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Operating model transformations: Not all elements are created equal

Our research finds three elements—governance, culture, and workforce planning—have an outsized impact on organizational efficacy.
Dinora Fitzgerald Dobru

Partners with clients to enable business strategies and drive sustainable change through talent management, organizational design, and operating-model transformations

Caitlin Hewes

Leads client-based efforts to develop cutting-edge approaches to large-scale operating-model transformations and build dynamic, high-performing teams to guide organizations through disruption and change

Patrick Simon

Serves clients on a broad array of topics ranging from strategy to organizational design and transformation across industries, including consumer goods, retail, and fashion; leads our organization design work and helps companies through multiyear organizational transformations, focusing on bringing operating models in line with the realities of the markets, strategic shifts, and other success factors

Tom Welchman

Leads digital and analytics assets for the People & Organizational Performance Practice; helps executives design and implement “future-proof” organizations for enhanced organizational health, performance improvement, and growth

More leaders are asking questions about the future of their organization’s operating model due to the effects of the pandemic. However, successfully shifting to a new way of working requires more than redrawing boxes and lines.

Transformations that touched seven or more of the 12 elements of an operating model were three times more likely to experience a successful redesign.

McKinsey research found transformations that touched seven or more of the 12 elements of an operating model (see Exhibit) were three times more likely to experience a successful redesign. But, with a dozen elements to focus on, where should an organization start? Do certain elements matter more than others?

Operating model transformations: Not all elements are created equal
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New survey results reveal the answer: Not all elements are created equal. We sampled more than 1,300 senior leaders to assess their organization against best-practice indicators across these elements. Indicators were then linked back to overall organizational efficacy to gauge their relative importance. Of the 12 operating model elements, three stand out as having an outsized impact on organizational efficacy:

  • Governance: The structure, authority, and membership of bodies that make critical decisions about the direction of the organization and how it is run.
  • Culture: The organization’s health, particularly its ability to align, execute, and renew itself faster than its competitors.
  • Workforce planning: The organization’s approach to ensuring it has the resources, capabilities, and capacity required to deliver value.

Our research found organizations that prioritized effective practices in these elements were two to three times more likely to be perceived as effective than those that did not have clear strengths in these areas. Even within that group, the impact of governance and culture was particularly stark—strong scores on these elements were more likely to be associated with highly effective organizations.

The whole is more than the sum of the parts

What these insights confirm is that in today’s highly interdependent and fast-paced world, prioritizing operating model changes that drive “connective tissue”—i.e., high-quality horizontal (between group) and group interactions—are likely to be more impactful than those that focus on tweaking the primacy of the individual or hierarchy.

Indeed, governance, culture, and workforce planning taken together enable leaders to drive the value-creating, forward-thinking interactions required to deliver complex enterprise-level strategy (e.g., fostering robust debate, common norms, dynamic teaming), as opposed to more siloed individual or hierarchical team self-maximization. This conclusion intuitively supports our research that the healthiest organizations—those placing equal focus on “how they run the place”—deliver three times the total shareholder returns (TSR) of those that underplay organizational health over the long term.

A journey of 1,000 miles begins with a single step (or three)

Where, then, should one start when redesigning an organization’s operating model? Leaders should take a moment to ensure they can answer these critical questions:

  1. What are the top decisions your organization needs to make and what bodies own them? Are there gaps? How well does this align with where you want to go as an organization?
  2. How do you connect people in your organization? What are the structures, processes, and initiatives that support and renew these connections?
  3. What talent, skills, and capabilities will your organization need to succeed five, 10, or 20 years from now? What is the gap to acquiring them?

As a parting thought, these initial survey insights also indicate that starting with governance will go a long way towards addressing these questions. It’s always critical for organizations to deliberately craft a thoughtful governance structure that clearly articulates the mandates, decision rights, roles, and metrics of important bodies. However, this is even more crucial for leaders striving to drive transformational change. Leaders should seize the opportunity not only to capture the value that high-quality governance can deliver, but to take the initiative to support others in practicing the new behaviors of the future-state organization.

Learn more about our People & Organizational Performance Practice