How to start building your next-generation operating model

Here is a brief excerpt from an article written by Joao Dias, David Hamilton, Christopher Paquette, and Rohit Sood for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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Each company’s path to a new operating model is unique. But successful transformations are all constructed with the same set of building blocks.

A North American bank took less than two years to shift 30 percent of its in-branch customer traffic to digital channels and dramatically reduce its brick-and-mortar footprint. A European cruise line redesigned and relaunched five core products in nine months to increase digital conversions by three to five times and sales by 150 percent.

These companies have been able to transform because they have developed next-generation operating models that provide the speed, precision, and flexibility to quickly unlock new sources of value and radically reduce costs. The operating model of the future combines digital technologies and process-improvement capabilities in an integrated, sequenced way to drastically improve customer journeys and internal processes.

Lean management has already played a significant role in putting in place processes, capabilities, and tools to improve how businesses operate. But the digital age has increased both the opportunities for businesses who know how to react and the difficulty of getting it right. For one thing, tasks performed by humans are more complex, whether it’s accessing information in multiple formats from multiple sources or responding to changing market and customer dynamics at ever-increasing speeds. And as an increasing number of tasks become automated or are taken over by cognitive-intelligence capabilities, companies will need to take many of the lessons learned from lean management and update them. Like a sprinter who needs all her muscles to be finely tuned and working in concert to reach top speeds, fast-moving institutions must have a system to continually synchronize their strategies, activities, performance, and health.

But how? Many institutions understand the need to change how they work and have embarked on numerous initiatives, yet few have been able to get beyond isolated success cases or marginal benefits.

We have found that companies that successfully build next-generation operating models do two things well. They focus on putting in place the building blocks that drive change across the organization, and they select a transformation path that suits their situation. These practices don’t apply only to companies that have yet to start their digital transformation. In our experience, even companies that are well along their transformation journey can pivot to putting in place a next-generation model that delivers massive value while significantly reducing costs.

Building blocks of the next-generation operating model

Whatever the path companies choose to develop their next-generation operating model (a subject we return to later), we have found there is a set of building blocks of change that successful leaders put in place. Think of them as the mechanics of change—elements needed to underpin the development of the operating model. Given the dynamic nature of digitization and the fast pace of change, it’s important not to think about perfecting the implementation of each building block before the operating model can function. The process is highly iterative, with elements of each building block tested and adapted to grow along with the model through a constant evolutionary cycle.

[Here’s the first of four building blocks discussed in this article.]

Building Block #1: Autonomous and cross-functional teams anchored in customer journeys, products, and services

Successful companies constantly rethink how to bring together the right combination of skills to build products and serve customers. That means reconfiguring organizational boundaries and revisiting the nature of teams themselves, such as creating more fluid structures in which day-to-day work is organized into smaller teams that often cut across business lines and market segments. This approach includes empowering teams to own products, services, or journeys, as well as to run experiments. These organizations are also becoming nimble in how they build skills across their teams by making “anchor hires” for key roles, setting up rotational and “train the trainer” programs, and committing to ongoing (often weekly) capability building and training for key roles.

Many insurers, for example, are dismantling traditional claims and underwriting units and reconstructing them to embed subject-matter experts such as lawyers and nurses into service groups. In the best companies, these teams also work side by side every day with technologists to design the tools and technology to improve efficiency and effectiveness.

Iteration is crucial to making this approach work. Leaders test various team configurations and allow flexibility in response to changing customer needs. One credit-card company, for example, shifted its operating model in IT from alignment around systems to alignment with value streams within the business. Cross-functional teams were pulled together to work on priority journeys and initiatives to deliver on the value stream. These changes dramatically simplified the operating model, lowered direct leadership expenses, and contributed to a 200 percent increase in software-development productivity within three months.

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Here is a direct link to the complete article.

Joao Dias is a partner in McKinsey’s Cologne office; David Hamilton is an associate partner in the Detroit office; Christopher Paquette is a partner in the Chicago office, and Rohit Sood is a partner in the Toronto office.

The authors would like to thank Somesh Khanna, David Wilkes, Alex Singla, Rohit Bhapkar, Zachary Surak, Marta Rohr, and Andy Eichfeld for their gracious support and expertise in creating this article.

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