Zappos’ Journey with Holacracy: Then and Now – Part I
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Hierarchies. They're simply organized in theory but contain a multitude of layers that once you start chipping away at, can unveil major flaws and inefficiencies—something Zappos experienced first-hand.
At a high level, a hierarchy is a system or organization in which people or groups are ranked one above the other according to status or authority.
Hierarchies are used in various systems including politics, families, and even science, when it comes to classifying living things. They’re one of the most common forms of organizing the workplace, yet research shows that command-and-control models don’t work well. This leaves companies searching for alternative solutions to the traditional top-down approach.
Enter Zappos. The customer service company stayed true to its unconventional, ahead of the curve culture when it adopted Holacracy in 2013 to create an environment of autonomy, accountability and leadership among its workforce.
This type of responsibility-based workforce is a very Peter Drucker concept. Drucker reasoned a knowledge-based workforce demands a responsibility-based organizational (RBO) structure–that if properly implemented, creates a mission/vision everyone understands, and a spirit of performance that flows from not making everybody a boss, but making everyone a valuable contributor (from new hires to those with senior positions).
Zappos has continuously tweaked this structure over the years, redefining what success looks like. See how below.
Introduction
It’s been six years since Chris Peake, Director of Strategic Initiatives, was part of the Holacracy implementation team at Zappos.
In Part I of this two-part interview, I took a step back in time with Chris to see how this responsibility-based structure came to life and how it’s changed in the complex world we live in.
In Part II, we’ll dig deeper into how other companies can incorporate RBO, and how mentorship, training, the interview process and mindsets must shift in order to be successful with new and emerging organizational structures like Zappos’.
Q: What originally interested Zappos in adopting a responsibility-based/holacratic structure?
A: At Zappos, we have always considered ourselves a self-managed/self-organized company, but as we grew up as a company, we were finding bureaucratic decision-making layers were coming into play.
It was becoming harder for our employees to innovate and create; It was harder for people at the front lines–even though they were making decisions that were improving the customer experience–as they didn’t have full authority in executing their ideas. They’d have to go through five or six layers of management.
So we tried to figure out how to get every team to not only be autonomous, but for every single person to own their roles and accountabilities in order to move their team’s purpose forward.
It was more proactive than anything, but it was also reactive because we were starting to see the writing on the wall. We were slowing down and it was imperative that we experiment around putting more decision-making autonomy into employees’ hands instead of the traditional manager, processes and practices.
Q: What has the path of holacracy been like at Zappos? What’s changed? What’s stayed the same?
A: It’s weird because we said let’s roll out Holacracy as a tool for self-organization but we required every team to use it. Over the years, we’ve found that we couldn’t treat Holacracy as dogma as it was a bit too rigid for our culture and people – you can’t just take any program right out of the box and say it’s going to work for every department and team.
We discovered that there are teams that need to operate in a more traditional mindset/structure, and then there are teams that do their best when given full control over decision-making and steering the team.
So in 2017 we went through a discovery phase, a sort of “Holacracy-lite” to figure out different ways in which teams could work.
Teams were bringing new meeting structures to life in the spirit of self-organization, people were figuring out the best tools, processes and mindsets to get things done.
The only thing that Zappos really asked of these teams is that they still used the core elements of Holacracy to capture their work, i.e. Circles with purposes, defining and maintaining clear roles, accountabilities and projects that were transparent to the entire company, to name a few.
If Holacracy didn’t work, we asked that they just give it a shot until they found something else that could work better.
Overall Holacracy has given us a foundation that enabled every team to be autonomous–every team is responsible for their own business, just as every person is responsible for leading their role and energizing their accountabilities in service of the business and the customer.
Q: So what does Holacracy look like at Zappos today?
A: In the book Triumphs of Cities, by Edward Glaeser there’s a data point that Tony [Hsieh, Zappos CEO] talks about that states, “Every time a city doubles in size, each of its occupants get 15% more productive, but every time a company doubles in size, the opposite happens–you get less engagement/productivity.”
Using that data point and a new system we call “Market-Based Dynamics (MBD),” in the last couple years we’ve been trying to figure out how to create a city inside the walls of Zappos.
MBD enables every Circle to think and operate as its own autonomous small business, so long as it a) has internal customers who are willing to pay for their work and b) “break even” financially (don’t spend more money than they earn). MBD also refers to the internal market that we’re creating at Zappos.
Connected to this, we introduced a “people points system” where every person at Zappos has 100 people points representing 100% of their time. Each of these people points comes with a people cost. Whatever team you’re on, and however you’re dividing your time between teams, there’s an associated cost those teams are expected to pay.
This is something you have to be responsible for when running a business–your Profit and Loss isn’t just focused on operating expenses from a travel and entertainment standpoint, but you need to determine how to make enough money to also cover the employees within your Circle. It adds a different top-of-mind dynamic for every team at Zappos.
One of the biggest flaws we saw with Holacracy was that it still relied on a top-down budgeting structure. There were still only a few people who had a lot of control of funding and teams still had to go to those people to get funding for ideas– that was getting in the way of us becoming even more self–organized.
Now we’re really trying to evolve accountability even further with a networked approach of budgetary transactions, agreements and contracts between teams versus the top-down structure.
There are service providing teams and internal customer teams, and any team in the organization can be a customer or provider. This really opens up an opportunity to tap into the creative genius of the company as each team has services that other teams can benefit from.
If you have an idea, no matter what level you are or what part of the company you’re from, if it brings value to the company and is something you’re passionate about and competent in, and you can find an internal/external customer for it, you can start your own internal business.
This allows people to really do something with their ideas–in Holacracy, people could create a Circle but not have any support or funding. This new system advocates for ideas and supports them.
It’s exciting and complex. Ultimately, you can change your whole career path if you have a good idea that you prove out and find an internal customer to fund.
Check out Part II where we dig deeper into how other companies can incorporate a responsibility-based organizational structure (RBO), and how mentorship, training, the interview process and mindsets must shift in order to be successful with new and emerging organizational structures like Zappos’.