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What's the difference between target operating model and organizational design?

Confusion and debate surround these two common industry terms. Is it better to use one and not the other, are they complementary concepts or simply different names for the same things? In this article, Rupert Morrison looks at what each means, how they relate to each other, and how you should use them.

Published by Rupert Morrison

[This article was updated on July 24, 2019]

I am often asked what the difference is between target operating model and organizational design. I tend to find that while target operating model is generally well understood, there’s a lack of consensus among academics, HR practitioners, HR generalists, and those outside the HR function when it comes to a working definition of organizational design. Many people still think of org design as an exercise in changing the structure of an organizational chart. It’s so much more than that!

Why is it so important to be clear about these definitions? Rhetoric and pedantry aside, confusion in terminology and scope of these two concepts can cause the significant value they promise to deliver to be overlooked.

What is target operating model?

By and large, there is consistency and structure in how target operating model, or TOM, is understood in a business context. KPMG, IBM, and Deloitte all define it as a comprehensive model that enables the implementation of business strategy.

An operating model breaks down the working parts that make up an organizational system and describes how a business delivers value. A commonly used way to describe these components is people, process, and organization. In other words, TOM is the blueprint for how a business will deliver its value proposition and profit model. It specifies what the organization needs to do for the operating model to achieve its objectives.

Designing your target operating model

When designing the target operating model, there are nine constituent parts that must be addressed (see Figure 1). These are:

  • People: your workforce, its competencies and capabilities
  • Processes: value chain and activities
  • Organization: structure, layers, and spans of control
  • Information: workforce, operational, and financial data
  • Technology: software and systems
  • Customers: market segmentation
  • Channels: routes to market
  • Products/services: innovation and time to market
  • Physical location: where you operate offices or facilities

Breaking down a company’s current operating model into these elements makes it easier for business leaders to assess the maturity of their company’s current operation, define their desired future state, and design the roadmap to get to this state. This makes target operating model both a noun and a verb – a desired future state and the process of getting there.

What is organizational design?

By contrast, organizational design (OD) is fundamentally about shaping an organization’s structure to align people, processes, and competencies with business strategy and objectives.

To make the distinction clear, I think about org design as a question: How do we organize people and work to maximise the probability of hitting our goals to deliver the strategy and achieve the organization’s vision.

The target operating model only provides the delivery blueprint for a company’s business model, whereas organizational design deconstructs the model, focusing on the granular level of how to ‘Make it Real’ (see Figure 2 and Figure 3). It gets into the micro-level design that includes goals and objectives as well as competencies and roles.

To understand our thinking on org design in more detail, visit our web page on the topic. You can also download this introductory chapter from our book on data-driven organizational design.

Where OD meets TOM

Org design should be thought of as a part of the TOM and should be undertaken at the same time during any transformation project. The diagram below shows the interconnection of an organization’s elements at a micro level.

Choose one and stick with it

Much confusion has been caused by professionals using both TOM and OD in a project. In the academic context, both are simply different pathways to the same end goal: to move the organization to its future state. I would recommend you choose one concept and use it consistently.

Regardless of which you choose, you must be sure to drill down to the micro details and define all elements of the organizational system, so that your company vision is implementable and sustainable.

The ideal transformation journey would address all 11 elements shown on Figure 1. But in practice, you can’t do everything at once without putting your organization into cognitive overload and under unnecessary time pressure. You’ll need to decide which of the 11 elements to prioritize, in what order, and to what level of detail.

In the end, being clear on what you want to achieve with your macro design and getting the basics right is more important than the route you take to get there.

References

  1. Deloitte (2009) Managing Complex Transformations: Achieving Excellence. Available at: http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Energy-and-Resources/dttl-er-managingcomplextransformations-08082013.pdf (Accessed: 27 November 2015).
  2. IBM (2012) Target operating model accelerator. Available at: http://www-01.ibm.com/common/ssi/cgi-bin/ssialias?htmlfid=GBD03161USEN&appname=wwwsearch (Accessed: 27 November 2015).
  3. KPMG (2013) Target operating model. Available at: http://www.kpmg.com/in/en/services/advisory/performance-technology/itas/pages/targetoperatingmodel.aspx (Accessed: 27 November 2015).

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