In the Loop —Chapter 2: In the Loop Leadership

If you are the CEO or senior executive of a company with big aspirations — whether startup or Fortune 500 — it’s on you. Only you can turn your company into a fit systems enterprise.

You know one when you see one. The fit systems enterprise exudes customer value. A steady stream of innovative new products (and improvements to existing ones) flows into the arms of happy customers. Rich feedback loops reach into the ecosystem like roots, drawing nourishment and insight from developments in the market, customers and technology. A digitally literate top team has placed technology at the center of the enterprise, transforming products and automating processes. Technology use is guided by ethical principles. Data access is democratized throughout the enterprise; teams have the data they need to track performance and drive improvement. The performance bar for talent is high. Top echelon architects, engineers and product managers are attracted to join the company. They leverage disciplined agile delivery methods, reactive microservices architecture and efficient cloud based infrastructure to build great technology. The revenue engine hums like a Porsche. As change swirls in the ecosystem, nimble teams seize advantage, create new value, cut out obsolete parts of the system, discard out-of-sync processes and rebalance investments.

Just consider the winners. Amazon. Salesforce. Netflix. Microsoft. Google. Read what their leaders say: Bezos, Benioff, Hastings, Natella, the Google founders. They don’t hide what it takes. Bezos explained his philosophy in an SEC filing, called “Day 1.” Benioff speaks to his “seven lessons.” Hastings released the “Netflix Culture” deck. Natella has been open about his management philosophy. Books have been written by Googlers about the Google culture. Across all of these, the themes are remarkably consistent: build feedback loops everywhere, obsess about customers, drive constant digital innovation, set a high bar for talent, focus on teams, balance freedom and responsibility, focus on results not process, think systemically.

The bottom line is that there is just one way to create a fit systems enterprise: great leadership. To build the fit systems enterprise, you need to be an In The Loop leader. At a high level, you need to:

• Ready yourself to lead
• Set strategy
• Align people
• Manage change
• Drive execution
• Build culture

Ready Yourself to Lead

As CEO, you hold destiny in your hands. Many have entrusted their futures to you. Your customers have. Your employees have. Your investors have. It’s an awesome responsibility. If you are not prepared to lead in today’s fast changing digitally driven world, your future and the future of all who count on you will be bleak.

This means that the first person you must fix is yourself. To be a teacher, you must be a student.

You are a systems thinker

An In The Loop leader is a systems thinker. You conceive of your enterprise in its proper context. It is a system, living in an ecosystem. This enterprise can be viewed at multiple layers of abstraction. You see it comprised of both operating systems and meta systems. Inside these operating and meta systems are domains. Domains are made up of people, workflows, technology and money flows. All domains exhibit varying levels of threat and opportunity, health and maturity. Your job is to elevate them to counter threat and seize opportunity.

The ecosystem impacts the enterprise in diverse ways as competitors jostle, technology advances, customers change and markets roil. Change in the ecosystem must be sensed via feedback loops. In the enterprise, multiple teams operate at the boundary between the ecosystem and the enterprise, including revenue engine teams and product management teams. They are the ones on the receiving end of feedback. But it’s not enough to sense change. These teams must be capable of reacting. You empower these teams to sense and react.

In the fit systems enterprise each team has been assigned a unique business outcome objective. It aligns with the objectives of other teams. You have ensured these objectives link together in a hierarchy that leads up to the enterprise’s bounded purpose. You understand that for them to perform, the people inside all teams need role clarity, competency, motivation, energy and the right staffing levels to pursue their assigned objectives.

All of these factors require that you see the dynamic, integrated nature of things. It’s not enough to attack a symptom. You need to look beyond symptoms to root causes. You need to consider the interactions between people, workflows, technology and money flows. You need to appreciate that there are inevitable lags between intervention and effect. You need to consider now, near and far. You need to see your enterprise as a set of systems, not as a set of functions. Only then can you conceive of proper system interventions that advance your purpose in the face of change. This requires you to think systemically.

