What is a Finance Operating Model?

What is an operating model?

The term ‘operating model’ seems to hold no universally agreed definition.  Much of the

explanation and resources relating to operating models stem from the world of consultancy, and even there, consultants interpret and explain operating models in different ways. 

For example, one firm of consultants describe an operating model as the way in which an organisation creates value and whom within the organisation creates it.  Others describe it as the ability to convert strategic objectives into action through operational capabilities, or the blueprint for organising resources and operations to achieve strategic goals.  More simply an operating model defines the mechanism for how value is created and delivered to the customer.

Academics on the other hand, broadly align on the concept that an operating model is instrumental in delivering business objectives and value to an organisation.  This is achieved through the standardisation and integration of business processes for the purpose of meeting customer needs.  One academic defines an operating model as being ‘a visualisation (i.e. model or collection of models, maps, tables and charts) that explains how the organisation operates so as to deliver value to its customers or beneficiaries’.

Why is it important?

Despite the differing definitions and descriptions, consultants and academics alike place emphasis on the need for an organisation to structure its resources and capabilities effectively, and in a manner that delivers value and achieves strategic goals. 

What is also evident from the differing definitions is that an operating model is vitally important to an organisation in achieving its objectives.  It enables organisations to improve business performance through operational efficiency, drive better decision making and improve customer connectivity.  An operating model that improves connectivity across an organisation can also reduce costs and promote greater agility and innovation.

So what?

On the other hand, the absence of an effective operating model may prevent an organisation from being able to fully exploit new opportunities as they ‘fail to effectively co-ordinate their resources’ to respond to those opportunities.  Organisations are also exposed to greater operational risk such as breaches in standards and regulations where, for example, employees are unable to carry out their work in a manner that protects an organisation from such breaches, due to the absence of clear internal policies and standards, together with insufficient clarity around individual’s roles and responsibilities that could impact decision making when it comes to seizing opportunities or addressing issues.

The term operating model should not be confused with the term, target operating model.  The distinction between the two is clear - the ‘current’ operating model is how an organisation is ‘configured today’, whereas the target operating model is a future end state of how a company can be better organised in moving towards achieving its strategic objectives more effectively and efficiently.

What is a financial operating model?

There are two main aspects for Finance to consider: effective business partnering and robust financial processes and control.

• Business partnering: supporting the business with relevant, accurate and timely financial insight to navigate current risks and future opportunities and to enable effective and better decision making.  By integrating Finance with the business and being actively involved in business decision making, organisations can make more informed and better decisions aimed at improving profitability and achieving overall organisational success.

• Financial processes and control: with a focus on governance, operations and value protection, finance teams need robust end-to-end financial processes - such as billing customers, paying suppliers, managing cash and paying taxes - and controls in place to maintaining effective management of financial risks and keep operating costs as low as possible.

An effective finance operating model enables an organisation to structure its resources, processes and use of data, with the support of appropriate technology, in a way that maximises value for a business.

Conclusion

While many definitions exist on what an operating model is, the consensus amongst experts is that a fully defined, developed and aligned financial operating model enables an organisation to meet its overall vision and strategic objectives and for Finance, if designed well, enables the finance team to being a more value added team by serving and supporting the organisation to make better decision making and meeting all its financial obligations.

Our next article focuses on the process for designing an effective operating model....

Author: Mark Trenavin-Body EMBA, CMgr FCMI, FATT