As my continuing effort to learn and share about Organizational and Operating Models, this week I pulled information about the Dell Operating Model. The content posted here is from the Dell Operating Model thesis that was submitted to the Sloan School of Management by Blaine Paxton in 2004. In 2008, Dell drove actions to enhance Competitiveness, and Optimize Operations to improve profitability and cash flow. Like every company that went through growth and revenue adjustments, and organizational realignments because of 2008 financial crisis, the changed conditions may have influenced the current Dell’s operating model as well. However, if we assume that the Operating Model is the foundation for execution of Strategies, the fundamentals of the Core Operating Model should sustain up and down of the market place. To that end, I believe the premise of the thesis around People, and Practices at Dell should still be relevant now in understanding the subject of Operating Models.

Dell’s operating model consists of four assumptions about how people should work:

• Being obsessed with producing results,
• Being flexible in the way work is done,
• Leveraging the value of personal relationships, and
• Encouraging leadership at all levels in the organizations

If Vertical integration is about owning and operating multiple steps in the value chain, then Virtual integration is about owning one step, but coordinating the actions of many steps. Dell and its supplier’s area uniquely configured network of alliances and partnerships i.e. Virtual Integration. One of the core competencies is strategic outsourcing.

Some general management practices at Dell:

• Expecting a high level of personal accountability
• Minimizing celebration / maintaining sense of urgency
• Management teamwork, especially “two-in-the-box” management
• Tightly managing the balance of revenue and growth
• Being able to kill losing projects quickly

One of the interesting methods I noted out of thesis is “Time pacing” which is creating new products or services, launching new businesses, or entering new markets according to the calendar. Time pacing according to Blaine Paxton’s thesis “can counteract the natural tendency for managers to wait too long, move too slowly, and lose momentum”. It also “create a relentless sense of urgency around meeting deadlines” while at the same time creating predictability by giving “people a sense of control in otherwise chaotic markets”.

Is your Operating Model still relevant? If not, what is driving those changes?

“Multi-sided Platform” is one of the business model patterns. Multi-sided Platform brings together two or more distinct but interdependent groups of customers. Such platforms are of value to one group of customers only if the other groups if customers are also present. The platform creates value by facilitating interactions between the different groups. A multi-sided platform grows in value to the extent that it attracts more users, a phenomenon known as the “Network Effect”.

“Network effects” and “Positive feedback loops” are economic terms that describe the snowballing benefits to front-runners in some markets.

For example, the more people that use Google search, the more data the company has, and that data is the raw material for refining its search results further. And the greater its market share in search, the more advertisers wants their ads placed on Google to reach the largest audience. That, in turn, solidifies Google’s position as the dominant ad market, and strengthens its pricing power. According to Bill Gates, “There are several positive feedback loops in this business, and they are particularly powerful”.

A business model describes the rational of how an organization creates, delivers and captures value. A business model dictates the long term and short term strategies for competitive advantage which in turn get translated to Operating model (Business Process, Technology, People, Ownership and Metrics) for execution. One example for “Multi-sided Platform” is developing a gaming platform. The platform’s value for a particular user group depends substantially on the number of users on the platform’s “other sides”. A video game console will only attract buyers if enough games are available for the platform. On use it. On the other hand, game developers will develop games for a new video console only if a substantial number of gamers already.

• From a strategic perspective, one way multi-sided platforms solve this problem is by subsidizing a customer segment. Though a platform operator incurs costs by serving all customer groups, it often decides to lure one segment to the platform with an inexpensive value proposition in order to subsequently attract users of the platforms “other side”.
• From an operating model/execution perspective, the organization aligns the sales, marketing, services, and support functions to deliver margins required by business for success.

Business Models, Strategies, and Operating Models are interrelated.

I am meeting a CIO of a big company this week. The company is making major acquisitions globally. Their goal is to leave each business operating independently with local autonomy to make decisions for growth. Initial information I received is that the CIO will leave the current IT systems alone leaving some room for future functional consolidation – HR, Procurement, Finance/Operations.

Which Operating model is this company going to adopt?

My research and analysis tells me that this company is going to pick “Coordination” Operating model. The product that the company produces is perishable that a common man in the world consumes. They have shared customers – but the packaging and distribution of the product may wary depending on the national factors – culture, currency etc.

Per Enterprise Architecture as a Strategy, the authors Jeanne Ross, Peter Weill, David Robertson –

“Coordination calls for high levels of integration but little standardization of processes. Business units in a Coordination company share one or more of the following: customers, products, suppliers, and partners. The benefits of integration can include integrated customer service, cross-selling, and transparency across supply chain processes. But while key business processes are integrated, business units have unique operations, often demanding unique capabilities. For companies with a Coordination model, low cost is usually not the primary driver in company-wide decisions. Autonomous business heads execute their processes in the most efficient manner possible, but corporate directives and negotiations focus on providing the best service to the customer. Strong central management defines the need for cooperation. Successful companies rely on incentive systems and management training to encourage company-wide thinking at the business unit level.”

