Inner Loop / Outer Loop

In “The Second Machine Age”, Erik Brynjolfsson and Andrew McAfee relate a fascinating finding, based on the research of economist Paul David. In the last century, when American factories were undergoing electrification, the first factories to replace steam power with electric motors saw very little productivity or economic benefit. It wasn’t until 20–30 years later that they started to see dramatic benefits.

When engineers were first installing electric motors, they simply replaced the big steam engine at the heart of the factory with a big electric motor. In steam-powered factories, the engine drove a single shaft, and all the machines in the factory were driven by various belts, gears, and secondary shafts that were attached to that main shaft. As a result, factory layout was driven by access to the shaft — they often built multi-level plants to facilitate this layout. Goods flowed according to the needs of delivering steam power, rather than in the optimum production order. Just plopping in a big electric motor didn’t change much.

A factory organized around the belts and shafts required by steam power.

It wasn’t until the next generation of managers came into the plant and started to replace the single giant electric motor with smaller stand-alone motors (or new machines that had their own motors) that they were liberated from that layout constraint — they could use new organizing principles. Savvy managers were able to re-orient machines around the flow of materials (think assembly line) instead of the flow of power. These changes finally unlocked the promised productivity increases.

How We Adopt Technologies

This is a story about the generational adoption of technology. When a new technology first appears, there’s a tendency to see it as a replacement for the previous generation of technology. (Horse-less carriages! Wireless phones! Driverless cars!) Eventually though, it becomes pervasive and we create complementary innovations — among them are changes to the fundamental processes we use to organize our work. Len Epp, writing for Techcrunch imagines what will happen when we move past the driver-less car concept and see the possibilities created by autonomous fleets of vehicles: “To pick just one example, companies like Walmart will almost certainly let their robot cars drive you to and from their stores for free, as will their competitors.”

What’s the lesson for managers here? Well, for one thing, how are you thinking about your “factory layout?” How does work and information flow through your “plant?” Are you laid out according to old rules, or is there an opportunity to re-think your organization based on the way technology works?

Of course, I think there is, which is why I’m writing this. In our last book, Lean UX, Jeff and I wrote about how small teams can work together to create great technology products. These teams have re-configured themselves in new ways to be effective in the world of digital technology. Among the changes: they work in cross-functional teams instead of silos; they seek value — working to deliver outcomes rather than spitting out features; they test their hypotheses and pivot rather than working to set plans; and they work in small, continuous, loops — call it agile, or Build-Measure-Learn or OODA loops as you see fit.

These days, I am calling this the “Inner Loop.” These small teams can be considered the small electric motors of your organization. But how should you “lay out” these teams? How do you coordinate activity among the teams? How do you structure your organization to take advantage of this Inner Loop? In what ways is your existing structure holding these teams back? You need to be thinking about what we’re calling the “Outer Loop” as well.

Aligning the Inner and Outer Loops

The Outer Loop can’t stay the same — just as the factory needed to be laid out differently, so too the Outer Loop needs to change. Among the changes we’re seeing:

  • A change in the way work is planned and assigned — a move away from feature roadmaps and towards outcome roadmaps. This involves expressing strategy at the top of the organization, aligning outcomes in the middle of the organization, and defining tactics at the execution level.
  • As a necessary complement, we’re seeing funding models changing as well. From fixed annual budgets based on output metrics to rolling budgets based on relative metrics of outcomes.
  • Other functions like, sales, marketing, operations, legal — all of this must be laid out in new ways.

All of this is about unlocking innovation — both the sustaining innovation that keeps our organizations alive and the radical, disruptive innovation that propels us into the next generation.

Want to learn more? Our next book is underway, and it’s all about bringing the Inner Loop and the Outer Loop into harmony. Sign up here to get periodic updates on the book, and be among the first to know when it’s available.

Originally published at on April 9, 2015.