276. From strategy to performance: Building a new operating model for a new world

The whole operating rhythm of that company is now fundamentally different. You just wouldn't recognize it. And so if you'd grown up and were successful in the first company, I think you would culturally really struggle and would stand out as somebody who wasn't leading in the right way, wouldn't be collaborative enough, for example. And that whole process of design into implementation took about kind of nine months and another twelve to eighteen months to really get to full potential and reduce the the strategy performance gap.

And that company's growth rates accelerated significantly.

From McKinsey and Company, I'm Sean Brown and welcome to Inside the Strategy Room. You just heard Dickie Steele, a partner in our New York office, discussing the positive impact that can result from making deliberate organizational choices to successfully execute a strategy. And in today's episode, we sit down with Dickie and Julie Goran, who's also a partner based in New York, to explore the key elements of an operating model and how to design one that supports the strategy, drives performance and creates value in the face of volatility.

They'll share insights from their research on the trends shaping organizational design and offer practical guidance on navigating the challenges of redesigning an operating model to unlock value in a rapidly changing business environment. We recorded our conversation in New York after Julie and Dickie led a discussion on building high-performing operating models. And if you'd like to read more about their research, we've included a link to their McKinsey Quarterly article in the show notes titled A New Operating Model for a New World.

And now I'd like to introduce our two guests. Julie leads our digital organization work in our people and organizational performance and financial services practices, and she helps executives transform organizations to pursue growth and seize digital opportunities. And Dickie designs and delivers purpose-driven transformation programs and is an expert in culture change and organizational agility. Dickie and Julie, thanks so much for joining us on the podcast.

Sean, thanks so much for having me here today. I'm a uh, longtime listener, first-time caller, as, uh, they used to say on Frasier, happy to be here.

I cannot follow that, but Sean, I am also thrilled, uh, to be here and discussing operating model with you and Dickie today.

Thank you both so much. It's wonderful to have you on the podcast. So let's start with the basic concept. What is an operating model and how does it connect to strategy? And more importantly, why should executives spend time building a high performing operating model?

Maybe I'll start this one off, Dickie, see if you agree with me. Uh, when we talk about operating model and we can get into all of what that means, but it's really a set of organizational choices you, uh, make to get from your strategy to the successful, hopefully the successful execution of that strategy. I think two things that we started off with today that really resonated with the group. Um, one is the operating model and these organization choices are something that you as an executive or CEO can actually control.

There's so much that you can't control, um, but these are a set of decisions that you can really get value of. And since they're in your organization relatively under your control, I think that's very appealing, um, to some of our executives as they think about everything going on. And then there is a gap. What all of our research shows, and we've looked at this through a whole set of different angles, is that we lose value between what we set out to do and what we actually do to the order of 30%.

And so there's real value here if we can get some of these elements right.

I really love that definition. I think for the longest time, we've recognized that well, we've always used the equation delivered performance is your full potential less organizational interference. And so the gap that you're referring to Julie between the full potential, the written down, the aspirational strategy and what emerges from the system of elements that govern how humans work, the that interference, that's that's a big gap, and often as much as 30%. What's interesting is I would've said a few years ago, the interference is due to the human factors.

It's the human factors that get in the way of performance, how we collaborate, how we're incentivized, what we focus on. But through the research, and particularly in this emerging world of AI and agentic, especially, it's no longer just the human factors, it's also the technology factors and uh, that that contribute to, uh, the strategy performance gap.

Thank you both, and I look forward to diving more into the role that AI can play soon. But let's first talk a little bit more about the various elements of an operating model and what are the most important ones for executives to focus on.

Well, first of all, let's talk about the most obvious one, which is very important, but is really insufficient to close the strategy to performance gap. And there are a whole series of pitfalls leaders make, and that's structure. So most people think that there's a one to one match, that operating model equals structure. And it was it's a powerful lever because it's a powerful lever. They they pull that they redesign their organization structurally, they move the boxes and arrows and lines of reporting around.

