Target Operating Model (TOM) - Building solid grounds for your business model

Target Operating Model (TOM) - Building
solid grounds for your business model
Operating models in a changing banking environment
Summary in Swedish:

Verksamhetsmodeller i en föränderlig bankmiljö

Vare sig det handlar om en global universalbank, en multinationell privatbank, en lokal bank eller en
kapitalförvaltningsboutique – är chefer för finansiella institutioner nu för tiden upptagna med att försöka
hitta lösningar på frågor av aldrig tidigare skådad komplexitet för branschen. Övertygande svar på frågor
som utmanar kärnan i bankernas affärsmodeller söks, t.ex.: Hur kan jag säkerställa aktieägarvärde i en
"overbanked" marknad? Hur kan jag bibehålla lönsamheten i en lågräntemiljö? Hur kan jag effektivt
anpassa affären till nya regleringar? När övertygande svar har hittats utvecklas nya affärsstrategier, vilket
ofta leder till en betydande förändring av affärsmodellen.

Men det är självklart att utarbeta en strategi är inte slutet på historien utan snarare början, eftersom
förändringarna i affärsmodellen måste genomföras med konsekvenser för en banks verksamhetsmodell.
Baserat på zebs långa erfarenhet med Target Operating Models (TOM) beskriver författarna
tillvägagångssätt för framgångsrikt implementering av TOM som täcker sex dimensioner ((interna)
produkter och tjänster, funktioner och processer, organisation/styrning, personal, performance
management, IT). Utöver en helhetssyn på dessa dimensioner samt en robust projektstyrning och
projektplan beskrivs ytterligare viktiga framgångsfaktorer. Med en tydlig fokus på alla relevanta
dimensioner och kritiska framgångsfaktorer, är författarna övertygade om att TOM projekt kommer att
resultera i en vinnande verksamhetsmodell, som gör det möjligt att hantera alltmer fientliga
marknadsförhållanden.

Be it at a global universal bank, a multinational private bank, a local retail bank or a
boutique asset management firm, executives of financial institutions are tied up these
days in trying to find solutions for issues of unprecedented complexity for this industry.
Compelling answers to questions challenging the core of banks’ business models are to
be found: How can I ensure shareholder value in an “overbanked” market? How can I
maintain profitability in a low interest rate environment? How can I efficiently adapt to
new regulations? How can I regain the customers’ trust? How can I compete with
Facebook, Google or the like in future (to name only a few)? Once compelling answers
have been found, new business strategies are developed, which often lead to a
significant alteration of the business model.

However, it is self-evident that elaborating a strategy is not the end of the story but
rather the beginning, as the changes to the business models have to be implemented.
Here, answers to an equally comprehensive set of questions need to be found, such as:
How do I have to organize myself in order to support the future business model? Which
of my processes will shape the customers’ experience in future? How can I ensure the
utilization of scale effects without compromising customer proximity? Will differences
in banking regulations allow for a globally harmonized process model? Can my IT
architecture support my ambitions in digitization and cost cutting?

Clearly, these are questions that banking executives have been asking themselves for
decades. Yet, since industry attractiveness for financial institutions will be challenged
for a certain time, finding effective and practicable ways to redesign or even reinvent a
bank’s value chain becomes ever more important in order to maintain a strong market
position or to remain in the market. It is obvious that against the backdrop of current
mega-trends in banking such as digitization, regulation, consolidation and their impact
on business models of banks, operating models are to be considered and rigorously
challenged.

Given that these mega-trends have already been prevalent for some time, one would
expect that revisions of operating models have taken top priority for most financial
institutions today. However, if you take a closer look at the project portfolios of most
banks, projects related to implementing new regulations (MIFID II, FATCA or the like)
and quick-wins on cost-cutting (which often compromise a coherent operating model)
are currently being carried out. A comprehensive and systematic review of the operating
model (i.e. on who is performing which function, where and how with what IT against
recent or current business model alterations) is quite rare despite the urgent need
induced by increasingly adverse market conditions.

Moreover, current project experience suggests that adaptions in the operating model, if
any, are often very limited in scope (e.g. focus on organization but not on IT, sole view on
Back-Office without looking at Mid-/Front-Office). This is mostly for the argument of
keeping project complexity on a low level e.g. by segregating organizational from IT
initiatives or by just having one business line in scope. That approach might reduce risks
of failure of a single project to some extent. However, it comes at the price that this
approach falls way short of aligning the business model with the operating model as it
neglects the interdependencies and interconnectedness of the relevant dimensions of a
TOM.

DIMENSIONS OF TOM PROJECTS
zeb project experience suggests that successful TOM projects in general address six
dimensions (see Figure 1):

(INTERNAL) PRODUCTS AND SERVICES

Products and Services that are provided by a bank to its customers but also within a
bank (e.g. from back-office to front-office). Typical questions include: Are there
services /products that could be canceled or reduced, as they present little or no value to
the customer? Which service shapes the customers’ experience?

