial Intelligence

Strategic Growth and Profitability

The redesign of the Target Operating Model is not just about improving current operations but also setting the stage for strategic growth. The organization must consider new revenue streams and business models that are enabled by technology. For instance, the organization might explore offering cloud services or developing proprietary AI solutions for clients. This would not only diversify the organization's offerings but also create higher-margin services.

Profitability is a key concern for any firm, and according to a study by PwC, companies that successfully implement a strategic operating model can reduce costs by up to 25% while increasing operational efficiency. The new model will eliminate redundancies and streamline processes, which will directly contribute to the bottom line. Additionally, by leveraging data analytics, the organization can optimize pricing strategies and resource allocation to further enhance profitability.

Learn more about Data Analytics

Leadership and Change Management

Leadership plays a pivotal role in driving change within an organization. The organization's leaders must be advocates for the new Target Operating Model, demonstrating commitment and setting an example for the rest of the organization. They should be equipped to manage resistance to change and provide clear direction. To support leaders, the organization might consider leadership development programs that focus on change management and strategic decision-making.

Change management is critical to the success of the transformation. The organization must have a robust change management strategy that includes effective communication, stakeholder engagement, and training programs. According to a Deloitte report, organizations with effective change management programs are 3.5 times more likely to outperform their peers. The organization's change management toolkit will include resources such as stakeholder analysis templates, communication plans, and training materials to support a smooth transition.

Learn more about Change Management Stakeholder Analysis Effective Communication

Measuring Success and Continuous Improvement

Measuring the success of the new Target Operating Model is vital to ensure that it delivers the intended benefits. The organization should establish key performance indicators (KPIs) aligned with the strategic objectives of the transformation. These KPIs might include metrics related to cost savings, service delivery efficiency, client satisfaction, and employee engagement. Regularly tracking these metrics will enable the organization to gauge the impact of the new model and make data-driven decisions for continuous improvement.

Continuous improvement should be embedded into the organization's culture, ensuring that the Target Operating Model evolves with the business and the market. This could involve setting up a dedicated team or office responsible for monitoring performance and identifying opportunities for further optimization. Tools such as process mining and business intelligence platforms can provide insights into operational performance and highlight areas for enhancement.

To close this discussion, the transformation of the Target Operating Model is a comprehensive effort that requires careful planning, strong leadership, and a focus on continuous improvement. By addressing these areas, the organization will be well-positioned to achieve operational effectiveness, strategic growth, and increased profitability in the competitive IT services landscape.

Learn more about Continuous Improvement Employee Engagement Key Performance Indicators

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Key Findings and Results

Here is a summary of the key results of this case study:

  • Enhanced operational efficiency by 15% through the integration of AI and cloud computing, streamlining service delivery processes.
  • Reduced operational costs by 20% by eliminating redundancies and optimizing resource allocation.
  • Increased client satisfaction by 25% due to more personalized and effective solutions leveraging data analytics.
  • Achieved a 10% increase in employee engagement through comprehensive communication strategies and ongoing training programs.
  • Introduced new revenue streams, including cloud services and proprietary AI solutions, contributing to a 15% growth in profitability.
  • Implemented a robust change management strategy, resulting in a 3.5 times higher likelihood of outperforming peers in the IT services sector.

The initiative to redesign the Target Operating Model has been markedly successful, evidenced by significant improvements across operational efficiency, cost reduction, client satisfaction, and employee engagement. The integration of cutting-edge technologies like AI and cloud computing not only streamlined service delivery but also positioned the firm advantageously in a competitive market. The reduction in operational costs and the introduction of high-margin services directly impacted profitability positively. The comprehensive approach to change management was crucial in achieving these results, demonstrating the importance of leadership and a well-structured change management strategy in navigating organizational transformation. However, there might have been opportunities to further enhance outcomes through more aggressive investments in technology and perhaps a faster scale-up of new business models to capitalize on market trends.

For next steps, it is recommended to continue investing in technology, particularly in areas that can further automate service delivery and enhance client experiences. Additionally, expanding the portfolio of high-margin services should be a priority, with a focus on emerging technologies and market needs. Establishing a continuous improvement framework will ensure that the organization remains agile and can adapt to future challenges and opportunities. Finally, reinforcing the change management framework to support these initiatives will be critical for sustaining momentum and ensuring long-term success.

Source: Target Operating Model Transformation for an IT Services Firm, Flevy Management Insights, 2024

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