And then they're surprised when having done that, they don't close the strategy to performance gap. So I think the first thing is structure is indeed a key element of operating model, but there are many others. If you're going to close, uh, this gap, uh, between full potential and delivered performance. Julie, maybe you want to elaborate on a a few of the other factors beyond structure.

Yeah, um, I'm gonna make a comment on structure and then I will, uh, take the bait that Dickie has has set for me. We always get the question, you know, what structure is going to be most successful? what structure is going to help me, um, execute my strategy? And we did the research. We looked at six different types of structures and we said, Hey, do companies of one type of structure perform better than others? Um, and the answer is they don't.

You're equally likely to perform well regardless of what your structure is. It doesn't mean it's not an important choice, as Dickie said, but it does mean that the execution of that structure and how you do that is extremely important. I'll just comment now, I will answer Dickie's question, which is I'll just comment on a few additional pieces. And we're not gonna drag you through all twelve elements, but one that has, uh, come up again and again, um, at, uh, my clients recently is governance.

And how are we making decisions? How are we setting out to make decisions clearly, at the right speed and with the right consideration? And on what cycles? On what cycles do we prioritize resources and reprioritize resources? That is equally, if not more important than you know, what is our formal structure that we are, um, working within. Um, another one is processes, and actually, as we start to see companies really moving towards getting value out of AI and agentic, which many are trying to do and many are failing to do.

How we run our processes, how we reimagine our processes, how we get the right skills in there, which is another element, um, also extremely important, uh, to value creation. All of those are are elements, um, along with a few more.

I'm really intrigued just to build on what you said about governance, cause even some of my best clients. They do some modest work on structure to tidy things up and then they do focus on governance processes, which fundamentally about resource allocation, which is the most contentious issue. And they don't do enough work on leadership behavior and talent. And that can be reallocating the resources they have to the priorities. It it could be really marking their talent to market and saying, well, can the same team that has only delivered this kind of performance and has only delivered that kind of strategy, can we expect the same team to go to the next level?

So I think moving beyond structure through governance to then saying, what does that mean and our processes? What does that mean for our talent and how we show up as leaders? And um, I look back at work where, you know, a great strategic planning process was undermined because one leader said, Well, I need all of the resources. I'm more important than the others. And so they couldn't execute, they couldn't execute that strategy. And there are so many ways in which resources are sticky when they need to be reallocated.

So these talent factors and leadership behavior factors, I think, are really key.

So your research shows that emerging versus traditional structures are better suited to address certain megatrends, things like accelerating digitization and increasing regulatory complexity. And I was hoping that maybe you could discuss some of the advantages that these emerging structures might offer. And and why?

Absolutely, let me start just by giving a brief of what we mean by traditional and emerging. Um, so we make sure we're all talking about the same thing, um, and then we'll answer your question. Um, in our research, we isolated six different types of structures, three of which were more traditional. Um, and I imagine folks are familiar with a business unit structure, a matrix structure, a functional organization. These have all been around for a long time and, frankly, are predominant, um, in how companies are still organized today.

Um, there are three emerging, uh, structures. One is a product platform model, and and think about that as where we've started to reorganize both how we interface with our clients or customers, as well as the tech stack that's really supporting that. A full-blown, um, enterprise agile organization and more of a network organization. So that's just to set the stage for what we mean, um, by traditional and emerging. Um, as we said before, um, no single structure decision is going to help you drive your strategy.

But what we have found is that for some, um, trends, uh, that we're seeing, both tailwinds and headwinds, these emerging structures are actually much better at responding. So if you think about things like, are we prepared, um, to do all the changes we need to do to scale AI and automation, to accelerate digitization, or to really utilize data across the organization? Emerging structures are are better prepared to take advantage of some of those opportunities.

I, I, I would add, um, most traditional. Well, the underlying principle of of, um, traditional structures has been. How do we make a small number of decisions which have long cycle time and are big bet decisions? How do we organize hierarchically to do that, have the right controls in place? So there's a kind of a philosophy of what are we trying to do? And that reflects how business has been over, you know, the last century, frankly, the emergent models that Julie's referring to are all built for many decisions to be made by project teams who are accountable over a short cycle period.

