Welcome to the February edition of the Insurance Market Update, which considers how the life insurance industry can deal with defining a 'Target Operating Model' (TOM).
Insurers are constantly facing change, either through new regulatory regimes such as Solvency II and the Retail Distribution Review or through internal reorganisation such as finance transformation. In order to deal with change more effectively insurers need to have a clearly defined TOM, without which there is a great risk of failure in making the corporate strategy operational. The TOM seeks to create the optimal business architecture for the successful realisation of strategy.
In this month's edition, Brian Robinson discusses different aspects of a TOM. Initially covering the drivers behind a TOM and how insurers would benefit from one, he then defines the content of a TOM and gives an overview of its possible architecture. Finally, he describes the key elements required to ensure a successful TOM implementation.
We hope you find this edition informative. As always, your comments and suggestions for future themes or topics are welcome
Demystifying Target Operating Models – Dealing With Complex Change More Effectively
Introduction
From a regulatory perspective, firms are having to deal with significant change. Preparation for Solvency II and the Retail Distribution Review are well under way and with IFRS 4 Phase II on the horizon, change will be a common theme in the years ahead.
In addition, shareholders' desire for increased returns means that senior management are looking at ways of improving the efficiency of their organisations and finding sources of growth. Efficiency can be achieved through operational transformation (e.g. finance transformation or outsourcing) and growth can be achieved through, for example, acquisition. Both of which can result in major change for an organisation.
As a result, complex change is becoming part of the day-to-day running of an insurance firm and will continue to do so. Insurance companies need to be able to deal more effectively with the change that lies ahead. Not doing so can prove costly and may lead to a competitive disadvantage relative to peers.
You wouldn't build a house without architectural drawings
Large change programmes run into tens of millions of pounds so it makes sense to have an architectural blue-print or design that describes at a high level the target end state of the organisation post change. Without a design there will be poor communication, misunderstanding and a lack of clarity about what the programme is trying to achieve.
Major change impacts all aspects of a firm's operations including people, processes and technology. One way of articulating the design associated with significant operational change is through 'capabilities' (or business outcomes) and a TOM. The key benefits include:
- Providing a clear definition of the end state
- Supporting effective communication and decision-making
- Providing a foundation for effective planning
- Being able to mitigate programme risk
- Simplifying complexity through a structured approach
Articulating what the business is trying to achieve
Capabilities are a way of articulating at the highest level what the organisation needs to be able to achieve post change. For example, in the context of Solvency II a capability at its most simple level would be calculating the Solvency Capital Requirement. The focus is on the 'what' not the 'how', once there is clarity on the 'what', it is easier to tackle the 'how'.
It is the combination of people, processes and technology that collectively represents an organisation's ability to deliver capabilities and these form the foundation of a TOM.
A TOM provides a clear articulation of how an organisation's operations will be configured to deliver the capabilities / business outcomes post change. It acts as a focal point for the decisions around operational strategy such as: what processes / activities are required, how technology supports the processes, what data is required as inputs to / output from the processes, and how functions should be configured in size and budget.
A TOM consists of a number of architectural layers encompassing: processes, data, technology, people, organisation and location (see below).
Developing a successful TOM
Gain stakeholder buy-in
Obtaining buy-in from senior stakeholders at the outset is critical. They need to understand how the TOM will help support the delivery of the change within their organisation. Without a TOM, the end state of the programme may be unclear and there can be significant problems gaining consensus around the change required.
In addition, it is also important that the key stakeholders are involved in the development of the TOM. The TOM needs to be something that they will recognise and should reflect how they view their business and how it operates.
Adopt a structured approach
Developing the TOM requires a structured approach. At a high level, a TOM has four steps:
- Articulating the strategy, vision and objectives
- Defining the business capabilities including guiding principles, target operating metrics and an overview of key enablers (e.g. technology) to support the capabilities
- Developing the overall architecture of the business across process, people and technology
- Analysing options and selecting the final operating model
Investing the right amount of effort up front is key so that the development of the TOM is sufficiently embedded before detailed design work. This can be difficult, particularly on a regulatory driven change programme where there is a need to understand the detail of the regulatory guidance. As a result, on a regulatory programme the TOM may need to be developed in parallel to the detailed analysis.
Embed as a communication tool
The TOM should be used as a key communication tool across the programme. It provides a single coherent view and helps to reduce uncertainty through a common language and standard way of referencing the change. It enables everyone on the programme to understand how their piece of work fits into the bigger picture and how it links with other components of the design.
Use as the foundation for planning
The TOM should form the foundation for planning activity.
Programmes can fall into the trap of using plans as a way of
articulating what needs to be done without an overall design. The
TOM represents the end state and the planning needs to be aligned
with the implementation of the design. In addition, it helps to
identify and communicate the critical path.
Summary
Large change programmes are expensive and without a clear end state it is very easy to waste effort and activity in the wrong areas. Change is here to stay, driven both by regulation and a need for greater shareholder returns. In an increasingly competitive landscape insurance firms need to be able to deal with change as effectively as possible.
Using a TOM helps management understand how their operations will need to be re-configured to deliver the business capabilities required within their organisation. It provides structure and clarity, supports effective communication and decision-making, and provides a foundation for effective planning.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
