What’s Zappos Trying to Solve With Holacracy?

When 14% of your employees decide to voluntarily leave your company in one fell swoop, most organizations would hit the panic button.   Yet, for Zappos, a fast-growing online retailer of shoes and fashion, this past April 30th represented an ultimatum for employees to either choose embracing a massive organizational change coined “Holocracy”, or take an attractive payout and leave the company. 210 employees chose to depart.

The ultimate change that Zappos has been grappling with for the last three years is their pending shift into an organizational structure called Holacracy.  Initially devised by self-described “recovering CEO” Brian Robertson, Holacracy is a distributed authority system – a set of “rules of the game” that bake empowerment into the core of the organization.

Think about it as running an organization without the classic “command and control” structure found in many of today’s organizations.   In a Holacracy, authority and decision-making are distributed throughout a holarchy of self-organizing teams rather than being vested at the top of a hierarchy.  As a result, you’d come to expect a more flexible, agile organization — One that is built to handle constant change while creating an empowered culture.  That distinct culture makes it very difficult for any competitor to replicate.

Since joining Zappos at the age of the 27, CEO Tony Hsieh had established a unique strategy for the online retailer.  Zappos is world-famous for setting the bar when it comes to customer service.   Many, including Hsieh have call it a “Customer Service Company” that just happens to sell shoes and clothes.   The Zappos customer experience is so unique and personalized, that everyone who does business with them can’t stop raving about it.

To deliver “wow” (in Zappos’ own words) to their customers, their 600-employee strong Customer Loyalty Team (CLT) who staff the phones, email and chat lines, are not your typical call-center.   They don’t follow scripts or manuals. They are likely the most empowered customer service team in the entire industry – and it works wonders!

Since his early days at Zappos, Hsieh knew that just about anyone can setup an online store and sell shoes.   Amazing service, however, has become a rare occurrence as many organizations see customer service as a cost, not an asset.   He knew that having amazing service is something that cannot be easily replicated by competitors.   The strategy worked and propelled Zappos to over $2B in annual revenues in just a few short years.

So how do you deliver “wow”? Hsieh has always been clear about that – It’s about having the right culture.

Since it’s beginnings, Hsieh has been focused on building Zappos into a culture that includes fun, creativity, receptivity to change and learning, among others.   To shape Zappos’ culture, Hsieh always fostered a very strong culture of experimentation at Zappos. He pioneered dozens of practices through “hacks” that have been either piloted or fully implemented across the organization.

Practices such as paying employees $2000 to leave the company after taking the new employee training had traditional HR executives doing face-palms.  However, for Zappos, it worked like a charm and drove high-quality employees and created a very desirable place to work.

When I visited Zappos’ headquarters in downtown Las Vegas last year, the place didn’t feel like an office, it was more like a village.   It is a unique environment where people seem super-excited by what they do and why they do it.   In a revamped building that formerly held Las Vegas’ city hall, lies a meticulously designed space that really brings Zappos’ culture to life.   It is a great space for collaboration, fun, and what Hsieh calls collisions (or serendipitous encounters between employees).

A work environment that just invites collaboration
A work environment that just invites collaboration

Zappos employees are proud of their collaborative mindset, often selflessly helping others, no matter which role or department they are in.   They are mission-driven; from HR to tech folks, it is all about delivering “wow” to their customers, no matter their role or rank.

Their top execs, which they refer to as monkeys, share desks and sit in relatively open areas with other employees. Positivity and fun was everywhere, and they weren’t just putting on a show.

Tony Hsieh
Tony Hsieh’s Desk at Zappos

It sounds like an organization most CEOs would dream about running.   Most organizations with the revenues and size of Zappos are plagued by lack of collaboration.  Silos, layers of management and bureaucracy slow them down to a crawl when times demand change.

So why is Hsieh not satisfied with the amazing company he’s built?

What problem is he trying to solve with Holacracy?

