How to Design a Target Operating Model (TOM) for Outsourcing

A Target Operating Model (TOM) defines how an organization will operate in the future after implementing a strategic change like outsourcing. It provides a blueprint for structure, processes, technology, governance, and culture. A well-designed TOM ensures the outsourcing initiative aligns with the broader business strategy and delivers intended benefits.

This document outlines how to design an effective Target Operating Model specifically for outsourcing.

1. Why a Target Operating Model Is Essential

• Aligns outsourcing with business strategy and objectives.
• Defines clear roles, responsibilities, and processes.
• Provides a roadmap for managing change.
• Enhances coordination between internal teams and external vendors.
• Reduces operational risks and ensures service quality.

2. Core Components of a Target Operating Model

a) Organizational Structure

• Define which teams and roles will remain in-house versus outsourced.
• Identify relationship management functions (e.g., Vendor Manager, Service Owner).
• Set escalation paths and governance structures.

Tip: Introduce a “Retained Organization” — the internal team responsible for overseeing outsourced services.

b) Processes

• Redesign workflows to integrate internal and external teams.
• Standardize service delivery processes (e.g., ticket handling, incident management).
• Establish Service Level Agreements (SLAs) and Key Performance Indicators (KPIs).

c) Technology

• Identify technologies to be managed by outsourcing partners.
• Define integration points between internal systems and vendor platforms.
• Ensure data security, privacy, and compliance.

d) Governance

• Develop governance models to oversee vendor performance and issue resolution.
• Set up regular reporting, quarterly business reviews, and compliance audits.
• Define change control procedures.

e) People and Culture

• Plan change management initiatives to support internal adaptation.
• Foster collaboration and trust between internal teams and external providers.
• Address potential cultural gaps, especially in offshoring scenarios.

3. Steps to Design a Target Operating Model for Outsourcing

1. Assess Current State: Map current organizational structure, processes, technologies, and capabilities.
2. Define Strategic Objectives: Clarify what outsourcing should achieve (e.g., cost savings, speed, innovation).
3. Design the Future State: Sketch the new operating model covering structure, process flows, governance, and technology.
4. Gap Analysis: Identify gaps between current and target states.
5. Develop a Transition Plan: Define workstreams, timelines, responsibilities, and change management actions.
6. Test and Refine: Pilot elements of the new model where feasible to validate assumptions.

4. Best Practices

• Keep It Simple: Focus on essential capabilities needed to deliver value.
• Design for Scalability: Ensure the model can adapt to future business growth.
• Involve Key Stakeholders: Secure buy-in across business, IT, HR, legal, and finance teams.
• Plan for Flexibility: Allow room for vendor innovation and continuous improvement.
• Integrate Risk Management: Embed risk identification and mitigation into processes and governance.

Conclusion

A Target Operating Model isn’t just a theoretical exercise — it’s the foundation for operational success post-outsourcing. A well-designed TOM aligns organizational capabilities, outsourcing partnerships, and technology into a coherent, high-performing system.

Investing the effort in TOM design ensures outsourcing delivers on its promise of efficiency, agility, and value creation.