You are digitally literate

In today’s world, advantage goes to the enterprise with the greatest customer-centric digital leverage. So whether or not your background is in computer science, you and your fellow senior executives must all build digital literacy. It’s not surprising that the new CEO at Starbucks, Kevin Johnson, was previously CEO of Juniper Networks and held a senior role at Microsoft. A digitally literate leader understands what it takes to build and maintain sound technical architecture and infrastructure. She knows how to build great development teams. She appreciates that the skill of the technical team is a critical success factor, and that the difference between an average software architect and an excellent one (in performance terms) can be profound — often 10X or more. So too for all technical roles. Unlike procedural functions, where the difference between average and excellent might be 2X, the difference in key technical roles is always orders of magnitude greater.

The digitally literate leader appreciates the danger of technical monoliths. Technical monoliths are brittle and difficult to change. They impede adoption of modern applications such as big data, AI, machine learning and IoT. They can only be managed via a monolithic engineering organization pursuing waterfall (not agile) methods. The digitally literate leader understands what it takes and supports the extra work to refactor the monolith and transition into reactive microservices.

The digitally literate leader is comfortable allowing self-organized teams to figure out what software must be built to advance a defined business purpose. She appreciates the value of disciplined agile delivery methods. She understands that while applications are the most visible face of competitive advantage, these applications can only perform at their fullest potential when residing on top of modern cloud-based infrastructure. And so she supports projects that increase infrastructure scalability and resiliency, even if they draw resources away from the more rapid development of customer-facing features.

But most of all, she appreciates that significant investments in talent, time and technology are required to unlock these capabilities. These investments may take years to pay off. The digitally literate leader brings fellow executives along on the journey, approaching the task with relentless drive and determination.

You are ethically grounded

The In The Loop leader is guided by a strong ethical core. You have created and are guided by a virtuous vision for the enterprise. You have thought through the ethical issues associated with leadership and the deployment of advanced technologies. You are sensitive to the legitimate interests and rights of all stakeholders within and outside of the company. You work to ensure these principles are brought to life in decisions and actions.

In summary, In The Loop leaders are ethically grounded, digitally literate systems thinkers.

Set Strategy

Your top strategic priority is always to be generative. Value is in steady decline; you must replace it. You need a top team that is obsessed with customers. It must be capable of adopting an extreme outside in vantage point. It mobilizes some teams to discover and build new product value, and other teams to optimize existing product value. The generative imperative is always the first priority.

The second strategic priority is to be adaptive. Your enterprise needs to be built in a way that makes it capable of evolving as necessary to survive and thrive. The adaptive imperative has three components, in priority order: to become resilient, to become scalable and to become efficient.

Resilience grows in a system when you increase its feedback loops and increase self-organization. Feedback loops give teams the data to act. Self-organization gives them the freedom to act. You increase scalability when you remove limits to growth. Some limits can be removed by individual teams. Other limits are overcome by actions at the operating system level. Still others may require actions across multiple or all operating systems. Strategy involves identifying these limits to growth and mobilizing steps to remove them.

Efficiency is the least important of the three priorities that advance the adaptive imperative. Efficiency is a good thing, because it saves money that can be reinvested elsewhere. But in a world of constant change, resiliency and scalability are much more important than efficiency. Never increase efficiency at the cost of resiliency or scalability.

Strategy is about prioritizing time, effort and money. First generative, then adaptive. To advance your generative and adaptive imperatives, it starts with great people. To be effective, great people need feedback. Challenge them to build new feedback loops. Only with feedback loops can you identify negative archetypes and limits to growth throughout your systems. Attack the limits to growth, often by embracing technical change. To do this well, you must build digital capability and democratize data access. These are all components of strategy.

In summary, smart strategy requires that you:

• Obsess about customers
• Adopt extreme outside in thinking
• Embrace new technology and external trends
• Build digital capability
• Invest to chase new value breakthroughs and business model opportunities
• Invest to continuously optimize and digitally leverage existing product value
• Recruit great people
• Increase resiliency by adding feedback loops and increasing self-organization
• Democratize data access
• Identify and remove the limits to growth — points in the system encountering constraint

Align People

People are the key to everything. Enterprise purpose will only be achieved by high performers in the right roles and teams, free to act. Self-organization increases resilience. This requires an organization design that is tightly aligned but loosely coupled.

The fit systems enterprise is built in a modular structure made up of domain teams. In The Loop leaders let go of the function-centric view of the enterprise, and move towards a systems-centric view. The enterprise is comprised of operating systems and meta systems. Within these systems are domains. These domains do one thing, and one thing well. Domain teams have the freedom to act on data consistent with an assigned business outcome objective. Self-organization increases speed and resiliency.