And that fits with the speed of work, uh, it requires and enables digitization. And so I think it's important when we consider traditional versus emergent. If you're going to try and move to new organizational structure, you have to uncover the leadership assumptions and the purpose of the current organization. So moving in the direction of an emergent model is not to be taken lightly. And it requires the most senior people in the organization to really understand viscerally how people want to work today and how do you work at speed?

So Julie and I were just, uh, with a fantastic group of executives, and and one of them was saying, you know, he'd been to the West Coast to see how others organize. And really feeling that it it was gonna be very uncomfortable, that it wasn't for him, that he can't imagine working that way. And so that's just to speak to the level of change management underpinning, um, that's gonna be required to make a a fundamental shift in organization.

That does indeed sound like moving to, uh, an emerging structure could be a pretty fundamental shift. And I understand that your research also looked into how certain trends can have really different impacts on organizations, depending on their different organizing models. Can you tell us a little bit more about that?

So, as part of our research effort, we interviewed a large sample of executives from leading companies. Uh, we asked them about a set of trends. What was really interesting is that, um, we asked them to classify them into tailwinds that would power performance and headwinds that could hold things back. First of all, there was a difference actually. Higher performing companies were more likely to find opportunity to feel that AI, digitization and data, uh, were going to be real tailwinds for them.

Underperformers actually said some of those things are headwinds for us. We we we can't deal with them. So that was an interesting finding, um, but the key overarching finding was that organizations that were more traditionally organized, um, rated their preparedness to capture value from these tailwinds of AI, digitization and data significantly, um, at lower levels than people in emerging organizations. So often as much as twenty points difference. So being in an emerging organization, I think that's built for this digital era, really is almost necessary in order to be able to to put these technologies to work.

And I get to talk about some of the headwinds rather than the the tailwinds. Um, what was interesting about the research on, um, the headwinds, and we talked about trends around unwinding globalization, around increasing regulatory complexity, as well as just being prepared for a changing workforce. Um, what we saw here was a little bit more mixed on, uh, unwinding globalization, a very similar trend than what as what Dickie spoke about with the with the tailwinds. Companies in emerging structures felt much better about their ability to to deal with with changes.

And I think that's because we have a structure that can adapt, or, as Dickie referenced earlier, um, is set up to make many smaller decisions more quickly. Um, what we found on increasing regulatory complexity and the changing workforce is actually companies in traditional models and emerging models felt about the same about their their preparedness, although different between the two. So about half of companies, um, felt they were prepared for increasing regulatory complexity, regardless of structure. And I think this really speaks to one of the points, um, that we started this with, which is structure's important, and it's where everybody's head goes, but it is insufficient.

So your ability to deal with regulatory complexity, at least through our research, uh, has not a lot to do with your structure, and probably a lot to do with your risk function and your processes and your governance and your decision making and the like. Um, for the changing workforce, no one really feels prepared for this. It really doesn't matter what your model is. Um, whether, uh, you're thinking about how AI and agentic are gonna change your workforce, whether you're thinking about, um, the skills and capabilities of people coming into the workforce, or of people in or potentially leaving the workforce.

Broadly speaking, companies do not feel prepared for this. And again, it has much less to do with structure and much more to do with just the general level of preparedness.

So, with these tailwinds and headwinds in mind, how should people think about designing their high performing operating model in the context of their strategy?

Yeah, so what I think's really important is, first of all, not to assume that a wholesale redesign of an organization across all elements of the operating model is is is necessary. It might be a good idea, but it's a big lift. And so by doing a very rapid diagnostic across the choices that an organization currently has in its operating model, we can pretty much guarantee that you'll find two or three areas of significant performance improvement. Particularly if you can get, say, the top fifty leaders, certainly the top dozen leaders of a company, to do that diagnosis together.

And very often people are living with, um, flaws in the operating model, but no one wants to talk about them. So people know that the budgeting process is really what's driving focus, not the long-term strategy, for example. Or they know that they're satisfying on talent and no one wants to face into the fact that they've got a whole load of leaders who may be a past their sell-by date and or aren't allocated to the right roles.

