7 out of 10 of our clients have the need to clarify their corporate operating model, and half of them don’t know it or recognize it, jumping straight to restructuring or tactical RACI (Responsibility, Approval/Accountability, Consult with, Inform) governance work.

stock-photo-27242128-strategy-on-blackboardOperating Model Strategy is about explicitly defining the governance of the company, defining the role of the corporate center with respect to the other business units, functions or regions of the company.  Without this defined Operating Model Strategy, misalignment plays out in frustration, confusion and power plays across the organization.

This seems to be a more prevalent issue with mid-cap companies in growth mode, out growing their historic way of running the company.  A few weeks ago we were with the top 25 leaders of a rapidly growing mid-cap company.  With growth through M&A and international expansion, they were in need of clarifying how the organization needed to operate in an expanded and more complex organization.  The informal relationships between the corporate folks and respective Business Units and Regions could no longer be sustained.  Allowing the various organizations to “work it out,” resulted in a broad range of understanding and mixed agreements between groups about how they would interact, make decisions and define accountability, which created greater confusion and frustration. They needed to define the macro operating model to guide these relationships and accountabilities.

We often see organizations jumping to RACI or RASIC (tools to define roles, responsibility and interactions between groups) work to resolve conflicts, decision-making and accountability issues.  This is a symptom of a larger issue, which must lead work on detailed governance work like RACI, or it will perpetuate mixed models and understanding across the company.  The productivity and synergy of the firm will be negatively impacted as a result.

This is a significant change management issue and must be approached as such.  The operating model of the company defines the respective power, roles and accountability of the organization and its leaders.  Whenever power shifts or gets defined, protectionist behaviors come into play, many times through unproductive games.  Engaging the organization’s leaders in a process is critical to buy-in, support and full synergy.

Lastly, strategy should lead the discussion around the Operating Model.  Should you choose a Holding Company, Federated or fully Integrated Operating Model?  Well, that depends on the advantage you get in the marketplace across the businesses in your portfolio.  Berkshire Hathaway has chosen to be a Holding Company, with a small corporate center that acts as a portfolio manager over wholly independent companies – seeking no leverage across those companies.  GE has chosen to be a Federated Company with a corporate center that has selected specific areas of the companies to be common across all divisions – seeking advantage with common culture, shared talent and leadership, financial planning process/systems, etc.  GE Divisions have their own customer and market strategies given the uniqueness across their respective businesses.  McDonalds has chosen to be a fully integrated company – seeking a single brand, culture, common practices and processes across all stores – seeking advantage with one brand experience and efficiencies and common ways of working across the company.  Regions are able to adjust locally to different customer preferences – so menus in New York, Beijing or San Palo can differ based on local differences.

These operating model choices don’t fall cleanly into three buckets, but, rather, across a continuum of variations determined through a set of criteria or guiding principles agreed to by the leadership of the company.

There are a series of implications for all of these respective operating model choices, often overlooked or under appreciated.  Most common is the lack of definition and accountability for the changes in leadership behavior and skills needed to implement the new model.  Next, is insufficient depth and detail in the implementation of the operating model through the structure, processes and roles in the organization.  Last, is the definition and alignment of culture in support of the strategy, operating model and behaviors required to optimize the organization.

The punch line is, don’t take short-cuts and invest in thoughtfully defining the strategy, operating model, structure, common or shared capabilities of the company, with attention to the change management, behavioral and cultural alignment needed to implement, optimize and sustain the defined organization to gain the marketplace advantage desired.