The History And Evolution Of The Operating Model
In business, the operating model is touted as a key in realizing strategy and vision. We typically come across an operating model when companies scale or adapt to customers’ needs and to market conditions. We have participated in its design, by describing the current state (as-is) or by prescribing the future state (to-be). We have been involved in its implementation, by bringing to life processes, organization structures and IT systems. Popularity of this topic has spurred a lucrative industry of internet articles, management books, executive courses, and consultancy services.
Discussions about operating models are rife with jargon. “The right operating model serves as a bridge between strategy and effective execution”. More attractive to the bottom line, “a winning operating model converts strategy into results”. Yet, it is hard to describe exactly how operating models work to bring about business outcomes such as increased profitability and customer satisfaction.
Unlike established concepts such as business models, operating models describe many things for different purposes. In management consulting, an operating model “serves as a blueprint for how resources are organized and operated to get critical work done” (Bain and Company) or “represents how value is created by an organization — and by whom within the organization” (Deloitte Consulting). For Tesco, a retailer, “[t]he operating model describes our processes, how we organize ourselves around those processes and the systems we use to execute them”.
Amid this technobabble, it is useful to step back and review the history of the operating model. We trace its evolution from the industrial revolution to the present to help us reframe how operating models are deployed in organizations.
The Industrial Revolution
A machine for “watering Turnips or other Drill Crops” was publicized in the February 1820 issue of The Farmer’s Magazine. This machine had been invented by Mr. John Young, a surgeon in Edinburgh. To demonstrate how a 200-gallon machine would work, he had built a much smaller, 5-gallon operating model. Successful tests were conducted on the model, and it was inferred that a full-scale machine would work as described. Mr. Young was awarded five guineas and commended for his “ingenuity in its invention”.
In the following century, operating models were physical constructs for engineering use. There are records of operating models of pumps, hydraulic gates, and electric motors. These scaled-down devices, also known as field or working models, mimicked how increasingly complex machines work in real life. These contrast with less nimble laboratory models, which were often used as mock-ups. In a 1915 patent trial, a wooden model of the motor controller in dispute had to be substantiated with lengthy cross examination for its intricate mechanisms to be adequately understood in a verdict.
Usage in the 20th Century
Gradually, the operating model was adopted to represent abstract systems beyond machinery. The United States Department of Agriculture (USDA) constructed a physical operating model that illustrate how rats transmit disease and methods of proofing homes against these pests. Operating models were used to study complex systems and behaviors in many scientific disciplines. Its applications ranged from agriculture (fishery dynamics) and environmental science (air quality control) to social science (welfare).
For non-physical systems such as social systems, the distinction between an operating model and a “regular” model is distinct. A “regular” model represents all or significant elements of a complex structure or process, usually as charts or diagrams. An operating model additionally allows for the manipulation of these elements and their relationships. This may involve simulations where people play roles and interact with each other, often using a computer. Operating models in social science help explain and predict behaviors, and examine interventions that cannot be experimented on, such as nuclear war.
21st Century Discourse
In the early 2000s, the operating model exploded in public discourse. The Ngram below shows an exponential increase in the appearance of the term “operating model” in English language publications. Nicola Bateman, associate professor at University of Leicester, speculates that a commercial organization may have been the first to use this term in a business context. The dominant perspectives of operating models currently come from three sources: academics, corporations and consultancies.
Occurrences of “Operating Model” in English Language Publications. (Source: Google, retrieved March 2021)
Formal research of this subject is limited to the context of IT. Jeanne Ross, an MIT researcher, is often cited as the first user of “operating model” in contemporary academic literature. Ross proposed that companies should define an operating model to maximize value from IT investments. More recently, Harvard professors Marco Iansiti and Karim Lakhani explored digital operating models as companies adopt advanced technology such as artificial intelligence. They described an operating model as “all the assets and processes [a firm] uses to deliver the value it promises to its customers”, centered around digital technology.
This technology view of operating models has been adopted commercially, in briefings by corporations such as Prudential, Tesco and Boeing. The broader idea has also been co-opted for non-IT business areas such as operations management. Ford, the automobile company, overhauled its operating model as part of a business turnaround. The changes adopted were operational and organizational: reshuffling business units, realigning teams’ accountabilities, and changing employees’ behaviors.
Outside of IT, understanding of the operating model remains implicit. The term is loosely used to summarize systems of operations within an organization. Definitions and frameworks vary based on the sectors — manufacturing or servicing — that an operating model is designed for. Unlike its engineering and social science counterparts, we cannot rely on operating models to predict business performance. Operating model audits, which assess how well operating models translate into real-life operations, are unproven against bias and noise. Conclusions about a company’s strategy and operations made on this basis are, therefore, highly subjective.
Like any tool, we need a sharper understanding of the operating model to wield it proficiently. We need to understand how it works to solve business problems and recognize its limitations in doing so. Otherwise, operating models will persist as addictive jargon marketed by consultants and executives, instead of a remedy against corporate ills.