How to design a target operating model in banking

A target operating model is at the core of any bank and forms the basis of how a bank provides value to its customers and stakeholders and how the bank actually runs itself. Fincog experts outline what a target banking operating model looks like and what it takes to design a comprehensive and successful operating model.

A target operating model is essentially a model that explains how value is created and by whom it is created within the bank. A target operating model can therefore be seen as a blueprint that helps a bank translate its strategy into operational processes and decisions.

Based on our experience, a target operating model consists of four building blocks: organization, processes, technology and people.

organization
Which units and business areas do I need and how are they structured?

processes
What are the key procedures and process flows required to operate the organization?

Technology?
What technology and IT architecture is needed to support and enable the organization?

persons
What key roles, responsibilities, types of people and skills are needed in the organization?

strategy at the beginning

Designing an operating model begins with outlining the strategy. An operating model helps an organization and its management translate strategic goals into operationally executable actions. Because the operating model bridges the gap between strategy and execution, it is fair to say that strategy ultimately determines the key building blocks that make up the operating model.

Take the example of an online lender whose strategic goal is to offer retail loans seamlessly and efficiently by leveraging technology and alternative credit scoring. Instead of siled teams responsible for originating credit and using traditional data sources for pre-approval and credit decisions, strategic goals require multiple cross-functional teams working closely together.

In addition to the typical teams handling client acquisition, loan approval, and the underwriting process, a modern lender also needs teams responsible for the data platform or machine capabilities to support the new loan scoring models using alternative data sources.

Such a team can also intervene across multiple functions and processes, such as: B. credit monitoring or general customer care, and with so many intertwined processes and teams, the organization has a variety of downstream needs. This includes teams managing the necessary technology such as cloud infrastructure, but also people with cross-functional skills and ways of working across the organization.

Therefore, before defining the operating model, a bank should first create a clear strategic vision in relation to the market, product and customer segments in which it will compete, a differentiated value proposition and a clearly defined business model. All of these aspects should be sufficiently detailed as they directly influence the design of the operating model.

Steps to define the operating model

Once a bank has defined its strategic vision, so-called design principles should be established that explain how the operating model supports the strategic objectives. It should also identify the key requirements and capabilities that must be supported by the intended operating model.

Based on the design principles, a high-level design can be defined that outlines the construct of the operating model from front to back. This could include rough sketches of the org chart, key roles and responsibilities of key units, or an initial description of cultural guidelines for collaboration across the organization.

Once the general design of the operating model is established, a detailed design can follow. Aside from aligning the operating model with the overall strategy, a second crucial aspect is to design an operating model around customers’ end-to-end user journeys.

It is therefore recommended to move from high-level functions to detailed processes and organizational designs by identifying key user journeys.

Finally, it is important to note that as an organization’s strategic priorities and goals change over time, certain elements of the operating model should be adjusted to allow for continuous agility and improvement.