You’re gearing up for an exciting road trip, but you wouldn’t just hop in the car and drive aimlessly, right? You’d map out your route, pick the best stops, and make sure your car is ready to roll. In the same way, a Target Operating Model (TOM) is like a business’s roadmap. It outlines how all the moving parts—processes, technology, and teams—come together to deliver value.
What is a Target Operating Model (TOM)?
A TOM serves as a blueprint for how a specific function or process should operate to achieve its objectives. Think of it as a guide that outlines the structure, responsibilities, and workflows necessary for success. Whether you’re managing a single department or overseeing the entire organization, a TOM ensures that everyone is working toward the same strategic outcomes.
Why Is TOM Important for Budgeting?
Budgeting is changing as we know it; it focuses not only on crunching numbers but also on efficiently allocating resources to support the company’s strategy. The traditional ways of planning finances often feel clunky, disconnected, and slow to respond to the dynamic needs of businesses today. With outdated frameworks that rely on stale data and rigid assumptions, many organizations struggle to create budgets that truly align with their goals or adapt to unforeseen challenges.
For budgeting, the TOM ensures clarity and transparency, offering finance teams a clear roadmap to align resources, set priorities, and track performance. While there are many TOMs designed for different purposes, we’ve created the TARGET model to help finance teams streamline their budgeting processes specifically.
A well-defined TOM provides a clear picture of how the organization operates, making it easier to identify where to invest and where to cut back. This alignment ensures that the budget supports the company’s goals and adapts to changes in the business environment.
Key Components of a TOM
Let’s break down the main elements of a TOM:
- Processes – These are the workflows that keep the business running. In budgeting, this means understanding how to conduct financial planning, forecasting, and reporting.
- Technology – This includes the tools and systems that support budgeting activities, like financial software and data analytics platforms.
- Organization Structure – This defines who is responsible for what. Clear roles and responsibilities ensure that budgeting tasks are carried out effectively.
- People and Skills – Having the right talent with the necessary skills is crucial. This means training staff in budgeting techniques and financial analysis.
- Governance and Decision-Making – Establishing clear policies and procedures ensures that budgeting decisions are made transparently and align with the company’s objectives.
- Culture and Leadership – A culture that values financial discipline and strong leadership can drive effective budgeting practices.
- Customer Experience – While it might not seem directly related, understanding customer needs can influence budgeting priorities, ensuring that resources are allocated to enhance customer satisfaction.
How to Develop a TOM for Budgeting
Creating a TOM tailored for budgeting involves several steps:
- Assess the Current State – Understand how budgeting is currently done. What works well? What doesn’t?
- Define the Desired State – Determine what effective budgeting looks like for your organization.
- Gap Analysis – Identify the differences between the current and desired states.
- Design the TOM – Develop a plan that addresses the gaps, aligning all components—processes, technology, people, etc.—to support effective budgeting.
- Implement and Monitor – Put the plan into action and regularly review its effectiveness, making adjustments as needed.
Benefits of a Well-Defined TOM in Budgeting
By having a clear TOM, organizations can:
- Enhance Efficiency – Streamline budgeting processes to save time and reduce errors.
- Improve Alignment – Ensure that budgeting aligns with strategic goals.
- Increase Agility – Quickly adapt to changes in the business environment.
- Strengthen Decision-Making – Provide better information for informed financial decisions.
Introducing the TARGET Framework for Budgeting
The TARGET framework is a simple yet effective way to make your budgeting process more strategic and flexible. Each letter in “TARGET” represents a step in the process.
Transform Objectives into Goals (T)
Break down broad strategic objectives into clear, actionable goals that everyone can rally behind.
Align Teams (A)
Ensure every department’s plans align with overarching business objectives.
Reallocate Resources Wisely (R)
Distribute resources where they’re needed most to support your goals.
Generate Progressive Metrics (G)
Create measurable indicators that track progress and provide actionable insights.
Evaluate Performance Continuously (E)
Keep a close eye on results and adjust as necessary to stay on track.
Tailor and Improve Plans (T)
Make ongoing improvements to refine your strategies and adapt to new challenges.
Now, let’s break down each step and see how you can apply it to your budgeting process.
Step 1: Transform Objectives into Goals (T)
Start by turning high-level objectives into specific, actionable goals to set your budgeting process on the right path. This transformation ensures clarity and focus, making it easier to allocate resources and measure success.
Step 2: Align Teams (A)
Budgeting isn’t just a finance function—it’s a team effort. To ensure success, all departments need to align their plans with the company’s strategic goals. This step fosters collaboration and reduces inefficiencies.
Key Questions to Ask Your Teams
When engaging department leaders, ask questions like:
- What additional resources do you need to achieve your targets?
- Are there any market trends or opportunities you think we should explore?
- What potential risks do you foresee, and how can we address them?
- If costs needed to be reduced by 10%, what would you cut?
- Are there any areas where cross-department collaboration could enhance outcomes?
These conversations ensure alignment and help identify gaps and opportunities that might otherwise be overlooked.
Step 3: Reallocate Resources Wisely (R)
Resource allocation is where strategy meets action. To get the most out of your budget, you need to distribute resources in a way that supports your objectives while remaining flexible enough to adapt to changes.
Leveraging Scenario Planning
Scenario planning equips you to anticipate and adapt to different potential future outcomes. For instance, you might plan for a potential economic slowdown by earmarking funds for efficiency improvements. Alternatively, you could allocate resources for scaling operations in a high-growth scenario.
By considering multiple scenarios, you’re better equipped to make informed decisions that keep your organization resilient and adaptable.
Step 4: Generate Meaningful Metrics (G)
Metrics are the backbone of effective budgeting. They enable you to monitor progress, pinpoint areas that need improvement, and make informed decisions based on data.
Guidelines for Choosing Metrics
- Focus on What Matters – Select a few key metrics that align with your primary objectives.
- Keep It Simple – Avoid overly complex indexes. Clear, straightforward metrics provide better insights.
- Ensure Alignment – Every metric should tie back to your strategic goals.
For example, if your goal is to improve customer retention, a relevant metric might be the churn rate. By focusing on such specific indicators, you can monitor progress and adjust as needed.
Step 5: Evaluate Performance Continuously (E)
Once your budget is in place, the real work begins. Regular performance evaluations ensure that your plans are on track and that any deviations are addressed promptly.
Tools for Evaluation
- Dashboards – Provide a visual overview of performance metrics.
- Scorecards – Track progress toward specific objectives.
- Templates – Standardize reporting across departments.
By regularly reviewing performance, you can identify trends, address challenges, and ensure accountability across the organization.
Step 6: Tailor and Improve Plans (T)
The final step is about adaptability. Business environments change, and your budget needs to keep up. Regular updates and adjustments ensure that your budgeting process remains relevant and effective.
The Role of Forecasting
Forecasting allows you to test the validity of your budget in real time. By comparing actual performance with projections, you can:
- Update your plans to reflect current conditions.
- Improve predictability and decision-making.
- Align actions with both short-term needs and long-term goals.
Why Does it Work?
By following this framework, you create a budgeting process that is not only aligned with your strategic goals but also flexible enough to adapt to changes. Budgeting doesn’t have to be a tedious, rigid exercise. With the right tools and mindset, it can become a dynamic process that drives growth and innovation.