Domain teams can be either technical or operational. A single domain may be run by one type of team or both, depending on the context. For procedural domains that have automation potential, one or more operational teams might manage the domain day by day, while an adjacent technical team might be assigned to develop software that increases automation within the domain.

Domains can be high variation or low variation. In “high variation” domains the nature of the work itself is constantly changing, or there is a “hypothesize / test / iterate” cycle that is required. High variation domains include product development teams, marketing campaign teams, sales opportunity teams, corporate development teams and the senior executive team. Such environments tend to be where change hits hardest, and creative problem solving and innovation needs are greatest. It is here that the 10X performer is most critical. Low variation domains include procedural areas such as accounts payable, payroll, HR on-boarding and so forth.

Teams engage in agile methods to identify best practices and chart the way forward. Leaders provide these domain teams freedom but expect responsibility. The talent performance bar is high.

Domain teams are the dominant organizational form in the fit systems enterprise, but episodic teams (such as project teams, tiger teams and skunkworks teams) are also part of the organizational design. These teams are mobilized to address needs and opportunities that don’t fit neatly inside one domain team. The fit systems enterprise also boasts capability-based affiliations. A group may be formed to advance disciplined agile delivery best practices, or to advance the cultural value of data driven decision making, or to increase systems thinking skills. Domain teams, episodic teams and capability-based affiliations are the three organizational forms in the fit systems enterprise.

The In The Loop leader understands that as a company scales, complexity rises. The only effective response to rising complexity is to increase the density of high performers. This requires that leaders hire carefully, develop aggressively assess clearly and cut smartly. The In The Loop leader works to create a virtuous cycle: 10Xers want to work with 10Xers.

Senior executives must own their personal development. Every senior executive must become digitally literate. Every senior executive must become a systems thinker. The role of leadership is different in the fit systems enterprise. Leaders are there to recruit, set context, to coach and to cut, but not to control.

In summary:

Adapt the organizational model

• Move from function-centric to systems-centric thinking
• Build modularly, defining domains at the right level of abstraction and then assigning domain teams (one-team and two-team)
• Self-organization increases speed and resilience, so support teams to self-organize

Allow teams the freedom to deliver outsized performance

• Define the business outcome objective and why, not the how
• Domain teams are the primary organizational form, but they are augmented by episodic teams and capability-based affiliations
• Give people time for team-based initiatives, stock certain parts of the company with talent that is “on the bench” ready for the next project, and build capability to match skill requirements to talent and availability with high efficiency and effectiveness

Nurture and develop high performance teams

• Increase the density of high performance people
• Recognize that in high variation roles (the ones most exposed to change most critical to success), top people perform 10X the level of average people
• Hire carefully, develop aggressively, assess clearly, cut smartly
• It’s a virtuous cycle: 10Xers want to work with 10Xers
• In the enterprise, resiliency is more important than efficiency
• Balance freedom and responsibility

Set the path and continue to evolve

• Establish context (strategy, metrics, assumptions, objectives, roles, knowledge of the stakes, relative priority, level of precision required in a decision, decision-making transparency) and coach; don’t control
• Continuously increase digital competency
• Continuously increase systems thinking competency, especially in management

Manage Change

Change is the only constant. You must understand pressure points, interpret implications, decide direction and act. When in doubt, make decisions quickly. Velocity is a critical success factor; time is your biggest competitor. If the cost of decision failure isn’t too high, it’s best to decide and then fix if necessary. Get comfortable acting on just 70% of the information you might prefer to have; just be explicit about your assumptions as to the things you don’t yet know. You’ll learn more from the reaction to a decision than you will from up-front analysis. Jeff Bezos argues that to achieve decision velocity requires a “disagree and commit” culture. You can’t wait for every stakeholder to get fully comfortable. Sometimes you just have to decide, and ask others to disagree and commit.

It’s not just the decision — you have to mobilize the actual change quickly as well. Wherever possible, you let one person drive the change. This can occur whenever the interdependencies are low. If there are moderate interdependencies, expect the change leader to collaborate ad hoc. That’s much better than formal reviews and meetings. If the interdependencies are complex, you may need to spin up a quick, agile project. Challenge the leader to focus on results, not process. Get to “done” quickly. Sometimes projects are large and complicated. These are the monoliths of change. When such a project is unavoidable, best practice is to break it into a series of small, quick, agile projects.

