Holacracy at Zappos: If There Is No Room for VOC….Is Legendary Customer Loyalty At Risk?

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Zappos has initiated its well-publicized transition to a controversial – some might even say radical – ‘self-governing’ organizational model: holacracy. In an earlier CustomerThink post (http://www.customerthink.com/the-new-zomm-zappos-organizational-management-model) the open, and core, question was raised about what impact this might have on customers. As deftly reported in Forbes by Steve Denning, this is a legitimate, and even potentially troubling, point: http://www.forbes.com/sites/stevedenning/2014/01/15/making-sense-of-zappos-and-holacracy/2/

Specifically, Mr. Denning asks: “Where is the customer in holacracy?” And, he goes on to detail his concern. “In holacracy, the only explicit feedback mechanisms…are vertical. There are no explicit feedback mechanisms from the customer, i.e. the people for whom the work is being done….In a world in which the balance of power in the marketplace has shifted from the seller to the customer, this issue is critical. When so much time and effort is spent on the micro-details of the internal decision-making mechanisms and absolutely no attention given to any external feedback mechanisms, one could easily get the idea that the internal mechanisms are supremely important while the customer is irrelevant. Unless and until this ‘gap’ is rectified, holacracy risks being a distraction from the central organizational challenge of our times, namely, how to make organizations more able to add value to customers through continuous transformational innovation.”

He concludes that holacracy may make sense for Zappos, potentially offering fresh value for customers in a company already obsessively focused on optimizing the customer experience. The model may, or may not, be effective for customers. Holacracy could even put Zappos’ extraordinary record of customer loyalty at risk. Will it? Time, as always, can be expected to reveal all.

Mr. Denning had some post-article back-and-forth with several readers, and in one he reasserted his position on holacracy and customers: “…adding steadily more value to customers through innovation becomes the very purpose of the enterprise. It becomes the key to survival. Firms need to focus all of their attention on adding value to customers and systematically eliminating anything that doesn’t contribute to that goal.”

I’ve seen lots of commentary on whether, and how well, the model (which originators have identified as a ‘tool’) will work in an organization of this size. One such article described the analytical work of Jan Klein, from the MIT Sloan School of Management (http://www.businessinsider.com/zappos-holacracy-unlikely-to-work-2014-1). Klein has noted that most companies trying holacracy have given up after six months or so, Why? Employees don’t self-regulate very well, and they leave rather than trying to continue working within the system. There is, as well, something of an ‘Animal Farm’ feel to this tool, where HR and certain company executives hold sway over employee compensation.

From my perspective, the biggest stakeholder issue, apart from employee functional effectiveness, alignment with enterprise goals, and day-to-day personal role clarity and performance comfort, is the potential impact on customer behavior.

8 COMMENTS

  1. Thanks Michael for your analysis of Holacracy. Just like you I enjoyed Steve Denning’s article on Forbes, and I think some of his arguments are based on misconceptions of what Holacracy is. If you look at the comments to his article by myself, Brian Robertson, and others, you will find responses to most, if not all, concerns that Steve Denning expresses. You can find the comments here: http://www.forbes.com/sites/stevedenning/2014/01/15/making-sense-of-zappos-and-holacracy/?commentId=comment_blogAndPostId/blog/comment/1311-10434-5841

    Also, you reference a Business Insider article and say: “Klein has noted that most companies trying holacracy have given up after six months or so, Why? Employees don’t self-regulate very well, and they leave rather than trying to continue working within the system.”

    If you look closely, this argument from Mr. Klein is actually not about Holacracy, it’s for other “flat organizational models” that aren’t cited. Most companies trying Holacracy do NOT give up after six months, at least when they get help from a certified coach. Most of our clients are still using Holacracy after 6 months – and more. Contrary to what has been said in the news, Holacracy does not require employees to “self-regulate”, and it is not a flat structure.

    This is a common misconception about Holacracy to associate it with other flat structures (Valve’s, Gore’s, and others), whereas it is, in fact, quite different. For starters, Holacracy is a specific system, not an overall category for “flat structures”, which the Business Insider article failed to see. It is not even a flat structure. Steve Denning’s article in Forbes explains it quite well. You can also read more in this blog post: “Five Misconceptions About Holacracy”: https://medium.com/about-holacracy/da84d8ba15e1

    Hope this helps clarify things a bit!

  2. …floating around in the ether about holacracy; and, in fact, I read and absorbed all the comments to Denning’s article, and his responses. If, in writing about holacracy, Mr. Denning is misinformed about any of its aspects or misunderstands them, he’s not alone.

    The core elements of holacracy, and how it functions within an enterprise, are fairly well-defined: emphasis on iterative governance, adaptive processes, and self-organization. That said, whether holacracy is labeled a system, tool, or model, whether it is flat, square or round, whether it has employees self-regulate and self-supervise or be tightly and micro-managed, the proof of its success at Zappos – or any company where it is applied, if it comes to that – is how well (with or without the support of a certified coach) it serves the overarching goal of optimizing stakeholder value and supporting customer-centricity.

  3. Michael,
    I appreciate your willingness to cock an eye at Zappos’ latest pronouncement and examine it closely. I own a consultancy, but take a dim view of most consultants, especially those who breathlessly pronounce the latest fad as an important key to business success.

    I am not a fan of Zappos, and as a former customer. I don’t believe that they are doing anything new on virtually every front. After several years of quite a bit of business from our family, they never followed up to understand why they lost us. Furthermore, they increase customer effort simply because Tony Hsieh believes that he developed and owns the “magic bullet” to success. Note that even his “magic bullet” couldn’t save Zappos and they were forced to sell to Amazon in 2009. Yet many Customer Experience consultants who constantly point to Zappos as a CX best practice example neglect to mention this.

