Operating Model Editorial Board
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McKinsey on Digital Services Introducing the next-generation operating model Editorial Board: Joao Dias Somesh Khanna Chirstopher Paquette Marta Rohr Barr Seitz Alex Singla Rohit Sood Jasper van Ouwerkerk Contents Introduction— Reinventing your operating model to win in the digital world: 1 How to capture the full value Part 1: The next-generation operating model: What is it and how do I build it? 7 The next-generation operating model for the digital world 8 Putting customer experience at the heart of next-generation operating models 16 How to start building your next-generation operating model 26 What it takes to deliver breakthrough customer experiences 34 From disrupted to disruptor: Reinventing your business by transforming the core 40 Part 2: New approaches and capabilities to drive your next-generation 49 operating model Digitizing customer journeys and processes: Stories from the front lines 50 Four fundamentals of workplace automation 58 Intelligent process automation: The engine at the core of the next-generation operating model 66 Making data analytics work for you—instead of the other way around 76 Part 3: Foundations to scale your next-generation operating model 89 Organizing for the future 90 Deploying a two-speed architecture at scale 102 Speed and scale: Unlocking digital value in customer journeys 106 Scaling a transformative culture through a digital factory 112 Transforming operations management for a digital world 118 Introduction Reinventing your operating model to win in the digital world: How to capture the full value How to profitably deliver services to customers has become a defining challenge for businesses today. There are a number of reasons for this. One is because customers don’t just expect more, the expectations themselves also change quickly, radically shifting profits. The other is that executives face an increasingly complex landscape of technologies, methodologies, and both regulatory and compliance pressures to ensure that new processes are standardized and traceable. This sea change for both B2B and B2C businesses is fundamentally transforming what “services” means. Our research suggests that as much as 45 percent of employee activities can be automated by adopting current technologies. That is calling into question how businesses work, build skills, and deliver customer experiences. This reality is particularly important given the high-stakes nature of today’s digital environment. Our research has revealed a “power curve” where the top quintile of performers capture more than 90 percent of the economic profit (see Exhibit). The 24 companies that make up the top 1 percent of our sample earn—astonishingly—the same as the next 87 companies combined. Moving into the top quintile, or even improving within it, is not easy. Most companies have embarked on journeys to transform their operating models, of course, but performance has been uneven. The efficiency levels of many service industries, for example, have barely changed over the past decade. Confusion about what the primary “axis of change” is—from customer expectations to technology—as well as which combination of capabilities to build and in what sequence, has been the primary culprit. Yet we know that companies across industries can successfully make the leap when they put in place a sound strategy and commit to making a specific set of big moves: accessing new markets or capabilities through mergers and acquisitions, investing in capabilities and value- creating activities at significant scale, aggressively allocating resources to those capabilities and activities, and radically improving productivity. There are recurring patterns of success, and a step-function improvement in productivity is one of the leading forces that allows companies to move up the power curve. To be clear, these “big moves” aren’t single bet-the-company 1 EXHIBIT 1 The Power Curve of economic profit. EXHIBIT 2 Three steps to the next-generation operating model. The global distribution of economic prot divides into 3 clear groups; all the value accrues Design the target operating model and transformation roadmap… to the top. Next-generation operating model Average annual economic profit generated per company, 2010–14 $ Millions, N=2,3931 … and transform the journeys that matter … Cutoff for bottom Cutoff for top quintile quintile Customer-centric design (146) 296 V IV III II I 10,000 Bottom Middle Top Lean process Digitization redesign 5,000 Intelligent process Business process Advanced automation (IPA) outsourcing (BPO) analytics Ø180 0 … while building an agile and cross-functional approach at scale Agile IT architecture -5,000 Management systems Culture and capabilities -10,000 Average EP (670) 47 1,428 1Global top 3,000 companies by revenues (FY13) less rms with insufcient data to calculate an accurate average economic prot for 2000–04 and 2010–14. Companies with EP above $10b and below $10b not shown for scaling purposes. Source: McKinsey Strategy Practice (Beating the Odds model v.18.3) and Corporate Performance Analytics™ kinds of actions. Experience has shown, rather, that a series of bold initiatives that reinforce each other and create impact cumulatively is the recipe for a successful transformation. When it comes to digital services, these big moves are all about disrupting how your business works today and are necessary to put in place a next-generation operating model that can sustain new levels of speed, agility, efficiency, and precision. We believe that requires a three- part program: 1) designing the next-generation operating model and transformation roadmap; 2) transforming the customer journeys that matter through a combination of capabilities and approaches; 3) building up cross-functional foundations to scale and sustain the benefits of the transformation (see Exhibit 2). 2 Introduction EXHIBIT 1 The Power Curve of economic profit. EXHIBIT 2 Three steps to the next-generation operating model. The global distribution of economic prot divides into 3 clear groups; all the value accrues Design the target operating model and transformation roadmap… to the top. Next-generation operating model Average annual economic profit generated per company, 2010–14 $ Millions, N=2,3931 … and transform the journeys that matter … Cutoff for bottom Cutoff for top quintile quintile Customer-centric design (146) 296 V IV III II I 10,000 Bottom Middle Top Lean process Digitization redesign 5,000 Intelligent process Business process Advanced automation (IPA) outsourcing (BPO) analytics Ø180 0 … while building an agile and cross-functional approach at scale Agile IT architecture -5,000 Management systems Culture and capabilities -10,000 Average EP (670) 47 1,428 1Global top 3,000 companies by revenues (FY13) less rms with insufcient data to calculate an accurate To help show the way forward, we have created this collection of articles to show what’s needed average economic prot for 2000–04 and 2010–14. to not just identify value from digital services but capture it as well. This collection builds on our longstanding experience in digital and lean management transformation at scale, with a focus on Companies with EP above $10b and below $10b not shown for scaling purposes. newer thinking and developments in digital services and operations. Source: McKinsey Strategy Practice (Beating the Odds model v.18.3) and Corporate Performance Analytics™ We’ve organized it in three sections designed to address the most important questions executives should ask: 1. The next-generation operating model: What is it and how do I build it? • What is the operating model needed to simultaneously disrupt existing processes, drive value, and improve customer experience while reducing costs to serve? • How do we actually build it and what does the sequencing look like? DIGITAL MCKINSEY 3 • Why should we focus on end-to-end journeys, and which ones will deliver the most value? • How can we use design thinking to reinvent user experience for our most important journeys? 2. New approaches and capabilities to drive your next-generation operating model • What is the right mix of capabilities and approaches we should develop to meet our primary objectives based on our starting point and aspirations? • How do we set up teams to be successful in a digital world? 3. Foundations to scale your next-generation operating model • What is the IT architecture we need to support a next-generation operating model? • How can we scale and sustain the operating model across the entire business? • How can we build a new and healthy organization that supports an agile and customer-centric culture? • What management systems should we put in place to embed the new skills, technologies, and processes in the organization? These are not simple questions to answer, but they are the right ones to ask—and ultimately, it’s up to senior leaders to answer them. Leadership, in fact, underpins whether the next-generation operating model becomes a reality or remains an aspiration. As the primary change agents in the business, CEOs and senior business executives in particular have outsize influence on the success of this transformation. Their roles must focus on forging alignment at all levels of the organization around journeys, championing new models of working that embody speed and agility, and anchoring a transformation through bold and effective decisions. The articles in this collection are intended to help light the path forward. We look forward to the conversations on the role of digital services in driving forward