Page 30 - Performance Leadership

Chapter 2 Traditional Performance Management • 19

F igur e 2.1
The Two Loops of Management

Management Second loop
of management
First loop
of management

Process

The first loop of management, or inner loop, concentrates on mon-
itoring activities on the operational level, and comparing those against
the targets. If measurements go in the direction of critical thresholds,
adjustments need to take place. In the first loop of management, we
generally let the decisions follow the facts; the decision-making process
tends to be rational. We operate within the rules, and actions tend to
be reactive and defensive. The first loop of management works with
metrics that are all very close to the process, such as call queue length
or average call duration in a call center; number of customers con-
tacted, sales pipeline value or conversion rate in sales; or scrap per-
centage and machine downtime in manufacturing.
But discontinuities do occur, and although we may not be able to
predict them, we need to be ready for them. The second loop of man-
agement, or outer loop, works more offline. In this loop, we seek
improvement through change, not through control. The first loop of
management focuses on measuring how the performance compares to
the targets; the second loop of management focuses on whether the
targets are set high or low enough, or attempts to assess whether we are
measuring the right things. On a more strategic level, the processes
themselves should be evaluated. How does a specific process relate to
the other processes in the organization? Could it be structured so that
it is more efficient or more aligned to other processes? How does the
process support the customer value proposition? Some examples of
metrics in the second loop of management are profitability or return
on investment for finance, market share, brand value or customer