FUNCTIONS AND PROCESSES

Functions and processes define how a bank’s value chain is organized. Typical questions
include: How can processes be harmonized /streamlined across locations and/or business
units? How can process complexities or excessive controls be reduced? How can idle time be
minimized and the use of resources be optimized? How can customer value be increased?

ORGANIZATION / GOVERNANCE

Organization and governance comprise the legal structure, a company’s superstructure
(primary business units and P&L responsibilities), the decision-making structure and
reporting lines as well as the organizational setup and collaboration rules across
business units and locations. Typical questions include: What decisions are to be taken
locally, i.e. close to the customer, which ones are to be taken centrally? How can economies
of scale and scope be achieved without losing the customer and organizational flexibility
out of sight?

HR

Talent requirements to make the Target Operating Model a success. Typical questions
include: What skills are required to achieve strategic targets? How can we attract the
necessary talents? How can labor cost be minimized without compromising service quality?

PERFORMANCE MANAGEMENT

Metrics and indicators that measure the effectiveness of the operating model. Typical
questions include: What are the most relevant metrics for measuring the effectiveness of
my operating model? How can they be measured? Which tools are to be used? How are
reporting processes designed?

IT

Technology in use in order to achieve a high degree of automation, robust processes and
the fulfillment of client expectations towards obtaining information and executing
transactions online. Typical questions include: How can the STP rate be maximized? How
can IT complexity be reduced? How can IT costs be cut without compromising quality and
reliability?

Figure 1: Objects, key dimensions and influencing factors of a TOM

TOM projects are highly complex and thus require vast resources due to their broad
scope and their impact on the entire organization and usually last several years from
initialization to stabilization. In order to maintain the risk of failure of such a
comprehensive assignment at a manageable level, a robust project governance needs to
be established and an effective project roadmap is to be developed (see Figure 2).
Governance and roadmap must, for instance, address the strong interdependencies
between the various TOM dimensions and enable efficient decision-making. Equally, due
to the long duration of TOM projects, governance and roadmap must be somewhat
flexible in their scope in order to be able to absorb external as well as internal changes,
which have an impact on the operating model.

Figure 2: Phases of a TOM

SUCCESS FACTORS
Apart from a comprehensive view of the six relevant dimensions (see Figure 1) as well
as a robust project governance and roadmap, zeb’s project experience in TOM projects
suggests further key success factors:

STAKEHOLDER COMMITMENT

Obtaining top management commitment is of paramount importance in any material
change initiative. The particular challenge of TOM projects is to achieve cooperation
amongst a very broad and diverse group of stakeholders ranging from top management
to work councils /trade unions to financial supervisory authorities (e.g. in case of
offshoring/outsourcing of activities). Furthermore, the cooperation needs to be
maintained over a long project duration. Experience shows that commitments tend to
diminish over time without constant interaction. Thus, continuous involvement of
stakeholders is a key success factor.

MULTIDISCIPLINARY PROJECT TEAM

TOM projects, as outlined above, typically comprise a very broad spectrum of issues,
which have to be addressed effectively. Consequently, a very broad set of skills is
required in a project team to cover all relevant topics. The required set of skills typically
ranges from specific functional expertise in order to effectively design the future
organization and processes to technical know-how for shaping the future IT landscape
as well as legal, compliance and tax expertise in order to prevent pitfalls. Furthermore,
HR expertise is a necessity for planning and implementing adequate personnel related
measures.

PROJECT SETUP / GOVERNANCE

Due to the large scale of such change projects with many stakeholders and project
participants, attention has to be paid to the setup of the project. Efficient project
management as well as a strong PMO are key for success. In addition, a clear project
governance has to be established so that—in case of any conflicts—a quick, central and
irrevocable decision can be made.

CONCLUSION
zeb’s project experience in designing and implementing target operating models with
leading universal and private banks suggests that, if done properly, TOM projects do
have a tremendous positive impact on costs, service quality and operational risks. For
instance, around 40% of personnel expenses have been cut, the STP rate has increased
by a double-digit rate and the number of failed or late settlements has been reduced
drastically in a TOM assignment for the investment banking division of a leading
European bank. Of course, as any large-scale project, TOM assignments bear a significant
risk of failure. However, with a clear focus on all relevant dimensions and the critical
success factors, TOM projects will result in a winning operating model, that will enable
the handling of increasingly hostile market conditions.

zeb – contact person

                       Your local contact persons – zeb
                       Nordic
                       Steffen Ljung
                       Senior Manager

                       E-Mail   sjung@zeb.de
                       Phone    +49 175 4072987

                       Office Stockholm
                       Biblioteksgatan 11
                       S-111 46 Stockholm