How to design a target operating model in banking

14 October 2022 4 min. read

A target operating model is the core of any bank, providing the fundament for how a bank delivers value to its customers and stakeholders, as well as how the bank actually runs itself. Experts from Fincog outline how a target operating model in banking 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 convert its strategy into operational processes and decisions.

The design of a target operating model hinges on four building blocks: Organization, Processes, Technology, and People.

How to design a target operating model in banking

What entities and lines of business will I need and how are they structured?

What key procedures and process flows will be necessary to run the organization?

What technology and IT architecture will be needed to support and enable the organization?

What key roles, responsibilities, types of people and skillsets will be needed in the organization?

Strategy at the outset

The design of an operating model starts by describing the strategy. An operating model helps an organization and its management to translate strategic objectives into operational executable actions. Since the operating model bridges the gap between strategy and execution, it is fair to say, that the strategy ultimately determines the main building blocks of which the operating model consists.

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

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

Such a team might also intervene across several functions and processes like loan monitoring or general customer servicing and with so many intertwined processes and teams, the organization will have a variety of subsequent requirements. These include teams who manage the necessary technology such as the cloud infrastructure but at the same time people with cross-functional abilities and ways of working across the entire organization.

Hence, before defining the operating model, a bank should firstly create a clear strategic vision around the market, product and customer segments it will compete in, a differentiated value proposition and a well-defined business model. All these aspects should be detailed sufficiently since they directly influence the operating model design.

Steps in defining the operating model

Once a bank has defined its strategic vision, so-called design principles should be established explaining how the operating model will support strategic objectives. Also, key requirements and capabilities that must be supported by the target operating model should be determined.

Building 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 organization chart, key roles and responsibilities of the main entities or an initial description of cultural guidelines for how people work together across the business.

With the high-level operating model design set in place, a more detailed blueprint can follow. Next to basing the operating model on the overarching strategy, a second crucial aspect is to design an operating model around the end-to-end user journeys of customers.

It is therefore advised to move from high-level functions to detailed processes and organization design by identifying key user journeys.

Lastly, it is important to point out that as strategic priorities and objectives of a company change over time, so certain elements of the operating model should be adjusted to allow for continuous agility and improvement.