The rapid acceleration of COVID-19 into a global pandemic that has cost many lives and livelihoods won’t last forever. On the other side of the bridge, firms will either still be in business or have closed their doors permanently. The operating model that made sense pre-COVID will require changes to be competitive in the new normal. This post outlines some potential changes that firms might want to consider.
An operating model is a framework for how a business delivers value to its customers. A trend over the past few decades has been focusing on the core competencies of a business, and outsourcing capabilities to third parties where this is possible so that a firm has a lean operating model and can focus on what it does best and the areas where it adds the most value.
What the COVID-19 pandemic has highlighted is that there are risks from outsourcing and offshoring that require flexibility and quick thinking inside often complex contractual arrangements. For firms that have their locations offshore, the movement restrictions will have reduced the capability of these teams unless investment in people, processes and systems was made well before COVID-19 arrived.
A firm will need to design a new target operating model to reflect the higher risk aversion and control over your value chain that boards will demand from senior executives. ESG risk is more important now, and in the new normal, than it was at Davos earlier in the year.
Institutional investors will expect great improvements in responsible corporate behaviour and efficiency. Employees will expect a strong focus on a safe workplace and measured changes to employment as opposed to indiscriminate cost-cutting. Regulators will expect compliance projects to deliver, even if deferred, and more regulation in many areas is likely to emerge in the new normal.
This scenario paints a picture of an ever more complex operational environment in which to design your new target operating model. For firms that were already struggling with people, processes and systems before COVID-19, this crisis could end them. The uplift in capability required for your *entire* workforce to be able to work remotely for extended periods will be beyond the constrained resources of many firms.
This remote work drive ignores the fact that two-thirds of the economy *can’t* work from home because of the type of work they do – for example, construction or in-person service at a retail store. The higher level of social scrutiny will mean standard responses to crises will face serious social media and political backlash if firms implement them. Already, those who are missing out on help because of the “lines in the sand” drawn by politicians are a major social unrest risk factor.
Because the core focus of the target operating model design is about delivering value to customers, the products and services that a firm offers will be adjusted. If firms are more conservative, risk-averse, and less willing to spend on discretionary items, your product and service offering will need to offer value-for-money and easily plug-in to existing operating models to win new business. The appetite for multi-year or even multi-month implementation projects will not return unless there are clear drop-dead regulatory deadlines.
The top value streams that your firm delivers to customers will need to be enhanced to reflect the new normal. Firms need to remove friction or pain in their customer experience, which implies high-skill people quarterbacking implementations and focusing on automation of processes wherever possible to reduce the overall cost of delivery and run-cost in BAU.
Simplifying the operating model of a business unit wherever possible, will assist in sustainable cost outs. The organisation design workstream of a target operating model design will need to carefully build the right structure that enables value delivery with no excess FTE requirements but sufficient flexibility to respond to ebbs and flows in transaction volume. Firms will need to work with collaboratively with customers and employees to arrive at this new organisation design. An indiscriminate restructuring that doesn’t consider the end-to-end value stream delivered to the customer will result in poor outcomes for the firm.
The role of location and place in how the assembly of value streams occurs will need to change. If more people are working at home, less office space will be required. Thankfully, because of outsourcing and offshoring, many handoffs between different organisations are already managed remotely through email, video chat, collaboration tools, and conference calls. There will need to be an uplift in the tools available if your firm doesn’t have these because getting people to use their cellphone and desk at home without full reimbursement will become untenable in due course.
The onshoring of all elements of the value stream, wherever possible, is a scenario some boards may ask senior executives to plan for. This will involve evaluating the entire value stream to ensure that end-to-end domestic replication is feasible. Firms will review customers and suppliers equally – it may become uneconomic to do business with some customers.
Some suppliers may find themselves cut out of entire markets overseas because of COVID-19 with no foreseeable way back in as the era of globalisation ends. Governments should be aware of the risk to the economy if entire value chains collapse under the strain of changes made by firms unilaterally as a result of this crisis. The end of business travel for the foreseeable future means that large enterprise sales are unlikely to be cemented which further increases the pressure on firms to cut costs and automate as much of their value delivery as is realistic under the constraints they are operating within.
The post-COVID-19 target operating model will be very different from the digital transformation or cross-functional capability TOM that found favour over the past few years. If you thought that the increase in risk and compliance projects stemming from the GFC and higher levels of supra-national regulation, then you are in for a surprise. Expect an enormous focus on risk management in supply chains and increasingly invasive due-diligence from customers.
For example, if I were advising a firm on due diligence of a potential supplier, a report of how they managed their response to COVID-19 in extreme detail would be a bare minimum expectation. This reporting will increase the timeframe for major supplier changes because firms will have to produce even more collateral and potential customers review it in detail to manage risk appropriately for any changes to components of an operating model.
The different target operating model designs that emerge after this crisis will have simplicity at their core. Wherever a value chain currently hits a border or complex manual handoff, the removal of these frictions will be a core focus of how capabilities combine to deliver value to customers. A higher level of governance, accountability, and assurance around controls and risk mitigants is by higher risk aversion at board-level.
There is also a higher level of ESG risk sensitivity from stakeholders, particularly asset managers concerns about enormous asset price fluctuations. This sensitivity means that any firm embarking on a target operating model design for the new normal must ensure that a responsible operating model is an outcome. A responsible operating model gives boards assurance that ESG risk reduction is part of the target operating model from the start of the program. It will enable the delivery of the revised strategy for the post-COVID-19 world that is a lot more conservative and cautious than it was even a month ago.