Target Operating Model

Definition

A target operating model (TOM) is the most comprehensive design artifact in business architecture. It describes the future state of the organization across all dimensions that determine how work gets done: the capabilities the organization needs, the processes that deliver those capabilities, the organizational structure and roles that perform the work, the technology and data that enable the processes, and the governance mechanisms that ensure accountability and performance. A TOM is always defined relative to a specific strategic objective — it answers the question 'What does our organization need to look like to execute this strategy?' rather than describing an abstract ideal state.

Origin & Context

The target operating model concept emerged from management consulting practice in the 1990s, as firms like McKinsey, BCG, and Accenture developed frameworks for helping clients design and implement large-scale organizational transformations. The term 'operating model' was popularized by Jeanne Ross, Cynthia Beath, and Martin Mocker in their book 'Designed for Digital' (2019), which argued that the operating model is the most important design decision a digital enterprise makes.

Why It Matters

The target operating model matters because it is the bridge between strategy and execution. A strategy without an operating model is just a wish list — it describes what the organization wants to achieve but not how it will organize itself to achieve it. The TOM makes the strategy concrete and actionable by specifying the organizational design choices that will enable execution. It also provides the governance framework for transformation programs — ensuring that individual projects are aligned to the target state and that the organization is moving coherently toward its strategic objectives.

Common Misconceptions

Myth: A target operating model is just an org chart.

Reality: An org chart is one component of an operating model — the organizational structure dimension. A complete TOM also covers capabilities, processes, technology, data, governance, and performance management. An org chart without these other dimensions is not an operating model.

Myth: The TOM is a fixed destination.

Reality: A target operating model describes a desired future state — but that future state evolves as the strategy evolves. Leading organizations treat the TOM as a living design that is reviewed and updated annually, not a fixed blueprint that is implemented once and never revisited.

Myth: You need to implement the entire TOM before you see results.

Reality: The most effective TOM implementations are phased — identifying the highest-priority design changes and implementing them first to demonstrate value and build momentum. A phased approach also allows the organization to learn and adapt as it moves toward the target state.

Practical Example

A retail bank designing a target operating model for its digital transformation might define the following design choices: (1) Capabilities — build 'Digital Customer Onboarding' and 'AI-Powered Credit Decisioning' as differentiating capabilities; outsource 'Payment Processing' to a fintech partner; (2) Organization — create cross-functional 'product squads' aligned to customer journeys (e.g., 'Home Ownership,' 'Everyday Banking'); (3) Technology — adopt a composable banking architecture with a core banking platform, a customer data platform, and an API layer; (4) Data — establish a unified customer data model with a single source of truth for customer identity; (5) Governance — implement a 'product owner' accountability model with quarterly OKR reviews. Each of these design choices is a deliberate decision about how the organization will operate in the future — and together they constitute the target operating model.

Industry Applications

Financial Services

Banks design target operating models for their digital transformation programs — defining how they will organize around customer journeys, adopt agile delivery, and modernize their technology architecture.

Healthcare

Health systems design target operating models for their value-based care transitions — defining how they will organize care teams, manage population health, and align incentives to outcomes.

Insurance

Insurers design target operating models for their InsurTech transformations — defining how they will integrate digital distribution, automated underwriting, and AI-powered claims into their existing operating model.

Manufacturing

Manufacturers design target operating models for their Industry 4.0 programs — defining how they will integrate digital twins, IoT, and AI into their production and supply chain operations.

Government

Government agencies design target operating models for their digital government programs — defining how they will organize around citizen journeys, adopt agile delivery, and modernize legacy systems.

Related Terms

• Business Capability Model: The capability model defines what the organization needs to be able to do — the TOM defines how it will be organized to do it.
• Value Stream: Value streams define how value flows through the organization — the TOM defines how the organization is structured to support those value streams.
• Organization Design: Organization design is one of the key dimensions of the target operating model.
• Business Capability: Capabilities are the building blocks of the operating model — the TOM defines how they are organized and resourced.
• Capability Assessment: A capability assessment identifies the gaps between the current operating model and the target operating model.