A comprehensive set of frequently asked questions about defining, designing, and implementing a target operating model in the BFSI (Banking, Financial Services, and Insurance) sector.

What is a Target Operating Model?

A Target Operating Model (TOM) is a strategic framework that outlines how an organization will operate in the future to achieve its business objectives. It serves as a blueprint detailing the organizational structure, governance, business processes, technology infrastructure, and people and culture to enable the company to reach its strategic goals. A TOM often incorporates specific elements such as regulatory compliance mechanisms, risk management protocols, and customer service standards in the financial services sector. For example, a bank might develop a TOM that includes advanced cybersecurity measures to protect customer data alongside process optimizations to improve the customer experience.

Why is TOM important to Financial Services Firms?

A well-defined TOM provides a strategic advantage in the highly competitive and regulated financial services landscape. It enables organizations to align their operational capabilities with business goals, creating a roadmap for transformation and improvement. Financial services firms are often subject to frequent regulatory changes, disruptive technologies, and evolving customer expectations. A TOM offers a structured approach to address these challenges. For instance, after the 2008 financial crisis, many financial firms restructured their TOMs to comply with more stringent regulatory requirements and to regain public trust. According to a Deloitte survey, 76% of financial institutions reported that their operating models were not effectively aligned with their business strategies, highlighting the importance of an updated and strategic TOM.

What exactly is an Operating Model?

An operating model is an organizational setup through which a company delivers value to its customers and stakeholders. It encompasses the firm’s structure, culture, policies, procedures, and technology. While a TOM is future-oriented, the operating model represents the organization’s current state. It outlines how resources are allocated, how work flows through the system, and how outcomes are produced. For example, in a financial institution, the operating model might specify how loan applications are processed, customer queries are handled, and investment portfolios are managed.

What are the typical Operating Models across Banking, Financial Services, and Insurance (BFSI)?

In the BFSI sector, the operating models can vary widely but usually fall into a few types:

1. Centralized Model: Common in traditional banking, a central office controls all decisions and processes. This often involves branch networks that report to a head office.
2. Decentralized Model: Mostly seen in asset management or insurance companies where localized decision-making is essential. Units operate independently, providing more flexibility but less control.
3. Outsourced Model: Functions like customer service, data analysis, or even investment management are outsourced to third-party providers. This model is increasingly prevalent due to the rise of FinTech solutions.
4. Hybrid Model: A combination of any of the above models, tailor-made to suit a firm’s specific needs and complexities. For instance, a bank might centralize risk management but decentralize retail operations.

What are the benefits of a purpose-designed Target Operating Model?

A well-crafted Target Operating Model (TOM) is a strategic enabler that allows financial services firms to navigate complexity, adapt to change, and effectively achieve business objectives. For instance, a McKinsey report indicated that banks that implemented a strong TOM saw an increase in revenue by up to 25% and a reduction in costs by 20%. A purpose-designed TOM offers:

1. Strategic Alignment: Ensures that every organizational component aligns with business goals.
2. Operational Efficiency: Streamlines processes, reducing operational overhead and time-to-market for new services.
3. Compliance and Risk Management: A TOM helps mitigate operational and legal risks by integrating compliance requirements.
4. Customer Centricity: Enhances customer experience through optimized service delivery channels and engagement models.
5. Technology Utilization: Aids in the effective adoption of emerging technologies like AI, blockchain, and big data analytics.

What are the symptoms that indicate an Operating Model transformation?

Indicators that suggest an organization may benefit from an Operating Model transformation include:

1. Missed Objectives: Failing to meet financial targets or other performance indicators.
2. Operational Inefficiencies: Sluggish processes, redundant tasks, and high operational costs.
3. Customer Complaints: Increased frequency of negative customer reviews or service issues.
4. Regulatory Sanctions: Frequent run-ins with regulators, including fines or warnings.
5. High Employee Turnover: Staff dissatisfaction leads to attrition and low morale.