As you scale, the systems inside your company will change. The larger you become, the more complexity will exist in all systems. As a leader, you will constantly need to rebalance your focus to ensure the most important change is properly prioritized and resourced. As to the rest, you’ll count on self-organized teams to make necessary change happen inside their bounded contexts.

In summary:

• Make decisions quickly: velocity is critical success factor (time is your biggest competitor)
• Determine cost of decision failure — if not too high, make decisions fast then fix
• Some decisions (credit card handling, cyber security, financial reporting, etc.) must be made perfectly; for most, 70% of ideal information is sufficient
• Disagree and commit
• To make change happen, consider interdependencies: one actor acting alone if possible; ad hoc collaboration if necessary; a quick, agile project if required; a big project broken into small ones only if absolutely necessary
• The company systems that matter most will evolve as you scale — requiring you to continuously rebalance your change management focus

Drive Execution

Results happen due to smart strategy, great people and strong execution. In The Loop leaders stock the enterprise with leaders proven at operational execution and driving results. These leaders tighten up role definition, sharpen workflows and leverage technology — but then they expect daily performance. Such leaders attack underperformance at the root. They seek to discover the limiting factor, and remove it. If the limiting factor is a person, they don’t hesitate to remove the person.

An In The Loop leader understands how easy it is to focus on process outputs as opposed to business outcomes. The head of HR may manage for procedural compliance in hiring; he ensures the multiple approvals are always signed off before allowing a hire to proceed. But if the result of that process is that 10X software architects are regularly poached before they can be secured and hired, the process is flawed. Business unit leaders may be incentivized to drive the profitability of their business units. But if multi-business unit collaboration is required to unlock certain types of market opportunities, the incentive can get in the way. In the fit systems enterprise, In The Loop leaders feel free to challenge and change processes whenever they get in the way of results. Processes exist to advance business purpose and drive business outcomes. Never allow anyone to value “outputs” over “outcomes”.

This does not mean that processes are bad. Process efficiency is good when it drives achievement of business outcomes. Six Sigma and Kaizen only become negative when they cause leaders to elevate process over results. The first question in any process improvement meeting must be: “Does this process still serve business outcomes, or does it need to be redesigned?” Always start with purpose. Only once you know purpose and process are basically in sync can you turn to continuous incremental optimization or redesign.

In summary:

• Stock the enterprise with leaders proven at operational execution and driving results — daily execution is fundamental
• Expect daily performance from everyone; address underperformance immediately
• Execution depends on continuously elevating the interactions of people, workflows, technology and money flows
• But focus on results, not process
• Process must serve purpose-aligned outcomes
• Stock the enterprise with leaders proven at operational execution and driving results — daily execution is fundamental
• Expect daily performance from everyone; address underperformance immediately
• Execution depends on continuously elevating the interactions of people, workflows, technology and money flows

Build the Culture

All of this has profound cultural implications. It’s not enough for top leaders to think “generative first, adaptive next,” or “digital at the center,” or “self-organization with freedom and responsibility,” or “data driven decision making.” Everyone needs to think that way. Otherwise, a product manager might avoid spending three weeks offsite living in a customer’s work environment, happy to just “go with his gut.” An operational team might resent a sidecar technical development team working trying to automate work inside the domain. A functional mid-manager might try to impose her will on a self-organized, cross-functional domain team. A senior executive might resist reorganization into a more systems-centric structure. A CEO might fight a 360 degree pulse survey that enables every person in the company to evaluate her effectiveness.

In The Loop leaders evangelize the culture they seek. This aspirational culture becomes real step by step and day by day, supported by reinforcing feedback loops. In the fit systems enterprise, cultural imperatives include:

• Maniacal customer obsession
• Always generative first, adaptive next
• Systems centric view
• Focus on results; create the process that drives results
• Only high performers welcome
• Transparent communications
• Data driven decision making
• Agile methods
• Self-organization with freedom and responsibility

Summary

On every dimension of leadership — from personal preparation, to strategy, to aligning people, to managing change, to execution, to building culture — the Loop differs from the old paradigm from the prior era (the structural-functional paradigm). If you want to build your company into a fit systems enterprise, you will need to become an In The Loop leader. It’s the only way.

The rest of this book will help you get there.