    When I read their latest PR announcement, I chuckled to myself. It described the organization that worked in in the late 1970’s in what was billed as the worlds largest shoe store at that time. We had 50-100 sales people on the sales floor at any time, and my personal daily sales ran between $8,000-20,000 ( $24,908-62,272 in 2012 dollars).
    We had roles to manage departments, and given vacations, sick time, etc. different people would fill the roles. Sure, we had people who led the departments; I led the athletic area for five years, but nowhere did we have a manager title, and we cross covered as needed. ALL of us sold ALL departments, and the customer came first in ALL cases! The only hierarchy we had was the owner who wasn’t on site for large portions of the year.

    It sounds crazy, but it worked extremely well and we had dedicated customers who almost treated the place as a religion. I had several families who were regulars that drove 200+ miles one way to buy from us. They would call me ahead of time to ensure that I would be there, and we would get a fast lunch together and launch into fitting 6+ family members into whatever went on their feet. Rock stars, boxing champions, other sports stars, you name it and we had them as customers.

    So, I struggle to find anything new from Zappos, with the exception of the non-stop self promotion from Mr. Hsieh.

    If it takes a buzzword to describe it, IMHO it’s nothing worth spending much time on as it will soon fade away.

  4. Wow! Your background is fascinating; and, I can relate because my professional vitae also includes several years in footwear industry marketing. As a b2b and b2c customer behavior consultant, trainer and researcher, I have an appreciation for the concepts behind Zappos approach to experience optimization – plus I understand Tony Hsieh’s motivation in forming the company in the first place, and, unlike your situation, my wife has had very positive, even over-the-top, buying transactions – my principal interest is whether this organizational move will enhance or diminish stakeholder value.

    Having attended one of Mr. Hsieh’s presentations when his book was released, clearly there is a promotional engine behind Zappos. He’s patterned a lot of what Zappos does around the book “Good to Great”; but, from my perspective, there are proven business approaches which create more customer benefit, as well as stronger results. (Note: When I mentioned this to Mr. Hsieh after his presentation, he had absolutely no interest in learning about the approaches advocated by Sheth, Sisodia, and Wolfe, which have produced demonstrably better financial performance.).

    So, if holacracy ‘works’ for Zappos employees and customers, I’ll be among the first to applaud this bold move. Until then, the rollout will be closely watched by many..

  5. I’m not sure what to make of holacracy, which I’m now just learning about in posts like this one.

    I doubt that Hsieh is doing this for promotional purposes. My take is that it’s a sincere effort to create a different culture. And let’s face it, without a culture that really stands out, Zappos is just another online retailer.

    Regarding the customer, it seems to me that Holacracy is not inherently customer-centric, any more than other management approaches are.

    If the purpose of the organization is about about delivering exceptional customer value via products (e.g. Apple) or experiences (e.g. Zappos), then maybe Holacracy can help. Or not.

  6. We agree. It’s a customer-centricity issue, not a promotional one. If stakeholders – employees and customers – are pushed into the shadows because of a new culture manifesto, then holacracy will have diminished value rather than made it more strategically, and positively, differentiated.

  7. The elimination of managers is not a Holacracy-centric concept.

    W. L. Gore (10,000 Stakeholders) eliminated managers in 1959 – no one at Gore works for anybody else. There are leaders, but no one works for or reports to them. They are leaders because people are following.

    Semco (3,000 Stakeholders in Brazil) eliminated managers starting in 1981 – took them nine years, but they’re all gone. Again, they have a few dozen leaders, but nobody works for them. Semco has no HR department and not a single written policy.

    Both companies are VERY customer-centric (and much flatter organizationally than Holacracy advocates).

    My new book, “Why Employees Are Always a Bad Idea”, shares our journey and how we help other companies do the same. I can give many examples of companies of every size in every industry that are going this route or have been there for decades.

    I wasn’t aware of HolacracryOne until a few months ago, and vice-versa (that shows this is a movement, not a clever idea), but the objectives are the same – to dismantle the cumbersome and outdated Industrial Age front-office Dilbert society and replace it with one that is more effective, makes more money, creates more agility, more creativity, and above all, better customer experiences.

    The notion that getting rid of managers somehow will degrade customer service flies in the face of the reality that the biggest impediment to getting anything done in a company (including and especially customer service) is almost always some guy with a title, not the customer service rep.

    HolacracyOne, our company (Crankset Group), and many others have put their finger on the new norm of business. It’s not the future – it’s been here for decades and is simply now getting some main-stream press after already proving itself for over half a century.

    Apparent differences – Holacracy is focused on a process; Crankset Group is focused on principles, beliefs, a flatter structure, and the result desired: (1) a results-based culture (replacing the traditional time-based culture); 2) replacing managers with a lot fewer leaders, and 3) replacing employees (functioning children) with Stakeholders (functioning self-managed, self-organizing adults).

    Both HolacracyOne and Crankset Group are seeing the same writing on the wall – the Industrial Age is dead and Dilbert should no longer be funny. Managers make Dilbert funny. Do the math.

  8. Chuck –

    Thanks very much for your extended comment. Re. Gore, I am very much aware of their lattice framework (Bill Gore and I had the same shared experience of having worked for du Pont), and actually discussed it in an earlier CustomerThink post addressing Zappos and holacracy: http://customerthink.com/the-new-zomm-zappos-organizational-management-model/

    Also, as in this and the earlier blog, my bigger concern with holacracy is not change adaptation, or the cultural and architectural effect of the new framework. It’s the potential negative impact on stakeholder value if the voice of the customer is a secondary or tertiary consideration.

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