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Is your operating model stifling innovation?

Is your operating model stifling innovation?

Most organizations recognize the need to be more innovative. They want to adopt new technologies, be more responsive to market and customer changes, quickly pilot new ideas and scale them.


Despite innovation’s association with ideas, we find within our clients that the biggest challenge is not finding compelling new concepts but getting them to market, learning what delivers customer value and turning ideas into sustainable businesses.


Innovation isn't an add-on to the current ways of working. Success requires a new way of thinking and operating across the organization.


We have found that organizations that take this path can address the common obstacles to innovation success — slow decision-making, conflicting departmental goals and priorities, risk-averse cultures, inflexible systems, fragmented processes and silo-based knowledge and information.


This article focuses on how to operate as a responsive, iterative, adaptive and value-driven business. It provides business leaders with a framework of the critical capabilities required to deliver sustainable innovation.

Success = Strategy x Execution


It's not uncommon for companies to give strategy more attention than execution. Nevertheless, an average strategy that is well-executed trumps a brilliant strategy poorly delivered. Leaders of successful businesses get this. They invest in their organization’s capabilities to execute and run innovation ideas with the same enthusiasm as developing product/service propositions or adopting new technologies.


Their cross-functional product teams use new ways of working, data analytics and enabling technology to iteratively experiment to find the best ways to deliver maximum value to customers. Their management systems, including finance, compliance and HR support the continuous delivery of customer value. 


Organizations that operate this way not only increase their speed and agility but also improve product/service quality, reduce risk by quickly testing new ideas in the market and lower costs by diverting spend to proven initiatives.

End-to-end and Front-to-back


To help visualize how organizations deliver customer value, consider the following two dimensions - the end-to-end customer journey and the value streams running from the front line to the back office, supporting the customer journey at every customer interaction.


End-to-end customer journey


Businesses are built on instigating a value exchange. Value is what customers want — their problems solved affordably, quickly and in a way which offers them convenience, control and peace of mind. Revenue and profit are what the organization gets in return.


The end-to-end customer journey is where value is delivered. These journeys can vary by product/service and customer segment. They can also be external and internal, and broken down into journey events, i.e. making a payment, analyzing medical results or booking a holiday.


Innovative businesses continually focus on improving the customer experience across the journey, constantly asking - What new ideas should we be testing to deliver greater value for our customers? How much do customers value these ideas?


Front-to-back value streams


Opportunities to improve efficiency and effectiveness can be found across the value stream from the front line to the back office in every interaction with the customer.


Innovative organizations unlock substantial value by reimagining business processes, removing operational constraints and getting people to collaborate across disciplines. Many traditional organizations find this difficult to achieve. We often see companies running a collection of disconnected technology and operational capability projects, each with its own goals, priorities and timelines. While these are improving specific parts of the value stream, they fail to uplift the company's overall ability to delight customers and grow revenue.


Why? Because siloed structures, conflicting departmental agendas, line-of-business budgeting and project rather than value-oriented performance measures constrain and erode their ability to step-change improvements in revenue, customer experience and costs

Configuring the business for innovation


With the digital landscape and customer expectations constantly changing, identifying how to improve customer value and how to deliver it requires carefully managed, frequent experimentation.


Traditional organizations are not set up to operate this way. Their processes and systems are designed for a more predictable business environment where cost efficiencies and ROI is the focus. They work in predetermined cycles using a rigidly controlled production-line delivery process. The stable, safe climate for which these processes were designed no longer exists. Their predisposition toward consistency often makes it hard for them to see this.


Innovative businesses operate differently. They bring together teams of people from across different functions to break down silos and streamline business processes. They align budgets, success and performance measures to value delivery. Risk-averse policies are reviewed to enable 'safe' experimentation guided by data-driven decision-making. Technology systems and software development practices are modernized to unlock value and efficiently deliver innovation at pace.


This new way of working focuses on the following five complementary operational capabilities. Once in place, they create the modern digital operating model that drives innovation delivery across the organization.


1. Management alignment around creating customer value and more flexible ways of working


Innovative companies are not just doing things faster. They are aligned behind the innovations with the greatest potential by rethinking their management systems to keep everyone focused on how their work produces customer value.


The challenge for many established companies is that existing strategic decision-making, budgeting processes and performance evaluation methods often make this difficult. To transform, they must redefine success in terms of customer needs and outcomes, not an internal operational activity or ROI. That also means realigning budgeting, objectives, success measures and assessing individual's impact on value delivery.


For example, a vehicle leasing company going through this process shifted the focus from 'How will this impact our bottom line?' to 'How will this impact the value we deliver to our customers?' They encouraged short duration (weeks/months), low-cost agile projects rather than 'big-bet' initiatives implemented over years. The better they became at this, the more they reduced the time and money spent on initiatives that did not deliver value.