In the financial services industry, signs could also include a declining share in a competitive market or the inability to adapt to regulatory changes quickly.

How do Financial Firms identify the Strategic Levers to boost Operating Model performance?

Strategic levers are critical components that, when adjusted, have a significant impact on operating model performance. These typically include:

1. Cost Optimization: Firms often use Activity-Based Costing (ABC) to identify areas for cost reduction.
2. Revenue Growth: Techniques like market segmentation and product differentiation are employed.
3. Customer Experience: Net Promoter Score (NPS) and Customer Lifetime Value (CLV) are often analyzed.
4. Process Efficiency: Six Sigma or Lean methodologies are used to improve operational workflows.
5. Innovation: Investment in R&D for product development or technological integration is considered a lever.

In 2015, Goldman Sachs identified technology as a strategic lever, investing heavily in automating many trading tasks traditionally done by humans. As a result, they saw a 30% reduction in their workforce in that division but increased their trading capabilities substantially.

What are the risks and rewards of a typical Target Operating Model Implementation?

Risks:

1. Implementation Failure: Poorly managed change processes could lead to unsuccessful implementation.
2. Cost Overruns: Unanticipated challenges could inflate the costs.
3. Resistance to Change: Employees may resist the new operating model, affecting morale and productivity.
4. Regulatory Risks: If the new TOM is not adequately vetted for compliance, it can lead to regulatory repercussions.
5. Strategic Misalignment: The new TOM may not perfectly align with business objectives, leading to suboptimal results.

Rewards:

1. Operational Excellence: Improved efficiency and productivity.
2. Competitive Advantage: A well-implemented TOM can provide a strategic edge in the marketplace.
3. Cost Savings: Streamlined operations typically result in cost reductions.
4. Customer Satisfaction: Better service delivery models improve customer experience.
5. Regulatory Compliance: A well-designed TOM ensures that compliance is built into the operating model, reducing risks.

What is the process and approach to defining, designing, and implementing a Target Operating Model?

1. Initial Assessment: Conduct a SWOT analysis to identify current strengths, weaknesses, opportunities, and threats.
2. Stakeholder Alignment: Consult key stakeholders for inputs and to align expectations.
3. Vision Setting: Define what the organization aims to achieve with the new TOM.
4. Design and Validation: Create and validate the TOM blueprint through iterative feedback loops.
5. Implementation Plan: Develop a roadmap with detailed tasks, timelines, and responsible parties.
6. Pilot Testing: Test elements of the new TOM on a smaller scale.
7. Rollout and Monitoring: Execute the full implementation and continually assess performance through predefined KPIs.

We don’t have the internal expertise to embark on a Target Operating Model exercise. How do we do it?

Lacking internal expertise isn’t uncommon and can be addressed in various ways:

1. Consulting Firms: Engage specialized management consulting firms that have experience in TOM development.
2. Skill Upgrading: Train internal teams through specialized courses or workshops.
3. Temporary Staffing: Bring in interim management with experience in organizational transformation.
4. Collaboration: Partner with technology or domain-specific firms that can bring expertise to the table.

For instance, many firms in the BFSI sector opt for consulting services from firms like McKinsey & Co. or Boston Consulting Group to guide their TOM initiatives.

Can we do it ourselves? Can we purchase a pre-built and customizable Target Operating Model DIY Kit?

While it’s theoretically possible to embark on a DIY approach to implementing a Target Operating Model (TOM), the complexities and nuances, especially in the financial services sector, often warrant external expertise. Pre-built and customizable TOM DIY Kits do exist, offering templated strategies, structures, and plans. These can be beneficial for smaller institutions or those with simpler operations. However, given the critical importance of alignment with business objectives and regulatory compliance, most financial services firms opt for a tailored approach. Finantrix.com offers a Financial Services Target Operating Model DIY Toolkit.

What are the best practices for a successful Target Operating Model Transformation?