The answer to this question, I believe, is vague at best.   While Hsieh was always one to continuously experiment and never sit still, implementing Holacracy at Zappos is his biggest bet by far.   Zappos is the largest company to ever adopt Holacracy.  It is a move that’s oozing with risk and uncertainty, even for an organization that’s already achieved levels of agility that are the envy of even the most progressive organizations.

I would be remiss if I didn’t explain what Holacracy really means.   There are many misconception out there that have materialized with time.   With much credit to Steve Denning, who has written about and dissected the key ingredients of Holacracy, here are some common misconceptions about Holacracy and how they might impact Zappos:

A Super-Charged Hierarchy

The first misconception of Holacracy is that Holacracy is non-hierarchical. While Holacracy puts a lot of emphasis on consensual, democratic decision-making, it is actually explicitly and strongly hierarchical.

Basically, in Holacracy, there is a hierarchy of circles, which are to be run according to detailed democratic procedures (they even have a very detailed constitution behind it).  At the same time, each circle operates within the hierarchy. Each higher circle tells its lower circle (or circles), what its purpose is and what is expected of it.

If a circle doesn’t meet the purpose as defined by its higher circle, it can be changed, re-staffed or even abolished.

What this might mean for Zappos is that while the model may work for certain functions (such as customer service, for example), it may run into trouble in functions that require far more coordination and project leadership.

No Managers?

In fact the responsibilities of the “core roles” in Holacracy, such as Lead Link, Rep Link, Facilitator and Secretary, are spelled out in exhaustive detail in the Holacracy Constitution. Any responsibility that isn’t explicitly covered is assigned to one of these roles. To suggest that there are no managers here is a fallacy.

This structure can potentially lead to “power-jockeying” and bureaucracy as individuals start vying for roles that come with increased power and decision-making abilities.  No managers, certainly does not mean no people seeking positions of power.

Just Follow the Manual

Each circle is required to be run democratically and openly while governed with exhaustively detailed procedures on how things like meetings are to be managed and how decisions are to be made.

We know how disempowering manuals and scripts can be.   Today, Zappos provides its employees with incredible autonomy to be able to do what ‘s right for the customer (comes back to delivering “wow”).  Today, most decisions are guided by simple principles and follow Zappos’ ten core values.   How will Holacracy’s manuals and processes guide decisions? Will it still be simple? Will they continue to focus on the prize – their customer?

What about the Customer?

The word “customer” or references to any feedback mechanism from the customer don’t appear even once in the Holacracy Constitution.

This is not to say that members of any circle are formally excluded from sensing a “Tension” from failure to meet customer needs when they happen to become aware.   However, the explicit focus of the Holacracy Constitution is entirely internal. The customer is simply not in the picture.

In an organization where even the CEO spends time answering customer service calls at peak periods, how will Zappos continue to hone its top competitive advantage and stay in close touch with an ever-changing customer dynamic?

While the jury is out, Holacracy may do wonders for Zappos and other organizations who choose to embrace it.  It is very clear and explicit on where Tony Hsieh would like to take Zappos.   He’s betting the company on it.

As a company that’s continuously embraced change and experimentation, Zappos has a resilient culture with many open-minded people who truly care for the company.   There’s little doubt that if any organization were prepared for such major change, it would be Zappos.   Yet, clearly, this particular experiment wasn’t everyone’s cup of tea and caused some individuals to pull the cord (as I’m sure some others will in the next coming months).

The reality is, no model or template will ever be perfect fit for any organization.   It is still unclear what Hsieh is actually trying to solve for with this big bet.

Is he going for more agility? He’s already got it.   Happiness? The company has won more “best place to work” awards than any other in its industry.   Revenues?  There’s easier ways to revenue than changing a culture.

Perhaps Hsieh sees something that’s way below the surface.   Something with a deeper meaning that has the potential to shape how we work?   Whatever the reason, we all owe him a debt of gratitude for being such a visionary and showing other leaders that there are indeed ways to do things differently.

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2 thoughts on “What’s Zappos Trying to Solve With Holacracy?

  1. Great Post !! Short and very useful information on how the organization is changing so rapidly which leads to more productivity and agility.

    Thanks for sharing.

    Sameer

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