So I'd always start with assume that we can refine and get more value, even if it's from a or actually, especially if it's from a traditional operating model. And do a rapid diagnosis and do it as a team. Work through the twelve elements, take stock of where you are today, what you're trying to accomplish, and see if you're actually delivering, uh, on the intended operating model. So that would be kind of step one. Step two would then be having done that in parallel, maybe think about a different operating model, one that might operate on a different cycle time or give you significantly different levels of clarity for different aspects of your strategy.

And then in order to do that, um, I always really encourage that you you've got to go see it, and you've got to kind of go and live in a different type of organization. So I think there's no substitute for going and spending time and hanging out at a different kind of a company that has a different kind of a rhythm and experiencing it. And it can be uncomfortable, but it really makes it real to people that ways of working are different, accountability is different.

And then I'm a big believer that, uh, experience matters, not just seeing things, but I love it when we get to do a kind of a gamified experience with, um, uh, with executives before they move to a new operating model. So sometimes we'll have a hundred leaders all play a simulation for how would they reallocate resources in a quarterly business review, which is one of the governance processes that's key in a in an emerging operating model.

And just to see how quickly people can respond to that different environment and to see who who gets hung up and can't imagine reallocating resources. So if you've gone to see a different company and then you've actually kind of gone through a gamified experience and tried to live it, I think that's so much more powerful than simply study it or or trying to do the work purely analytically. So I think that discovery process is super exciting.

And Julie and I have done a ton of this. We even did it in over Zoom in uh, in uh, in in Covid, with people voting and thinking that they agreed. Maybe Julie, you can tell that story.

Yeah, let let me add a couple of things that always come out during these exercises. I think, um, one is, uh, are, are we consistent? Are we internally consistent as we have made various operating model decisions? And the answer is is, unfortunately, often we are not. But the organizational friction actually comes to life and we can start to do with something about it. And let me give you an example. Um, we may say that, you know, the core of our value and how we're gonna create value is innovation.

And we might also say that that requires, um, a movement in the market and a set of decision making that is, that is fast and quick, and that's how we're trying to gear our processes. But then when we look at our resource allocation, which which Dickie just mentioned is one of our most important processes, we're running it on an annual basis. And it is entirely inconsistent with a resource allocation model that supports what we're trying to do.

So often, um, when we do these exercises, we find those we actually define the organizational friction that is that is standing in the way. Um, the second piece is just, are we aligned? And my joke always is, am I gonna ask six executives? and am I gonna get seven different answers? Um, but bringing to life where we are aligned and where we're not. And often doing this in kind of a gamified way, where we all answer the same question in very live, we see our results as a great way to kind of hold up a mirror to an executive team.

And then finally, and this came up with the executives we were just speaking with, we had them actually do an exercise. We actually said, here are the twelve elements of an operating model. We took them through step by step of the possibilities. And one of the first questions we got was, well, we got two really insightful questions. One is, can I pick more than one thing for each element of the operating model? And the second one is, is this for today's operating model or for the operating model that I want?

So there are certainly two dimensions of this exercise, which is where are we today? Is there organizational friction? Is there internal consistency? But has that really set us up for the future?

Yeah, and I think the fact that a couple of people were saying, Do I have to choose one thing? It's hard for me to choose one thing, just speaks to the current state. Clearly, in those instances, they hadn't been through a deliberative process to say, what do we stand for, what are we trying to accomplish? And, you know, a little bit of this and a little bit of that is a recipe for organizational confusion. Uh, also, we

You for for not a lot of progress.

not a lot of progress and a big strategy to performance gap.

So could you share maybe an example of an organization that has been through this process, including how they moved from A to B and the positive outcomes of making these changes?

One example, which is actually written up in the research that's available on McKinsey dot com, was, uh, an organization that had grown through acquisition. Um, it had bought a series of companies, for the sake of argument, let's call it about a dozen, and hadn't fully integrated them. So they had done the classic thing of, in the absence of kind of leadership and a full design, they'd put finance in charge. So the basic operating process was really stringent resource allocation and tight budget management and a lot of incentives to perform.