1. Executive Sponsorship: Ensure C-suite involvement and commitment.
2. Stakeholder Engagement: Continually engage with stakeholders at all levels to gain insights and buy-in.
3. Data-Driven Decision-Making: Utilize performance analytics and KPI tracking to make informed decisions.
4. Agile Methodology: Adopt an iterative approach to allow adjustments during the transformation.
5. Change Management: Implement comprehensive change management protocols to ease the transition.

How can the FUD (Fear, Uncertainty, and Doubt) factors be handled during the TOM implementation?

1. Transparent Communication: Clearly articulate the new TOM’s rationale, benefits, and expected outcomes.
2. Employee Training: Equip employees with the necessary skills and understanding to navigate the new operating model.
3. Pilot Phases: A phased rollout can help build confidence in the transformation.
4. Feedback Mechanisms: Establish open channels for concerns to be raised and addressed.
5. Reward and Recognition: Celebrate milestones and recognize the contributions of individuals to the transformation process.

What are some successful examples of TOM transformation in the financial services industry?

1. HSBC: Adopted a global TOM that centralized many functions, reducing operational costs by 25%.
2. Goldman Sachs: Implemented a new TOM focusing on technological innovation, substantially increasing its trading capabilities while reducing headcount.
3. Fidelity Investments: Redesigned their TOM to shift from a product-centric to a customer-centric model, resulting in an NPS score increase of 20 points.

These are indicative of how well-implemented Target Operating Models can bring about transformative changes, enabling financial services firms to meet strategic objectives, optimize operational performance, and navigate the regulatory landscape effectively.

As a regulated industry, what constraints do Financial Services Firms have?

Financial services firms operate in one of the most heavily regulated environments, which imposes multiple constraints on their operating models. Regulatory requirements such as the Dodd-Frank Wall Street Reform in the U.S. or the MiFID II in Europe necessitate robust compliance and reporting mechanisms. Data protection laws like GDPR further limit how customer data can be stored and processed. These regulations often require substantial investment in legal expertise and technology infrastructure, limiting budgetary allocations for other strategic initiatives. The Basel III Accord, for example, requires banks to maintain higher capital ratios, affecting their risk-taking abilities and profit margins. Non-compliance risks include hefty fines, reputational damage, and, in extreme cases, license revocation—as was the case with Wells Fargo, which faced billions in fines due to regulatory violations.

What are the elements of a Target Operating Model?

A comprehensive Target Operating Model usually comprises the following elements:

1. Organizational Structure: Defines the hierarchy, roles, and responsibilities.
2. Business Processes: Outlines core and support processes, from customer acquisition to service delivery.
3. Technology Architecture: Details the hardware, software, and data capabilities required.
4. Governance and Compliance: Specifies the decision-making authorities and mechanisms for ensuring regulatory compliance.
5. People and Culture: Describes the skills, values, and behaviors that staff should embody.
6. Performance Metrics: Lists KPIs that will be tracked to assess the effectiveness of the TOM.
7. Customer Engagement: Defines the customer journey and touchpoints for service delivery.

In a financial services context, elements like risk management protocols and financial controls could also be intrinsic parts of the TOM.

What are the Phases and Activities in defining and implementing a Target Operating Model?

Defining and implementing a TOM typically involves several phases:

1. Discovery and Assessment: Evaluate the organization’s current state, identify gaps, and define objectives.
2. Design: Develop the blueprint for the TOM, incorporating the elements mentioned earlier.
3. Validation: Involves stakeholder review and refinement of the proposed TOM.
4. Implementation Planning: Draft a detailed plan including timelines, resources, and responsibilities.
5. Execution: Carries out the changes, which could involve restructuring, technology implementation, and process redesign.
6. Monitoring and Feedback: Establishes metrics and KPIs for ongoing performance monitoring and continuous improvement.

Activities include data collection, stakeholder interviews, process mapping, risk assessments, and change management protocols. For example, JPMorgan undertook a TOM redesign to integrate AI and blockchain technologies into their operations, involving a multi-year roadmap and extensive stakeholder consultation.