IVI has launched the IT Capability Maturity Framework (IT-CMF). The IT-CMF provides a concise management roadmap to optimize business value derived from IT investments. The IT-CMF consists of a five-stage maturity model which is used to organize and structure a framework for mapping IT improvement efforts. The holistic approach of the IT-CMF is shown through four macro process for each of the five maturity stages. These consist of Managing the IT Budget, Managing the IT Capability, Managing IT for Business Value, and Managing IT like a Business. Altogether, 36 individual processes are managed by the framework.

• ITIL is a set of techniques and concepts for helping manage IT infrastructure, development and operations.
• COBIT (ISACA, 2007) is another framework which has attracted significant adoption and has its roots in the information security and auditing domain.
• An extension of COBIT called VALIT (ISACA, 2008) extends the risk management and security focus into the domain of value management.
• CMMI (SEI, 2003) is used often for software development and project management practices in IT organizations.
• The IT Service CMM (Niessink, 2005) applies a CMM approach to the IT service Management aspect of IT and has gained some traction in the Netherlands and surrounding countries.

If you are already applying one or more of other frameworks listed above, how will you use integrate IT-CMF?

Link to the complete article is here.

• Promote employee acceptance of change. Cisco IT addressed change concerns through a variety of awareness and education efforts. For example, employees participated in a one-day workshop to learn about demand clearing basics. This also validated the demand clearing process and provided feedback to the operating model team. Additional workshops, presentations at team meetings, and monthly CIO update presentations also promoted employee understanding and acceptance of the new Cisco IT Operating Model.
• Use the right methodologies for the problem. The design and deployment of the IT operating model used components of multiple methodologies and process frameworks including ITIL (especially within operations and management processes) and Six Sigma/Lean methodologies for cross-functional process design. No single approach had all the answers; a combination of various methodologies gave the best overall result in designing and delivering the operating model.
•  Provide reminders that an operating model involves more than governance. Discussions about a new IT operating model and the associated design of new processes can easily slip into a focus on governance because people are more knowledgeable and comfortable with that concept. Everyone involved in implementing the operating model can benefit from reminders that its focus is more on collaboration than control:  collaboration among diverse Cisco business groups and IT, and collaboration across diverse IT groups, which requires a shift to a broader level of thinking about IT processes, strategies, and decisions. 
• Deploy the new model in stages. Cisco IT executives know that the scope of the operating model meant its changes could not be implemented all at once. Instead, Cisco IT is following a phased implementation and assessing progress against an organizational maturity model. Using a structured approach to the operating model deployment also allows integration with other complementary organizational initiatives.

My question to you – “How do you develop an Operating Model designed for effective collaboration?”

Outcome-based and transaction-based pricing models are models which have been experimented before but did not become main stream until now. The reason for this shift now is the smaller IT budgets due to recession, and the increasing client pressure to share business risk. The newer business models are based on a risk-reward partnership and pricing based on defined outcomes. In such models, pricing is based on a set of results or on the number of transactions, rather on than on typical time and material pricing that is based on the number of man hours spent on a project.

The pure risk-reward models exist on product engineering projects or large capital intensive infrastructure projects. In these projects, the vendor who works on the product for the client is paid based on how successful the product is in the market via revenue sharing models. A similar model has now emerged for large IT service projects, where the client covers only the costs incurred for a project, but beyond that, the payment to the vendor is as a percentage of the profits. Part of the change is also being driven by newer technologies such as platform based BPO, and cloud computing that allow vendors to offer as a service, which were previously meant as capital expenditures in systems and software for the client.

The move from existing effort based pricing to successful outcome based partnership contracts is challenging for both suppliers and client organizations. Some of the key issues that need to be addressed are:

• How is the transaction defined from the beginning to end?
• What determines a successful outcome? Is this different from successful processing of transaction?
• What is the partnership model?
• What are the contract terms? How is the Risk-reward formulated?
• What is the basis for measuring the future value creation?

PRICING MODELS

Outcome-based pricing – This is not based on fully burdened employee cost, but on outcomes. This is risk/reward model. Upfront service-level agreements (SLA) are common and hence clients realize a return on their investment (ROI) much earlier in the engagement. Of course, the drawback is that if you default on a service-level agreement you end up paying the penalty. In fact, clients, too, are building this model in requests for proposal issued to vendors.

Cost-per-incident

Subscription-based pricing

Efficiency-based pricing: Y2 pricing on an engagement is less than Y1 pricing in multi-year engagements, hence increasing productivity.

Other Models – Engagement ramp ups and ramp downs with productivity still enabled.