We have found that organizations haven't always been successful in agile - it is often done in pockets. The result is a partial increase in speed, but the organization delivers value no quicker as a whole. The best results come when functions like Finance, Marketing, Legal, Compliance and Risk are engaged early and begin to adopt agile methodologies themselves, finding ways to avoid rigid budgeting processes and formal approval policies at every turn.


2. Cross-functional teams create digital products iteratively through experimentation


Successful innovators continually bring together functional experts and assign them to customer outcome-focused initiatives. People with different skill sets work closely together, full-time, coming up with innovative solutions and running rapid test-and-learn experiments to get valuable products/services into the customer’s hands sooner.


This approach minimizes inefficiencies created by departmental handovers and gives people the opportunity to learn about the work, priorities and motivations of others in the organization. They understand the bigger picture and how their actions affect everyone else. In our experience, cross-functional teaming is one of the single most impactful changes an organization can make to increase its level of customer focus and increase speed-to-value.


However, companies struggle to set up and run such teams. Existing siloed structures (product, sales, IT, marketing, etc.) and functional heads have their targets, budgets and priorities, resulting in conflicting interests. Employees also have their reporting line and KPIs. There are different ways of dealing with these constraints. For example, a company can make cross-functional teams the primary form of its organizational structure but removing all functional units is very difficult. An alternative approach is to create fluid structures so people can move into various roles and teams alongside the main hierarchical structure.


It is critical to these teams' success that they can work autonomously, own the products/services journeys, run experiments and be empowered to make decisions to achieve the agreed outcomes, not simply project tasks. This does not mean a ‘no rules’ situation. Business leaders provide the why (clarity on strategy and goals) but delegate the how.


3. Data insights to unlock new sources of value and better decision-making


Data helps businesses make better decisions and provide better products and services to customers. 


For example, the leading edge of the retail sector is using omnichannel data to drive sales and customer understanding, creating differential personalized experiences. Manufacturers use data to provide predictive maintenance or take preventative actions, increasing service levels and providing information as a value add to customers.


To achieve this, companies need to get data into the hands of the teams creating the products/services to make quick decisions on what to do, when to do it and when to stop doing something if it is underperforming.  


Innovative businesses set up feedback mechanisms between the front line, back office operations and the product teams. The abundance of data generated by daily activity is collated into user-friendly dashboards and reports, some of them in real-time.


Organizations typically have data scattered among disparate silos, often caused by a legacy of heavyweight systems that perform useful tasks but hoard data. Customer information, purchase history and inventory information are usually spread far and wide, making it very difficult to get a holistic view to create new offerings and drive cross and up-sales to existing customers.


Accessing data can also involve considerable bureaucracy, red tape and friction. This may be appropriate for controlling protected data, but in many cases, it is because data is locked up in multiple systems or controlled by different teams.


To address these issues, successful innovators have built technology capabilities to collect clean data, put it into appropriate places and align business processes so people across the organization can have easy 'self-service' access to it.


4. Platform architecture which allows for adaptability and frequent change


Flexible modular architecture is a vital component of a modern digital operating model. Platform architectures using microservices enable organizations to get products and services to market faster by allowing cross-functional teams to develop, test, problem-solve, deploy and update services independently.


Many organizations are still lumbered with monolithic applications with centralized, multi-tier architectures making change and additions difficult and costly. Innovative companies are overcoming these challenges by building modular technology for commonly shared capabilities that can be easily used across multiple customer journeys. They are running applications in the cloud rather than owning all their infrastructure. This brings cost benefits as well as speed and flexibility of provisioning, scaling and monitoring computing resources. 


Business leaders collaborate with technology teams to determine which systems need to move faster to deliver customer value. Together they are creating legacy modernization strategies that support the broader business strategy.


Modern systems combined with software development techniques (detailed below) reinforce each other, delivering massive productivity and faster customer value creation.


5. A modern approach to software development to get new products into customers’ hands quicker


Based on the same principles of agile to deliver incrementally and frequently, innovative businesses have adopted Continuous Delivery and DevOps practices to streamline processes.


Unlike the traditional approach, in which dedicated teams often work on discrete technology functions, the modern Continuous Delivery method means a team, aided by the automation of repetitive manual tasks, can release solutions and changes at the push of a button without waiting for lengthy testing and release cycles.


They also embrace DevOps practices and culture. In a traditional setting building the software, and managing and maintaining it in run mode, are two different activities with different skill sets. In DevOps, everyone is responsible for service provisioning and failure.


For example, a mobile phone manufacturer's adoption and improvement of Continuous Delivery and DevOps has significantly shortened its delivery lifecycle from months to weeks, enabling new product features to be in the market sooner.


Without these five foundational capabilities, innovation is less likely to succeed — slower to get going, harder to sustain, and importantly, lacking integration. As a result, initiatives are parked alongside the existing customer journeys or company operations and fail to have the desired transformative impact.

