Holacracy and 15% Employee Departures at Zappos: What Does This Mean for Legendary Enterprise Culture and Customers?

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As reported on a couple of occasions last year – http://beyondphilosophy.com/new-zomm-zappos-organizational-management-model-might-mean-employees-might-mean-customers/ and http://customerthink.com/holacracy-at-zappos-if-there-is-no-room-for-voc-is-legendary-customer-loyalty-at-risk/ – Tony Hsieh, the CEO of Zappos, has put a unique management and HR model into place. It’s called holacracy, an approach to organizational redesign. This is a project he began in 2013. Holacracy, long story short, eliminates most formal titles and management levels, replacing them with self-organization and self-management.

Holacracy, as a day-to-day enterprise operating approach, is also both controversial and uncomfortable for some. Even in a very progressive company like Zappos, this change has not gone down particularly well (Hsieh recently sent an email to employees advising all Zappos staff that they had until the end of April to make a stay/go decision), as close to 20% of employees have left the organization (http://www.cbsnews.com/news/zappos-does-away-with-bosses-and-not-everyone-likes-it/). One customer experience research and consulting company believes that these departures will not hurt employee engagement, and by extension their role as ambassadors inside and outside of the company (http://www.peoplemetrics.com/blog/14-of-zappos-staff-quits-which-is-just-fine-for-employee-engagement); but, that said, it’s challenging to see how there’s anything particularly positive for customers in this move.

My issue isn’t so much that Tony Hsieh has made the decision to morph the company culture, architecture and operational platform. It’s that the effect, or potential effect, on customers because of this change has not been studied or discussed and has yet to unfold. Further, there’s little evidence that this issue, i.e. customer behavior impact, has been taken into consideration at all. CEOs sometimes make major unilateral moves like this, and and there is probably something in their personalities that leads them to assume they can anticipate the marketplace reaction and cultural impact. Sometimes they’re right, sometimes they’re wrong. Earlier this year, Howard Schultz, CEO of Starbucks, pushed forward with his “Race Together” concept (http://www.npr.org/blogs/thetwo-way/2015/03/22/394710277/starbucks-will-stop-writing-race-together-on-coffee-cups). This was met with so much resistance, rather quietly from inside the company (as might have been expected) and more vocally and more negatively from customers, that the initiative was quickly withdrawn. Schultz claimed that the objectives he’d defined had been met, but that explanation felt more like backfill for an idea that was questionable at best and controversial and image-threatening at worst.

In the case of Zappos, the “pay to quit” deal has long been offered to new employees if they feel they don’t fit with the culture, or the culture isn’t right for them. They receive one month’s pay if they select this option. Normally, only about 1% to 3% of new hires make the choice to leave the employ of Zappos. At close to 15%, the “holacracy or resign”, i.e. my way or the highway, edict may have much more lasting and serious impact on the culture and on customers.

Many management scientists are skeptical about holocracy. Often, holacratic corporate systems have failed, and they have also been proven difficult to scale. In unilaterally moving his company to an arguably more utopian style of operations, an initiative some have felt is open to question (http://www.zapposinsights.com/about/holacracy), observers feel that Tony Hsieh has put his highly successful enterprise at some risk, and maybe more than he’d like to believe. What is the real price, to employees and customers, of such a massive culture change?

10 COMMENTS

  1. Great question raised by your excellent post–will a holacratic culture serve its constituents well over the long haul? But, I am left with a few broader questions. As observers, do we praise Tony’s willingness to be a courageous pioneer? Do we Monday morning quarterback the manner he lead change management? Or, do we skeptically wait and see, judging his effectiveness based on the performance of his company? Seems like Tony has had a pretty fair track record of creating an culture that drives a superior experience for customers while bringing growth to the bottom line. This will be a fun experiment to watch and learn from!

  2. I have mixed feelings. On the one hand, I applaud Tony Hsieh’s willingness to take risks and innovate. That’s all too rare.

