A Critique of Deloitte’s Thoughts on Operating Models

I have just read one of the better articles on operating models.  It is from Deloitte, and it appears to describe their approach.  I recommend it to you because it is relatively easy to understand (if you skip over the jargony, fluffy bits), and because, in my view, it has some important flaws.

Let me explain.  First the article suggests that the journey from strategy to success involves – strategy, business model, capabilities, operating model, people/process/technology – see exhibit (if it is a bit blurred, please go to the original in the article)

This use of language relegates the word strategy to what others typically call vision or mission; and the phrase business model takes up the space that others typically call strategy.  There is also an interesting step – “capabilities” – between business model and operating model, which I want to say more about.  Lastly, people, process and technology is seen as separate from operating model.  Whereas most of us think of people, process and technology as the heart of operating model.  The point I am trying to make here is that you need to be thoughtful about consultant frameworks: challenge them; make sure you understand them; look for gaps, overlaps, language differences, etc.

The flow of questions behind the framework seem logical and sensible.  But, how can you answer the question “who has ownership and decision rights?” without having first defined an organisation chart?  How can you decide which capabilities to buy in before you have defined the operating model?

Moving on to the capabilities box.  The authors are clearly influenced by the Enterprise and Business Architecture view of operating models, which places the concept of capability in centre stage, along with the concept of a capability map.  They provide a very accessible exhibit explaining Deloitte’s version of these two concepts (I suggest you go to the original in their article).

 

My concern here is that capabilities are being defined away from their operating model context.  Lets take “consumer marketing” (top of fourth column), which is presented here as a capability within the function Marketing.  First, this display, encourages the idea that there will be a function “marketing” rather than some other configuration.  Second, having only one capability titled “consumer marketing” encourages the idea that this is only one capability.  In my experience, consumer marketing for ice cream is a very different capability from consumer marketing for spaghetti, which is different from consumer marketing for knitwear.  By this I mean that, if you took someone who is a good consumer marketeer in one of these sectors and moved him or her to one of the other sectors, he or she would on average fail to perform well, without learning new skills.

It is for this reason that the Operating Model Canvas focuses on value chain maps rather than capability maps.  I believe that you first need to understand the different customer segments you want to serve and the value propositions you believe will succeed in these segments (this is what I call strategy).  Then you need to define the work processes (value chains or capability chains) needed for each of your value propositions.  This gives you an understanding of the work (capability) in its context (value chain).  So if you want to sell ice cream, spaghetti and knitwear, you will have three value chains and are likely to have a work step in each of these value chains called “marketing”. You can then consider whether some of the capabilities in different value chains (e.g. consumer marketing across these three different products) are similar or not.  Configuration (value chain), I believe, comes before capability analysis, not afterwards.

So, my flow from strategy to success might be something like this: mission/vision/values; strategy (what, to whom, how will we get advantage); high-level operating model (value chain first, then organisation model, then other elements including location and sourcing); then high-level financial model to make sure the high-level operating model is viable; then more detailed operating models for those critical capabilities that are to be delivered in house.

This flow differs from the Deloitte’s flow in a few ways:

  • There is no business model step separate from strategy or operating model. If you use the business model canvas, then strategy deals with the right-hand side (value propositions, target customers, channels and customer relationships) and operating model deals with the left-hand side (activities, resources, partners).
  • There is no “capabilities” step separate from the operating model work. The two are intertwined, and much of the capabilities work is done at a lower level of detail
  • There is a recognition that operating model work needs to be done at multiple levels: high level for the whole organisation, medium level for each function in the organisation, low level for each department or capability in each function.
  • There is a financial model step – as in the business model canvas – which needs to be done when strategy is being developed, then repeated for the high-level operating model, and so on.

I may seem rather critical of Deloitte’s article. But, actually, I rather like its clarity and willingness to convert ideas into visuals.  I particularly like some of the material in the section “Where does work get done?”, which is not about location, rather it is about outsourcing and building capabilities.

Thank you Kwan, Schroeck and Kawamura.  It would be great to meet up and debate these issues.

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 Capabilities, OM frameworks and tagged , , , , , , . Bookmark the permalink.

4 Responses to A Critique of Deloitte’s Thoughts on Operating Models

  1. davidwinders says:

    There are multiple points made in your critique. I will focus on a few.

    High level capabilities are not very helpful. If they encompass multiple capabilities, they should be split out. What the issue is here is that unless capabilities are mapped to a sensible level of detail then you are correct in your view. But if capability mapping is done properly, which takes a lot of work, then it does a good job.

    Both the capability method and your value chain approach work. The business architecture guild connects capabilities through its value stages to its so called value streams – so it is using value chains too. The guild promotes capability maps as the best practice route and is fairly inflexible in using anything else. I don’t agree. You can get to an operating model via several techniques as you demonstrate in your book and training.

    The model as presented in the article is quite linear. Agreed, I think that a strategy is more than just vision and mission. The business model is part of a strategy declaration and you need the cost side i.e. the operating model to communicate the strategy; so it is all iterative and recursive.

    In the real world you are reworking the strategy as you drill down into the operating model. The operating model confirms or disproves the strategy. The business case may well evaporate if the underlying cash flow fails to deliver.

    • andrew campbell says:

      David, I did a bit of editing of your comment, before replying. Please comment if I have misunderstood.

      Yes, I agree that most methods work if used well. But, I think some are more difficult to use well, and some bias the analysts thinking, making a less good outcome more likely. So, for me, it does matter, particularly for those who are less experienced. It is a bit like golf. There are many ways to get the ball down the fairway, but, especially if you are starting out, some ways of swinging the club are more likely to lead to a good outcome.

      My concern about the capability approach is that it causes analysts to see one capability when there are many and to see opportunities to centralize that are mirages (the negatives are greater than the positives). The benefit of the value chain approach is that it focuses attention on the core operating work flow that are needed to deliver value to the chosen customer segments – and this surely is a helpful starting point. It has served Lean well. I think it would help Business Architects and Enterprise Architects too.

      You point out that high level capability definitions are not very helpful. But I don’t see how you can start with low level definitions, without getting swamped in detail. You need some high-level way into the problem. For me, value chain mapping is the high-level way into the problem that is most helpful and links most powerfully with the strategy.

  2. I think that if you identify ice-cream, spaghetti and knitwear as products in the business model phase then you’re likely to acknowledge that the marketing capabilities might need to be different when discussing capabilities. Of course, with such a diverse portfolio it might be optimal to have marketeers that were experts in one product and less perfect in another.

    In summary, I’m not sure that the Deloitte approach needs more comment than just ‘oh dear,not another method. Don’t we have sufficient already’ ? It’s time to move on from the model vs model and approach vs approach discussion and let the practicioner choose model and approach. The real problem comes in organisational resistance to change.

    • andrew campbell says:

      A couple of comments. As you will see from my blog, I like to read about other models because it helps me spot whether the model I use is biased or not. I think practitioners should do the same. You are right that spaghetti and knitwear are pretty different, but what about low cost air travel and full service air travel or mass market perfumes and luxury perfumes? The capability approach does not provide a way of deciding whether the consumer marketing capability is different or not (at least not until you get down to level four analysis). I prefer to presume they different because they are part of different value propositions … and then explore whether there are significant gains from combining or linking them.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s