The implementation challenge


Many organizations put their efforts into setting up product teams, internal innovation labs or corporate new ventures, and get to work on building a minimum viable product (MVP). When they start engaging the rest of the organization, which they must, problems rapidly emerge — business-as-usual ways of operating and new digital best practices struggle to mesh. 


Without a holistic approach to transitioning the organization to a modern digital operating model, the innovation strategy will continually encounter obstacles. But companies have a finite amount of resources, bandwidth and funds. A broad, 'big-bang' transformation is neither feasible nor desirable. 


The alternative is to take a 'thin-slice' approach - a deep section running vertically through the organization from top to bottom, front line to the back office, enough to be containable but large enough to demonstrate value creation through adopting new ways of working.


This approach is more manageable. It enables companies to stress-test the impact of new ways of operating, and to implement and adapt iteratively.


Innovating through a vertical thin-slice


Start with the end-to-end customer journeys, be it existing or new products/services. Pick the areas that present the most significant opportunity for improvement.


Companies often miss opportunities to significantly improve customer value by failing to challenge and reimagine the customer experience. We have found that businesses typically underperform in key areas such as resolving customer problems/complaints, signing up and onboarding people, cross-channel sales and servicing, and tracking progress on fulfilment of orders. These aren’t always top of mind for organizations chasing innovation headlines, but they are critical to their performance.


Successful innovators excel by making it easier for customers to do business with them, providing radical personalization, removing complexity, automating low-level tasks and delivering cohesive solutions.


For example, a financial services company found more than 60% of customers attracted to the firm's competitive products found the six-day account set up lead time too long to start investing, especially during high market volatility. They were losing business to fintech competitors who were onboarding customers in six minutes or less. Another company that prided itself on the quality of its personal service discovered many customers were happier with self-service for some journey elements. It was more convenient and gave them greater control.


Use customer outcome statements to define how you intend to deliver customer value, i.e. 'I can do/get/see….' and assign measurable indicators to determine if customers are achieving these outcomes.


Next, look at the value stream running from front to back office supporting the customer journey - the people, processes, technology and data feeds. This is your thin slice and provides the focus for a) unlocking customer value and b) implementing the five operational capabilities.


It is essential to understand that these capabilities feed into and off one another. They should not be approached as separate sequential initiatives but as an integrated transformation program. Also, restricting implementation to selected functional units is not a thin slice. It may optimize specific parts of the business but will fail to achieve the desired innovation outcomes or learnings on how to drive sustainable change.


Things will go wrong. When this happens, it is tempting to blame the new ways of working rather than seeing them as a by-product of change and coming to terms with the new operating model.


Establishing the core capabilities across the slice takes time, but it will build lasting new confidence by convincing management, employees, stakeholders and customers through genuine changes, that innovation can deliver value, thus justifying the investments.


Making it happen


This article shows how organizations need to operate to deliver sustainable innovation. The process for transitioning to a modern digital operating model will vary depending on the culture and digital maturity of the organizations. However, we recommend the following advice for getting started.


  • It requires dedicated funding. 71% of companies surveyed in a recent study we commissioned, conducted by Forrester, used a dedicated digital transformation budget.

  • CEO and senior executives must align the middle management (surrounding the thin slice) behind customer value delivery, value success measures, rapid experimentation and iterative product/service development.

  • Function and business unit leaders have a crucial role in achieving broad buy-in and inspiring peers with the innovation vision.

  • Legal, Compliance, Finance and HR must be involved early to work out how to adapt existing policies and processes to new ways of working within the thin slice.

  • Someone needs to coordinate the process across the different functions and silos, pulling the right people and capabilities, as and when required, into the thin slice transformation initiative. It’s not a project to manage, it’s a mission to drive – so don’t assume your business-as-usual teams will simply pick this up.

  • Current talent, behavior and culture analysis, and the appetite for change must start at the beginning of the engagement. This should be part of an ongoing change management program to help make new working practices stick.

  • Innovation requires more than great ideas and digital skills. The organizations that succeed and thrive know that how innovation is pursued is just as important as the ideas themselves. They have built the optimal operational capabilities to deliver their strategies, and the flexibility to adapt fast to changing customer needs, markets and technologies without the risk of losing revenue.

About Thoughtworks


We help organizations interpret their strategic intent and turn it into reality. We implement the required changes across operations, technology, products and data to transform companies into modern digital businesses. 


Most of the essential operational methods and practices required for organizations to compete and grow in today’s digital world were designed and developed in the technology domain. Thoughtworks invented the concept of distributed agile and has over two decades of on-the-ground experience implementing the technical and human dimensions of digital transformation.


Founded in 1993, we’ve grown from a small team in Chicago to a leading technology consultancy of more than 10,000 Thoughtworkers in 17 countries.


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