More on business models and operating models

I recently came across Deloitte’s framework for business models and operating models (see exhibit below).   I was quite taken by the framework and began to think about what it is missing and why or whether my framework is better.   It is always good to keep challenging any framework you use because it can become a toxic influence on your work if it is not appropriate.

The first observation is that Deloitte uses the term business model to cover only the front end target customers, channels and the product and service value propositions; whereas I use the term business model to cover the whole subject.  For me the term business model is the big term – like strategy – everything else is a subset of business model.

However, Deloitte’s approach is similar to the approach in Enterprise Architecture.   The term Business Architecture refers to the front end of Enterprise Architecture.  Other components of Enterprise Architecture are Technology Architecture, Information Architecture and Applications Architecture.  Although the split may be a little different again. I think Business Architecture also includes process architecture so it is not exactly the same definition as Deloitte.

Another difference is that Deloitte does not include people or people policies within its definition of operating model.  Deloitte has a separate concept: People Model.  At one level I like this idea because I think there is often some really interesting opportunities that come from re-thinking the people model.  For example, one IT services company set up its operating model to be attractive to women with children working from home.  The company spotted that there is lots of under-utilised talent in this people pool and designed a good business.  In the same way Eden McCallum developed a different kind of consulting company out of the observation that there are lots of capable people with portfolio careers. Mark Warner has built a business model around gap year students.

At another level, this separation of people model from organisation design feels odd to me.  I do not believe that organisation design should be done without taking account of the available people.  In other words the design will change depending on the people you have, particularly at senior levels.   So people and organisation are hard to think about separately.  Hence, I include both as part of my concept of operating model – although I like to encourage some separate focused thinking about the people dimension.

Deloitte’s framework is also missing some things that surprise me.   It does not include suppliers and business partners – for me a vital ingredient to the operating model.   It does not include intangibles, like brand and IP; which for me are also important.  It does not include location, another significant part of the design challenge in my opinion.  Although, in Deloitte’s framework, location may be a subset of “physical assets”.  Possibly Deloitte also include brand and IP under “physical assets”.

Finally, Deloitte’s framework does not include the financial  model.   This maybe because Deloitte’s, being an accounting firm, ssee the financial aspect of the operating model as an integrated part of all the other choices – and hence all pervasive.  However, in my experience it is helpful to do some design work on the financial model as a separate step.   What are the ratios going to look like?  And, how do the ratios work so that there is a good profit margin and a good return on invested capital?

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About andrew campbell

Ashridge Strategic Management Centre Focus on strategy and organisation Currently working on group-level functions and group-level strategy
This entry was posted in Business model, Design tools, Enterprise architects and operating models, Strategy and tagged , , , , , , , , , , . Bookmark the permalink.

2 Responses to More on business models and operating models

  1. Andrew – The notion that a business model is about how to generate mutual value in exchanges with customers or clients makes sense to me. Have a look at Gary Hamel’s model in his book Leading The revolution – this is pretty cool and I use it a lot. In a business model, value exchange means what we (entity) and our customers get out of the exchange – it has got to work both ways in the end for obvious reasons. There is another concept which I like as well which sits at the level of strategy – “business idea”. This is about the intersection of a firm’s capabilities and what the market wants – if these two intersect (or can be made to intersect) then we have a business idea that has strategic merit. The business and operating models then enable this (or not as the case may be!) . I agree with you fully that it is crazy to leave out the value network part – ie partners and alliances. In fact this is an area that now, as never before, has primacy in thinking about organisational design, and I think that how to optimise this is something that is an under developed notion in organisational design terms (ie just let it be or purposefully design it for best effect).

  2. d says:

    Hi Andrew, Deloitte’s operating model isn’t a fixed framework. The version you have above is one of the many many variations. When you work at Deloitte (or any other service firm for that matter) you have access to mountains of template and customised frameworks at your fingertips. I worked there for a while, and never went into a client without researching our knowledge base first, then creating a tailored approach for the client drawing on work produced for similar industries. Sometimes the people policies will be under HR if one is added to the people section, but sometimes it may be more relevant to live under the governance area (with other corporate wide policies). Using the example you’ve provided above, I’d probably create a subset under People, or under Development & Deployment for the people policies, as people policies are part of the staff lifecycle under Development and Deployment of people. Regarding financial model, Deloitte used other frameworks for that, which correctly don’t belong under the target operating model. In a target operating model you are looking at the functions and structure of an organisation. It’s just the name of boxes to consider the dimensions or layers used to build an organisation – it doesn’t name or create the centres that staff are working in such as the Executive team, Finance, HR, IT, and other functional groups. The high level finance and revenue model is an output of the executive branch. You wouldn’t build this in isolation from the people who are going to be charged with running the organisation – you’d be working with the CEO, CFO, and others, who would hopefully have a pretty good idea of what it needed to be.

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