    By setting a strong direction and encouraging people to get off the bus if they don’t like where it is going, or how it is getting there, he will create a culture around holocracy.

    That said, I remain a skeptic that the idea itself is a good one. I think most people complain about management but like structure and order that a hierarchy provides. Not everyone wants to be a leader.

    So, the key may well be getting employees to opt out, leaving those that really want to make the system work.

    I hope it does, but even if Hsieh is successful at Zappos, I don’t think holacracy is something that most companies can pull off.

  3. I don’t know, Michael. Often there is not a fit between employee and company and employees have to quit. Here they are being treated fairly.
    Or is the point that organisations should make space for those who donot fit into their culture. Counter culture people are good.
    To some extent this is true bit they can become disruptive
    I don’t know

  4. Thanks to all for the comments. Tony Hsieh seems guided by his own enterprise cultural and architectural muse. For me, unilaterally moving to a holacracy model is far less the issue than the potential impact on Zappos stakeholders going forward.

    When re-engineering, code for staff reduction and outsourcing, was the management model rage two or three decades ago, identifying the potential effect on customers and customer experience was never really a priority. One result of re-engineering, though, was cultural impairment and discontinuity, especially where customers and remaining employees were concerned. Re-engineering disappeared pretty quickly; and, for both different and related reasons, holacracy may do the same.

  5. Fantastic post as always Michael. I personally completely agree that on occasion, business leaders make strategic decisions based on their beliefs, gut feel, experienced judgement (delete as appropriate), WITHOUT taking customer and employee feedback into account. Would Tony have carried through his intentions if he had asked his employees what they thought of the idea first?

    The JC Penney fiasco spearheaded by Ron Johnson is probably the most high profile case of failure as a result of not seeking the thoughts of customers and employees ahead of implementing a CEOs grand plan. Whilst Zappos are unlikely to see the same meltdown (and their situation is a very different one), what Tony has shown is a clear misunderstanding of the very thing that built the reputation of him and his business – his people.

    I recently wrote a post describing the different levels of engagement with people in any organisation – no business is populated by a full complement of thrivers – maybe Tony should have a read!! http://www.ijgolding.com/2015/05/07/thrivers-survivors-and-nose-divers-how-to-help-people-believe-in-transforming-your-customer-experience/

  6. Ian –

    Great point about Ron Johnson and J. C. Penney. There was little to no consideration of employee or customer impact in his retailing and marketing machinations. Similar leadership and inclusiveness issues can be identified for Target’s failure in Canada: http://customerthink.com/way-off-target-a-5-billion-failure-in-canada-and-problems-in-america/

    Earl Lynch’s approach to categorizing employees resonates with me, though I’d identify it as being closer to the segmentation and concept of ambassadorship than engagement: http://beyondphilosophy.com/employee-retention-engagement-and-ambassadorship-go-hand-in-hand-in-hand-at-successful-companies/

    Michael

  7. The more I think about Zappos and Tony Hsieh, the more conflicted my thoughts become. My first reaction when I read your article was ‘well, it’s his company, and he’s free to exercise whatever strategies and tactics he chooses.’ Lots of companies I’ve worked with and worked for have taken initiatives that I haven’t agreed with. Some have succeeded (to my surprise), and others have confirmed my deepest doubts. But, at first blush, I applauded Hsieh for his bold effort.

    Then, the more I thought about it, I began to feel as you did – that Hsieh’s diving Zappos into holocracy might be selfishly reckless. After all, Zappos employees are dependent on the company’s success, and testing something as unproven and controversial as holocracy appears to me to test something bold on the backs of others who cannot easily afford the ‘science experiment.’ Shouldn’t he have a stronger obligation to them and to his customers?

    I think there are two (or more) compelling sides to this debate.

  8. A recent breakdown of elective employee departures at Zappos based on the move to holacracy shows that most of the volunteers were non-supervisory, representing close to 20% of this group of employees. So, again, what will be the impact on culture and customers?

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