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How does having a completed feedback loop between your decision making and operations change the way your business operates?

A completed feedback loop incrementally and dependably improves a business.

In one of my favorite books, Jim Collins’ book Great by Choice he talks about the 10XER triangle. Without reading the book that all probably sounds like jargon, but a summary is that high performing companies have three common traits: fanatic discipline, productive paranoia, and empirical creativity. The book says these high performing companies couple those traits with high-level ambition and that’s what drives them to reach higher levels than their counterparts. The piece of the triangle I’ve used most, and in fact built our consulting practice around is the idea of empirical creativity.

Jim Collins makes the claim that high performing businesses do not look outside at what other companies do, they also don’t look to experts in their field. They create an environment where they can observe directly the result of their decisions. After all, all empirical means is that it’s directly observable. They create experiments which require few resources and lacks great risk in the event of failure, but when it is a success, they take that experiment and scale it up to capitalize on an otherwise unseen opportunity.

In short, this is how I believe businesses get ahead. They don’t think of it as empirical creativity, and even when I work with my own clients I don’t talk in those terms. I talk about creating a complete feedback loop.

The above diagram demonstrates a complete feedback loop. We examine something inside of a business, we create and document a plan to modify it, we implement the modification, and we test the results against what we expected. This usually doesn’t manifest itself inside of project work, but instead, it manifests itself in the form of weekly meetings, scorecards, and KPIs (key performance indicators). As we’ve mentioned many times, we adhere to the Traction model from the book of the same name by Gino Wickman. Inside of that model they do a scorecard review in which issues are identified and later solved during the meeting.

The act of reviewing a scorecard and creating a plan to modify the behavior or circumstances the modify piece I’m talking about here. Implementing tends to go on through the week and is tied to the modify piece since you’re implementing the agreed upon modifications. The Observe piece is already being done since it’s on a scorecard.

The traction scorecard isn’t the only feedback loop in a company, there are many reports and observations that need tracking at a level other than the leadership team. Management teams or shift supervisors may also have instances where they benefit from a complete feedback loop for example.

The most common breakdown in the feedback loop is in the observe piece. Therefore having an established meeting cadence within your organization is important. When there are regular meetings with a regular agenda and one of the agenda items is to review the outcome of a prior made decision then you can say with a high degree of certainty whether it was the right decision.

Consider all the places there could be a complete feedback loop within your organization:

·         Financial Forecast vs. Financial Statements

·         Operating Plans vs.  Operating Results

·         Marketing Planned Pipeline vs. Actual Pipeline Status

Of course, these are all high-level feedback loops, at the granular level the financial forecast may forecast that you will invoice $120,000 this week but you actually invoice $95,000. Now it's time to identify why you were under by $25,000 so you can modify the behaviors that caused you to be under, then implement those modifications, and observe the results to see if you made the correct modification.

It takes this type of complete feedback loop to improve a business. Any breakdown in the loop and you will fail to ask the right questions, implement the wrong solutions, and miss observing whether it works correctly.

So in summary, the feedback loop cannot be broken, and each step should look like this once a point of improvement is identified:

1.       Modify - modify in a small controlled way. Do not modify in a way that puts your company at risk. Find a small place to test your theory.

2.       Implement – Implement your modification. Be careful to do everything exactly as you have documented.

3.       Observe – Observe the results against what you expected to happen. This is the most common area where businesses fail the feedback loop. They fix something and assume the fix worked without any evidence one way or another.

Remember: it takes three or more data points to identify a trend on a timeline. Without a trend, you’ve failed to observe adequately whether your modifications were correct and the implementation was fulfilled per the plan.

When a feedback loop is structured this way management can improve their business bit by bit. It’s incremental improvement done when the scorecard or other reports are reviewed. It’s not exciting, easy, or immediate. However, it is a dependable management process.

James H Johnson, CPA.CITP, CGMA, MBA

Twitter: @james_h_j