Amid unprecedented challenges, companies around the world have been evolving their operating models at unprecedented speed: shifting entire workforces to a remote model, for example, or reallocating resources and developing new digital capabilities in a matter of weeks in order to meet rapidly changing customer preferences.

For most organizations, crisis has provided new urgency to a process of change that was already underway. Even before 2020, many of the world’s largest companies were investing heavily in new technologies and new ways of working. Financial services group JP Morgan Chase, for example, invests $11 billion every year in digital projects, and employs 50,000 technologists across its businesses. It became the first major bank to roll out AI-powered virtual assistants. Walmart added 1,700 technology-focused staff to its workforce in 2018 alone. The company is now estimated to have the world’s third largest IT budget.

Despite significant effort and substantial investment, however, relatively few big companies have made the shift to new digitally-enabled ways of working across their operations. In this article, we explore why companies hit the “great wall to scale”, look at some of the key pitfalls to avoid, and suggest a set of actions to maximize the chances of a successful operating-model transformation.

The next-generation operating model

When companies began to experiment with digital enhancements, automation, or artificial intelligence (AI), one truth quickly emerged: transforming involves more than just developing new technological solutions and plugging them into the existing environment. To reach their full potential, new technologies require processes to be redefined and simplified, data flows to be rewired, and the orchestration of work between humans and machines to be reengineered. Together, they imply a next-generation operating model—a new way of running the organization that combines digital technologies and operations capabilities in an integrated, well-sequenced way, thereby achieving dramatic improvements in revenue, customer experience, and cost.

We have identified three common characteristics shared by the minority of organizations that have managed to deploy a next-generation operating model at scale.

• A truly end-to-end, value-stream orientation. These leaders redesign their core operations to align with their most important value streams and customer journeys. A few critical success measures, including effectiveness, efficiency, and customer-related metrics, are systematically recorded and reviewed—both within functions and end-to-end as work moves from function to function.
• A strategic aspiration. The organization dedicates a significant part of its financial and human resources to the development and integration of new technologies, such as automation, advanced analytics, or AI, into its operations. These companies often establish centers of excellence for specific digital technologies, and their promotion is the responsibility of a dedicated C-level executive.
• An enterprise-wide continuous-improvement engine. These organizations have a managerial culture, expressed through carefully designed practices and systems, that enable continuous improvement at the front line. They also adopt agile approaches in critical processes, such as capital allocation.

Companies that successfully deploy a next-generation operating model at scale have created significant new value. One bank has seen its revenue increase by 25 percent and its operational costs decrease by 40 percent, while customer satisfaction improved by 15 percent. A telecommunications company has cut its time-to-market by a factor of ten, while employee satisfaction increased by 10 percent.

The great wall to scale

At-scale transformation to a next-generation operating model remains rare, however. A survey we conducted of more than 1,000 companies shows that while most have made some progress in modernizing their operations, less than one-third have managed to move beyond the pilot phase. Moreover, the last two years have seen little improvement in this situation (Exhibit 1). For the majority of companies, the great wall to scale appears almost impenetrable.

Another brick in the wall… and more

Many hurdles can hamper an organization’s efforts to roll out a new operating model, but we believe that five specific issues stand in the way of the majority of large-scale transformation efforts.

Distraction: losing senior-management attention. Transitioning to a next-generation operating model is not a one-off effort. Generating the first major, enterprise-wide improvements usually takes two to three years, and the building of a continuous-improvement engine to extract more value on an ongoing basis. These long time spans make it easy for top management to lose interest. Common symptoms include failing to formalize the transformation as one of the organization’s top two strategic priorities, failing to translate the transformation ambition into tangible and measurable targets, and failing to adapt incentive systems to focus all layers of the organization on their role in the transformation.

Starvation: underfunding the effort. Our colleagues’ Power Curve research indicates that the ability to rapidly shift financial and human capital to new strategic priorities is a crucial attribute of the world’s most successful organizations. Yet, when it comes to operational transformation, too many companies are nervous about such bold moves. Leaders can be held back by multiple factors, including risk aversion and the difficulty of challenging established cultures and operating models. Whatever the reason, the result is the same: the transition to a next-generation operating model is underfunded. The change team is expected to perform miracles, building the necessary excitement, momentum, and capabilities across the organization with only 25 to 50 percent of the investment it would need to drive real results. The experience of large companies that have successfully transformed shows that this requirement often translates to a resource allocation of more than $100 million.

Overextension: trying to run before you can walk. At the other end of the spectrum, some organizations become so galvanized by their vision that they try to do too much too soon, implementing multiple improvement levers in every business unit at once. Moving too fast makes it difficult for the organization to internalize the change. And having several groups climbing the learning curve at the same time can hinder the spread of institutional learning, leading to duplication of work and investments, and unnecessary complexity down the line. Excessive speed can also mean program teams are spread too thinly across the organization, unable to support or coordinate initiatives effectively.

Underestimation: ignoring the human factor. Despite the advanced technologies involved, the transition to a next-generation operating model is primarily a cultural and mind-set shift. For new technologies to add value at scale, they must be adopted by employees and customers alike. Companies that ignore this necessity quickly lose the confidence of both groups and fail to capture tangible gains from their investments. Underestimating the need for education, communication, and reskilling during a transformation has left many organizations in “pilot purgatory,” with ineffective models that prove impossible to scale.

Tunnel vision: failing to rewire supporting structures. A successful next-generation operating model requires close attention to value streams, such as customer journeys or end-to-end processes, but this focus is not enough to support a transformation at scale. A company will also need to change how it works beyond operations, from revisiting incentive structures (so they improve cross-functional collaboration and effectiveness) to redesigning organizational structures (for clearer accountability on each major value stream). Without an aligned, supportive environment, a new operating model can wither and die.