Why Every Company Needs an Operating Model [+ Steps to Build One]

If you are running a business, odds are, you’ve already figured out your business model.

It’s usually the first thing entrepreneurs build out, as it’s key to figuring out the value you’re bringing to the market and consumers.

But what about your people, processes, systems, and technology? Those are all key components of your business that should be outlined in your operational model.

Let’s dive into what an operational model is and how it compares to a business model, plus cover the steps to create one today.

What is an operating model?

An operating model is a visual representation of how a company runs. It includes everything from how the company sources its products to how it structures its business areas and departments. An operating model serves as a blueprint for executing your strategy.

Many people confuse business models with operating models. However, they outline different things and serve different purposes.

A business model outlines how a company captures and offers value through its products/services, value proposition, customer segments, key partners, etc. An operating model, on the other hand, lays out how a company will run in order to deliver that value.

So, in simple terms, a business model looks at the what. An operating model focuses on the how.

Let’s take the example of a fictional lifestyle business called EarthBound. Their business model will describe their sustainable and eco-friendly approach as their value proposition, outline their various product lines, lay out their customer channels through brick-and-mortar and ecommerce stores.

Their operating model will focus on how they source their products, the roles they need within the company, the systems they use in each business area, their data management plan, and more.

Unsure why you should design an operating model? Here are the benefits:

• It helps you identify the systems and structure necessary to serve your customers in a way that’s in line with your larger strategy.
• It’s a blueprint for how resources are organized and operated so, that serves as a baseline from which to scale your business.

Operating Model Template

When you build out your operating model, you focus on three key elements: process, people, and technology.

There are two approaches you can take: role-based or process-based.

When you take the role approach, you design your operating model based on hierarchy and the roles within your company. With a process approach, you focus instead on the journey to deliver value to your consumers.

The template you follow will depend on what makes the most sense for your business based on strategy. For instance, say you’re reviewing your operating model because you’re considering restructuring or reallocation of resources. In this case, a process-based approach may work best.

What You Need To Build Your Operating Model Design

You have to start by asking yourself: "How do we manage our resources to effectively run our business and deliver our services as intended while meeting our goals?"

As you start to think about that, focus on each area outline here.

1. Strategy

To build your operating model, you first need to be clear on your strategy.

This is because your strategy and core priorities will inform your operating model. Once you define it, the next step is creating a set of design principles.

Bain & Company, a global management consulting firm, suggests drafting a list of around seven statements that outline what your company must do to execute your strategy. This will serve as an anchor as you build out your model.

Anyone on your leadership team should be able to state these concisely and clearly using simple language. Here are a few examples:

• Standardize the customer experience across all regions.
• Reduce siloes and align the organization on key company priorities.
• Transition to digital-first approach.

2. Systems and processes.

For any company to run smoothly, they need systems and processes.

When creating or reviewing an operating model, you need to fully understand the inner workings of every business area.

What business systems are in place in X department? What hardware and software do they rely on?

As you think about these questions, make sure you consider both internal and external tools that your organization relies on.

This means knowing what every department needs to succeed in its roles. For instance, EarthBound’s finance department handles activities like invoicing, accounting, payroll, and billing. Going deeper, this means they may use software like Quickbooks.

The marketing team is likely responsible for lead generation and brand awareness through content, social media, paid advertisement, and more. As a result, they rely on tools like Casted to achieve their goals.

Once you know the systems and processes, you can figure out how it fits into your strategy and what changes can or should be made.

3. Organizational Structure

Over the years, new methodologies have been introduced that invite business leaders to revisit their organizational structure and make changes to their operational model.

One big shift in recent years has been how companies tackle projects. In the past, companies followed the waterfall methodology, which organized projects in linear, sequential phases. Today, many companies prefer the agile methodology, which is iterative and offers more flexibility.

Each framework is unique and comes with its own advantages and limitations. As such, it’s important for a business to know what direction they want to head in as they develop their operational model.

4. Talent Management

You can’t have a successful company without talent.

As you develop your operating model, one important question to answer is, "What do your teams look like?" and "What does success look like in every role?"

In this phase, you’ll want to understand the key roles and responsibilities needed to run the business and how those roles will evolve over X period of time.

Furthermore, you should also have a clear culture code that outlines the norms and behaviors you expect from your team and the values you celebrate.

These elements seep into other areas of your business and as a result, are incredibly important when working on your model.

5. Technology

As we’ve seen in recent months, the world is constantly changing.

More teams are remote than ever before and companies are investing in virtual tools like video conferencing and messaging. With this shift comes a need to have the technology to support growing global teams.

Beyond that, there is also the business technology needed to keep everyone in sync. Too often, companies suffer from siloes and have difficulty creating cross-functional teams. By understanding how you envision your team operating, you can seek out software that meets those needs.

Building your operating model is essential in maintaining the health of your company. Whether you’re just now creating one or revisiting an old one, doing so will help you better understand how to execute your strategy.