And what they'd emerged over time was that many of those acquisitions smartly served similar customers, or actually even the same customer. So their major customers were starting to say, hang on a minute, I'm getting, you know, ten bills from you. I want to have a single sign-on, I want to sing, have a single digital experience. I'm confused by all of these sellers who call on me, what's going on here? So it became evident that unifying to some extent that organization was going to be necessary.

And a conventional approach might have to taken those businesses and put them into a smaller number of similar sized sort of business units, if you will. And that would have been integrating within a more kind of traditional model. So moving from a a holding company mentality to maybe a business unit structure, and then maybe from just shared finance, maybe having some more shared operating resources, et cetera. So we reviewed that possibility and then took the client on a journey to learn from some different tech companies, and they decided to be much bolder, and that was super exciting.

Um, and so what they did was they said, you know what? We can get a lot more scale and efficiency. So actually, we're gonna have a single tech function that's gonna work in agile. Uh, we're going to bring operations together, and actually, we're gonna have much more coordination of our sales force. So what they needed to do was build some new capability. So they needed to build a capability to align the sales force and their product functions, their new product function that they built.

That was called the sales interlock process. So sellers would tell product what customers wanted, and different products would understand what they needed to innovate. They then identified some things which were gonna be common across products, the way, uh, software was gonna be consumed, for example. So that meant that they could then get more value out of tech. So they then had to put in place another governance process. We referred to it earlier, the kind of quarterly business review process, where each product group would be assessed against each other and they could allocate scarce digital resources across them.

So, from a kind of multi-divisional holding company having looked at becoming a business unit structure, uh, this entity actually moved towards what we would call a a product platform model with, uh, real clarity as to how customers would be served by, uh, generalist sellers and even some product specialists. Um, an innovation process owned by product, and then operations and technology managed for scale, but with processes that enabled, uh, resource allocation. You can imagine that revealed all sorts of talent issues.

So, uh, to lead those functions. But what I think is really exciting when you do that kind of work, you realize, well, who's managing these products? Have we got people who really understand the market? Have we got people who can work in this way? And so at the sort of level two and level three of the organization, they realized they had some really significant talent challenges. And they were over the next couple of years to go to tech companies, to go to other companies, uh, bring in new talent.

And then they were also able to invest in building a unique way of building products. Um, at that company, so, um, really successful, and the whole operating rhythm of that company is now fundamentally different. You just wouldn't recognize it. And so if you'd grown up and was successful in the first company, I think you would culturally really struggle and would stand out as somebody who wasn't, you know, living and leading in the right way, wouldn't be collaborative enough, for example.

So, uh, that would be an example. And that whole process of design into implementation took about kind of nine months and another twelve to eighteen months to really get to full potential and reduce reduce the the strategy performance gap. And that company's growth rates accelerated significantly.

I'll give another example that is of a similar flavor, um, but different. And what I like about this example is, um, a very highly successful movement in operating model and structure was not a lever, not a lever pulled. Um, large global company operations in many, many different countries, and while they would not have called themselves a holding company, that was probably the closest to what they were, just given how independent different businesses and diff different geographies were functioning.

Um, as the senior team and the CEO in particular looked forward to say, how are we going to create value in the future? It was very clear that a set of capabilities, many of them digital, um, but but not exclusively, um, that need to be created one time for the company. To too hard and and too expensive, um, to do any other way. We're gonna be a big part of what was going to drive success. And that, um, they needed a different operating model if they were actually going to leverage anything that was coming from corporate or central, if you will.

Um, they thought about, you know, does this require, um, a structural redesign? Again, they looked at how their products and their services and how they go to market. Um, it would have been extraordinarily complex and likely with little or no value, that the core of how they function is still going to be on a business unit and a geographic basis. Um, so they looked at other levers, they built up the capabilities, and they had to really redefine, um, how do our capability centers, if you will?

How do our functions interact, um, across this global network? What are the different ways we're working? Um, how do we govern? And there was a movement towards more, um, shared governance, more coming together, um, across the company to say, how are we driving value? Um, how are we sharing resources? And what? What is even a reporting model look like, um, where we can really efficiently and effectively, um, share resources. And at the end of the day, there was some, I would say, small structure work done on the margin, not an overall structure decision, some movement of resources.

