We all understand the importance of strategy. And we also pay close attention to the structure and size of our organizations. But there’s something more important, but less visible, that often gets short shrift: our organization’s operating model.
Yet, ineffective or unsuitable operating models, we have found over the years, are among the main reasons that some organizations, even those with the most-inspired and brilliantly conceived strategies, frequently fall short in the all-important “results” category.
Realizing that, it’s somewhat of a mystery why so many senior executives seem flummoxed when we ask them to discuss their operating model. On one level, it may be understandable: because an organization’s operating model has many moving parts. It’s complicated. On another level, it’s concerning, because an organization’s operating model is so critical to its success.
What Is An Operating Model?
In short, the operating model is how the organization arranges itself to make decisions, do work, and meet the needs of those it serves. It’s everything that comes after the organization’s mission or vision, value proposition, and strategy. It’s the mechanics of the organization: what makes it tick.
But it’s not just mechanics. An operating model is a living thing; it evolves with the needs of the organization and the requirements of its strategy.
Though it’s not a perfect example, consider the pro football teams we see in action each weekend. On a schematic, the teams are all more or less equal. The size and structure of the teams are virtually identical. In the National Football League, each team’s roster is limited to 53 players, 48 of whom are allowed to suit up on game day. Only 11 players from each team can be on the field at any one time. Both teams have strategies for achieving victory. But only one team will win: the one that uses its assets most effectively with the greatest consistency—in other words, the one with the superior operating model.
An organization’s operating model, in effect, is how it has organized and wired itself to effectively do what it does: in the case of businesses, to win clients or customers and make money. In the case of football teams, to win games, fans, championships, and make money.
Major Elements Of An Operating Model
Structure is just one component of an operating model. More important, perhaps, are the people, processes, practices, behaviors and incentives that push the organization to achieve its goals.
Let’s focus on people: the leadership and talent.
In the real world, two of the most-common operating models are: 1) the centralized version, where there is a formal command structure and everybody is expected to align their activities with the game plan laid out by the person or persons in charge (as in the military), and 2) the more loosey-goosey operating model, where second- and third-tier leaders have a significant degree of autonomy, with the concomitant credit or accountability that accompanies success and failure.
A central question in both cases is the same: Who has decision rights; who gets to make what choices?
There is no right or wrong. Whichever path you take, your leadership and talent capabilities need to align with your operating model. A centralized operating model will fail with an indecisive leader at the controls. A decentralized operating model won’t work well with a know-it-all or a control freak in charge—or with teams that are incapable of acting autonomously.
Return to the football analogy. On some teams—especially those with relatively inexperienced quarterbacks—the coaching staff calls the offensive plays. The quarterback typically improvises only when the play called by the coaches breaks down—or when the defense lines up perfectly to stop the called play. On other teams, the quarterback—the on-field leader—makes all or most of the play-calling decisions. Improvisation is seen as an asset—a key component of the team’s operating model—rather than as a weakness.
To repeat, there is no right or wrong. But each model requires appropriate people, processes, behaviors and practices.
They also require the right incentive structures to incentivize and reward employees to all pull in the right direction.
Another important operational decision involves the question of integration versus specialization. One company that handles this especially well is the Danaher Corporation, whose operating model has been internalized and formalized in the Danaher Business System, which, according to Danaher’s web site, is the key to the conglomerate’s success. “We view all work through the lens of DBS—constantly learning, iterating, and improving ourselves,” Danaher proudly states.
Big Blunders Leaders Make
As we all well know, everything always works exactly as intended on paper. In life, not so much. Plans go haywire. People mess up. The lights go out. Bosses blunder.
What are some of the big blunders bosses make?
1.They assume that structure can solve everything.
2.They don’t communicate the plans clearly.
3.They don’t align their people with their plans.
4.They ask people to do one thing (e.g. collaborate, innovate), but pay them to do another.
5.They seem flummoxed when asked to describe their operating model.
Every organization should review its operating model regularly. What better time than the end of the year?
The Year-End Review
Ask: Are we precise about what we really need to achieve in the next two years?
Clarify decision rights: Instead of job descriptions, be precise about who is able to make what decisions.
Look for contradictions between what leaders want people to do, or what the strategy requires them to do, and what you pay them to do.
Then, pay them for what you want them to do and reward them for doing it successfully.