By Liqueo Director, Craig Hammet.
In recent years, The Target Operating Model (TOM) and its associated Transformations have become increasingly prevalent in the Asset Management community. Seismic shifts in the market since the 2008 crisis - driving the search for yield, the assimilation of alternative asset classes and Mergers and Acquisitions - have made the running of TOM programmes almost mandatory. Other factors, including greater consumption and utilisation of data, technology enhancements such as Cloud have further increased the need to run more TOM programmes.
At Liqueo, we firmly believe that any large transformation exercise will need a review and a change in your operating model. To help guide you through the process, we’ve created our series of papers - starting with Why Your Operating Model Should Change.
Over the course of eight weeks, we will present further TOM associated papers, such as Outsource vs Insource, Managing Your Technical Debt, and Ways of Working (looking at Agile and traditional Waterfall delivery models). The purpose of these papers is to provide insight, while enabling you to achieve your set strategic goals and maximise the value proposition & ROI.
The strategy of a business should articulate its purpose or goal and help ascertain that business’ definition. How to execute this strategy and achieve the desired outcomes is the Target Operating Model (TOM).
The TOM is a future state model that only exists after a transformation stage. It describes how to manage, deploy and execute the resource capital of the organisation to achieve the strategic goals and maximise the value proposition.
An important point is that TOM should not be static. It must have resilience embedded into the design to ensure that, whether due to internal or external factors, change can be assimilated into the TOM so that value proposition for the business is retained or ideally expanded.
A key challenge is designing and managing the change of the TOM elements to achieve the desired outcome. These changes could be structure, geographical location, roles & responsibilities, governance, culture, human resources, technical resources and suppliers. Ideally, it will include a collaborative process, which solicits feedback from stakeholders across the enterprise.
Embarking on a TOM transformation without the strategic drivers that clearly solve for the problem statement, often leads to the reshaping of the existing process or a system change. This can lead to the lost opportunity to capitalise on the mobilisation and momentum of the organisation. In this instance, the transformation costs rarely yield a return on investment, and often the organisation can be left in state of change fatigue and disillusionment.
There are no hard and fast rules for a TOM blueprint. What is a good fit for one organisation may not fit another. Below are some suggestions on what to consider. Organisations with clearly defined goals are better able to align these considerations to a high-level blueprint and design framework, before embarking on the detailed design.
Scale is important: Larger asset managers tend to have a traditional front, middle and back-office model. This means that a TOM transformation could be centred in any of the three areas or across the current full operating model. Mid and smaller sized managers may have a mixture of outsourcing and a simplified Front with combined Middle and Back office. This can drive a different TOM process. Where outsourced Middle/Back Office exists the TOM may potentially be contained by what the outsource partner can provide.
Timeline expectation: Executives should not try and divorce the existing decision-making timelines from the transformation to the TOM. A firm that is measured in the decision timeliness will likely remain so during the transformation phase. If anything, given the level of change, one should expect longer timeframes. A large global Asset Manager may well take a 4-year time horizon whilst a small Manager might take 1-2 years.
Political culture: It is crucial that political bias to the incumbent operating model does not override either the clear definition of the strategic goals or the articulation of the design framework. Additionally, any bias due to political power centres that may overstate influence into decision making should also be monitored. Executive teams that recognise these risks and institute a failsafe mechanism tend to achieve a higher success rate rather than just restating the existing operating model.
Design Framework: The core question of how to manage and deploy the firms’ resources is often the more difficult aspect of a TOM transformation. The approach to collating the information for the design will depend on the organisation’s preferred approach (i.e., workshops, share documents, offsites, use of external partners, suppliers etc). What is critical is the imbedding of a clearly established, functioning feedback mechanism to ensure the design reflects modifications and changes in strategy.
Resilience: There are many disruptors in the Asset Management industry, such as inflation/interest rates, AI, the pivot to private equity, migration to cloud technologies and regional conflicts. Therefore, time and consideration must be given the core ability of the TOM to respond to change with agility and minimal cost impact.
How to approach a TOM transformation?
Those firms that have invested the time in understanding the problem statement and alignment with strategic goals are often more adept in answering the core question of ‘what do we do?’
This question has several possible answers:
Do nothing for now.
Continue to do what we are doing but do it better.
Change what we are doing.
Option a) Often a valid response given both the firms’ internal activity and macroeconomic considerations. This often has the lowest short term cost implication but may result in the highest negative value proposition impact in the medium to long term.
Option b) This option often leads to a combination of both Operating Model and IT system changes while keeping the existing operating model largely in place. Asset Managers with a separate front, middle and back structure will often segregate the work to a particular vertical segment or use this option for new products or geographical locations.
Option c) This option results in the greatest level of change and requires a different focus on both the planning and execution. This fundamental change can yield the greatest value proposition benefits, however the time to realise the benefits is often longer than other options.
What does good look like?
Whilst evaluating the choice of approach it is important to consider the core attributes that result in an efficient and resilient TOM. Successful transformations, regardless of if it’s option (b) or (c), result in an environment where decision making is empowered and unencumbered, and aligning the correct people for the correct decision is seamless. The boundaries on location, ownership or processes need to be clearly understood. Proper planning with mechanisms must be implemented that communicate clear priorities with an understood feedback mechanism.
The final step in preparing for a TOM transformation is then a correct level of planning and programme management. This will be covered in a future article.
For more information on how we can help with your Target Operating Model Transformation, please contact us.
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