Um, but again, what I what I like about this example is, you know, very often our clients will enter an operating model question coming off of a strategy. It makes a lot of sense either we, you know, something has happened, or we have a new strategy, or we have someone new in charge. Um, and we need to look at are we doing the things to get us from that strategy to execution, which is exactly what this company did.

Um, but they did so again without having to pull, um, the structure lever, but thinking about some of the other elements.

Thank you both. So did your research identify any common challenges that organizations face when they embark on redesigning their operating models and and any points on how they can be overcome?

Well, I think, and Julie, we've done a ton of this work together. I think leadership behaviors and some of the underlying technology would probably be the two. I don't want to speak for you too much, but I

Totally agree.

um, the on the leadership behavior, uh, going way back. I had a mentor who commented on a on on a client that they had the the old wine, new bottles problem. All you've done is you've put the same old people into new roles and you wonder why they can't perform. So I think really shifting leadership mindsets and behaviors and really doing that in a very practical way. And so now when we do these operating model shifts, we'll be really put a lot of effort effort into change management.

And um, having people work through scenarios that will be difficult, uh, so they they really understand what it means. You used to have the decision right, you used to be able to spend these dollars, you used to be able to set that priority, but now you can't, cause we want you to do something else. So that that I think is a really key part. So the leadership fabric of the company, and, uh, as I said, avoiding the old wine, new bottles.

But, uh, Julie, what would you add?

Yeah, look, uh, I couldn't agree with them more. I think it's, um, the old wine, new bottles, if you will, and the alignment of that team. I'll pick up on the technology angle as well. And I feel like it is, um, almost malpractice today to have a conversation where we're not bringing technology or AI or agentic to the table. And it couldn't be more true, um, for operating model. And I think one of the challenges is really getting clear about where is technology going to differentiate across our company, um, and how are we focusing our time and energy on that?

And actually having the conversation at the right level as a senior team. I think everyone's talking about everyone's investing and making broad statements, and then you can read any report to say we're not yet capturing that value. Maybe I am individually, I have more time, I don't know, to do my laundry or hang out with my kids, but it's not being captured by by companies. And I think the conversation that needs to happen at that senior team.

And as we think about operating model is where do we spend our time really? Um, reinventing the work that we are doing in a way that is connected to our strategy, um, and, uh, gonna differentiate us for competitors. And where do we want to use AI? But we don't have to be leading edge, and that's a very different set of, uh, processes, decisions and how we spend our time. So I think we've got to start spending, um, more time on really how is technology enabling us in a, you know, in a special way at the right level.

Yeah, and just to say where that might take us, we're already starting to see this emerging trend of of CHROs having to have a technology background. And certainly, if you don't, you can go that far in order to do a strategic workforce plan, say, for the talent needed in a new operating model. It requires an alliance between the HR function and the tech function to really a new degree. And the upskilling and the shifts in what it will mean for an HR organization to be really tech savvy and understand what an agent can do, what a person has to do, how you manage performance in this tech driven era.

We're just at the very early dawning of this era, and you can already see that functions like that are gonna really have to change, which again is a change management problem. So you have the people who typically lead change management, HR, going through maybe the most profound change. So they have to help the organization whilst reinventing themselves. So that's just one of many kind of emerging frontiers that we'll see as people start to adopt new operating models, which are more tech enabled, and it's gonna be a really profound shift.

So it's gonna be exciting to be doing it definitely with you, Julie, but, uh, also, I hope with, uh, some of our listeners today.

Julie Dickie, it sounds like a profound shift indeed, and and really appreciate you both taking the time to walk us through this today.

Sean, thanks so much, it's been great.

And thank you to all of our listeners for joining us today. We hope you enjoyed the conversation. And as I mentioned earlier, if you'd like to read more about Julie and Dickie's research, we've included a link to their McKinsey Quarterly article in the show notes titled A New Operating Model for a New World. We welcome your feedback and idea for future podcasts. Just email us at itsr at mckinsey dot com, which stands for Inside the Strategy Room.

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