SHIFT IN THINKING

The real key in generating innovation will come with evolving real KPIs for the customer and the vendor to measure. It will also be necessary to measure the real impact of better IT services on the core business of customer. For that to happen, the client must be realize that IT is a major enabler for generating revenue and profits—and generating major opportunities for core business. However, in most cases, the clients look at IT only as a “necessary cost of doing business” where IT gets clubbed as a cost item and not a value enabler. As long as the client organization look at overall IT (not just the service provider) as an item that has to show a YOY reduction, the benefits of innovative approaches will be hard to realize.

CHALLENGES

Customer Challenges: The biggest challenge is the willingness to lead the organization through the change i.e. shift in thinking described above.

• Conviction at the top and leading the organization through a long-term transition.
• Track record of driving Managed services persistently into the organization.
• Effectively change the way the team leads and the way line managers think and work. The benefits of well executed managed services are many — cost savings, quality, time to market, and better customer satisfaction. This is still very counterintuitive for many IT managers whose experience over the years has been that you can do it faster and cheaper only if you compromise on scope or quality.

Vendor Challenges: Scale itself does not guarantee success in transitioning to an outcome-based commercial model. Discipline and longer term investment in improving the delivery management capabilities of the team, and improving business domain depth for business analysts, seem to matter much more than scale.

Link to earlier post here

A Business Model is a representation of how an organization make or intends to make money. It can also be defined as a simplified description of how a company does business and makes money without having to go into the complex details of all its strategy, processes, units, rules, hierarchies, workflows, and systems.

The interest in business models comes from two opposing sides:

• Established companies have to find new and innovative business models to compete against growing competition and to fend off insurgents.
• Entrepreneurs want to find new and innovative business models to carve out their space in the marketplace

Within this context the business model concept is a particularly helpful unit of strategic analysis tailored to today’s competitive business environment. It helps executives as well as entrepreneurs increase their capacity to manage continuous change and constantly adapt to rapidly changing business environments by injecting new ideas into their business model.

In order to deal with market changes, the companies have to handle five changes that threaten company’s growth:

• Erosion of low-end product segments.
• Erosion of customer segments.
• Erosion of micro-segments.
• Erosion of traditional business boundaries.
• New intermediaries and new control points.

Execution (Performance metrics) determines whether Strategy is working on not, and Execution is dependent on the Operating Model, and Operating Model’s relevance is dependent on Business Model.

Padmasree Warrior, Cisco Systems’ CTO, notes the following predictions in her blog post –

1. Collaboration Networks will be to Enterprises what Social Networks are to Consumers
2. It is not about “on-premise” versus “on-demand”, it will be all about the User Experience
3. Innovation will be redefined by Operational Excellence
4. Organizations without boundaries will drive the next wave of productivity
5. Information Technology will evolve into Information Fabric

Best Buy is basing its future on customer-centric Operating Model. This new operating model will offer customers a richer in-store experience, better shopping assistance, and more products and services. Over time, the goal of the customer-centricity model is to attract new customer segments to Best Buy stores increasing the use of existing assets. In addition, it will give Best Buy an engine for continuing to innovate and respond to changing customer needs.

All stores will adopt some elements of the model, which targets five key customer segments:

• Affluent professional males
• Young entertainment enthusiasts
• Upscale suburban moms
• Families who are practical technology adopters
• Small businesses with less than 20 employees.

All US Best Buy stores will begin to receive the tools needed to implement centricity –

• Employee training in financial terminology and processes
• New customer service model
• Enhanced employee management techniques
• Deeper understanding on individual customer segments

The company believes the profitability profile of segmented stores will improve after the expected three-year conversion process is complete, similar to its historical experience with new store openings.

Procter & Gamble, Starbucks, Dell, Best Buy, Threadless, Microsoft, and Nike have all created digital platforms that allow customers to help them create new products, messages or seek feedback. Starbucks received over 17,000 coffee ideas in the first 14 months since the launch of its proprietary online forum, mystarbucksidea.com. Customers, of course, are increasingly demanding participation. They expect the ability to co-create and lead innovation, and their volubility has forced companies to devise creative solutions to be competitive in a new bottom-up age.

Crowdsourcing is not just limited to marketing materials – in this new era of digital marketing the concept is spreading to embrace software development as well. Same principle – you have a need and someone out there can help you meet that need, it’s just a case of finding them.

My opinion is shift from having a reactive culture to one that’s proactive by seeking ideas from the crowd will be disruptive. Transparency of the ideas generated by the crowd; and accountability – how are the ideas making their way into products; will have to be embraced. Of course, there has to be a delicate balance between encouraging participation and maintaining clarity of overall business objectives. As crowdsourcing continues to accelerate, the biggest question is how it will affect business writ large. But it will certainly usher in radical changes to business models and business systems.