A defined and transparent target picture for the Operating Model of a company (Target Operating Model – TOM) provides an important framework and essential design guidelines for every SAP S/4HANA transformation. This ensures alignment with the strategic goals of the enterprise. It also helps to avoid costly delays and inefficiencies during the digital transformation.
The capability requirements for enterprise platforms are constantly increasing: globalization, scalability, transparency and new business models require a flexible and future-oriented IT landscape. The transformation to SAP S/4HANA offers companies the unique opportunity to prepare their central nervous system for current and future challenges and create significant added value.
This transformation goes far beyond the introduction of new technologies and optimized processes. It also provides a chance to evaluate the fit of the current operating model for operationalizing the corporate strategy, business model and growth path. However, even if this opportunity is seized, unlocking the full value is not guaranteed. Many of these initiatives fall short of expectations. Not so much due to a lack of ambition, but often due to a lack of transparency and comprehensive definition of the Target Operating Model (TOM).
What is a Target Operating Model?
The operating model describes how a company’s business model is put into motion. It includes key elements such as governance and organization, steering model, business process model, material and value flows, legal and tax structures as well as the enterprise architecture and technology. The Target Operating Model (TOM) in turn describes the target picture of how the operating model should be structured in the future. It is essential to confirm whether the current operating model already represents the target state or whether future-oriented adjustments are necessary.
Transparency is the key to success
Without comprehensive transparency regarding the TOM to be enabled, delays and expensive surprises are inevitable during the SAP S/4HANA business transformation. In the worst-case scenario, the digital transformation fails due to a lack of transparency or because an outdated operating model was used as a basis. Digital transformation requires a solid foundation, which is provided by a future-oriented and transparent TOM.
For example, it is important for the finance function to understand where the responsibilities for the profit & loss statement lies and in which structures the company wants to steer the business. Clarity on the management dimensions in which reporting is to take place and the depth along the profit & loss key figures are also of great importance. Without this clarity, no detailed controlling concept can be developed in the S/4 transformation. Looking at the supply chain and its relevant processes, it is important to understand the material and value flows, such as which company and which division buys from whom. Particularly in international corporate structures with different production and sales companies, the network and its operating rules should be clearly defined to create efficient procurement, intercompany and distribution processes. The TOM provides fundamental input for the requirements that need to be reflected in the system.
Structures for the future
S/4HANA transformation projects require comprehensive transparency with regard to the TOM that should be enabled. Inefficient structures can be overcome by looking at the operating model to identify areas where adjustments may be necessary. Without a future-oriented and transparent TOM, there is a risk of implementing legacy structures in the new system that are difficult and expensive to change later. This can result in large investments being made for something that ultimately does not optimally support the future business.
TOM approach
The Target Operating Model deals with the essential areas of the company. It includes governance and organization, as well as the steering model, including the corresponding KPIs and reporting. The business process model is also considered, whereby a distinction is made between standard processes and those that differentiate the company in the market. Material and value flows along the entire supply chain are a central element, too. Hence, the physical material flows from the supplier to production plants to distribution centers and finally to the customer are considered. In addition to the associated value flows, the legal entities involved and any tax aspects play an important role. Finally, the enterprise architecture and technology are also part of a well-defined TOM. This layer defines which system architecture and applications are required to best support the overall TOM and the resulting process and functional requirements.
Before or at the very beginning of a S/4HANA transformation project, an operating model review should be carried out to evaluate the company’s current operating model in terms future fit.
If the analysis shows a need for adjustment, this change is subsequently designed to define the new Target Operating Model. Various options are evaluated and narrowed down. Depending on the results of the previous analysis, only individual or all dimensions of the operating model may be relevant. Once the redefinition has been completed, a roadmap for implementation has to be defined. Interlinking this roadmap with the S/4HANA transformation is compulsory.
Conclusion
Without a future-oriented and transparent Target Operating Model, an important input element for an S/4HANA transformation is missing. This not only means a missed opportunity but also increases the risks for the success of the transformation.
A well-defined target operating model is the key to successfully mastering the challenges of digital transformation and making the company fit for the future.
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