This is a repost of an article that ran earlier in the summer. We'll return to new content next week.
~6 minute read~
For the past couple of years one of the hottest names in leadership has been Tony Hsieh. He is the CEO of Zappos, a pioneer in online shoe sales and distribution. For the past decade they have been a staple of the Best Places to Work list, generally ranking in the top 10. A few years ago, Hsieh implemented an organizational philosophy known as ‘holacracy’ and many have watched (myself included) with interest and curiosity. Things seem to be coming to a head lately, so let’s take a look a closer look and see if we can come to some conclusions.
What is holacracy?
'Holacracy' is the name for a specific type of management philosophy that advocates for the elimination of formal, positional leaders in favor of a more team based model that centers on overlapping circles of responsibility. There are no vice presidents, directors, or managers. There is an inherent freedom built into the system to encourage employees to discover their own areas of gifting and motivation. For instance, let's say you are the director of HR, but that job is just burning you out and making you miserable, and where your passion and motivation actually lie is in the visual arts. So, you decide to paint murals on or redecorate the walls. If it is seen as a benefit to the organizational life of the company, you've just created yourself a new job! (For more information about holacracy, see it’s Wikipedia page, check out the website and see this Fortune article)
So if you're like me when I first learned about this idea, you're thinking 'that's pretty far out there' - that's a natural reaction. To be fair, there is more structure than appears at first glance: there are 'lead links' - a kind of 'first among equals' who is a point man/woman for certain tasks and responsibilities the team needs to complete. There are also team and group strategy sessions with voting vested in team members to reach a decision on a particular issue. Furthermore, there is a complex system of discipline and performance management centered around points and 'the beach': you are awarded a certain number of ‘people points’ to distribute to various teams in a given time period, and if you're not able to 'get on' enough teams you are relegated to the beach. Two weeks on the beach without spending your points and you no longer have a position at the company.
So what is happening at Zappos?
It’s easy to be a critic, so before looking at some of the problems of a holacratic structure, let’s look at a few positives:
- There is a strong emphasis on employee motivation and skills. ‘Zapponians’, as they are called, are encouraged to discover what it is they are gifted at and motivated by, and then pursue that. It’s common sense that people who are motivated by what they do have higher quality and productivity;
- A team based (or ‘circle’ based) structure is highly flexible – it has the potential (although not always the ability) to change quickly based on influencing factors. In the fast paced, ever changing space that Zappos occupies, this looks like it would be an effective strategy;
- Eliminating a strict hierarchy helps eliminate some of the problems that are associated with that form of organization: stagnation, autocratic decision making, and ‘cultural sterility’.
And yet, Hsieh’s experiment is on the edge. Despite being a staple on the list of best places to work and being a pioneer in internet sales and distribution, morale, productivity, and revenue is falling. Recently, he has been pushing beyond holacracy to try his own organizational theory named ‘Teal.’ In addition, he brought on an experienced executive to handle the HR function, which didn’t seem to be working effectively.
So much change, so little time
There are some deep, long-lasting challenges of the Zappos system that should serve as red flags for those seeking to implement holacracy or other types of ‘egalitarian’ structures:
- Decision making: Zappos is, supposedly, a shoe company, but according to one of the former employees Jennifer Reingold (the author of the Fortune article cited above) interviewed, “while I was there, almost no one discussed the business of selling shoes.” One of the huge advantages of hierarchy (and why so many companies and societies have chosen to use it in governance) is the streamlined decision making process. Democracy and collaboration can be time consuming and decisions difficult to come by because of all the opinions and stakeholders. Also, it can be very difficult to keep decisions in alignment with the company’s vision and mission, as well as focused on key metrics or objectives, such as selling shoes.
- Measurements and Accountability: speaking of measurements, without some amount of leadership/hierarchy it is very difficult to have measurements. What constitutes success and how do we measure it? If it’s not profits (and that is wishful thinking: in every business profits are a part of measuring success), what is it? Let’s say there are metrics in place: what happens if an employee fails to meet them? Who holds who accountable? Without some amount of positional leadership, it is incredibly difficult to create accountability and follow-through.
- Politics and favoritism: egalitarian management philosophies tend to emphasize the eradication of workplace politics and favoritism. Seniority rewards length of service but not necessarily aptitude, skills, or new ideas, and can lead to an entrenched power structure. The problem is these issues seem to always plague organizations (really, all human institutions), so the holacracy at Zappos just replaced one style of political power for another.
- Organization and Compliance: HR catches a bad rap as stuffy rule followers – some of that criticism is probably deserved, but much of it is sour grapes. My guess is 95% of employees have no idea how massive the regulatory burden is for many companies (even small businesses) and how much red tape and compliance is required by governments at every level. I’m sure many HR professionals would love to paint murals or design the upcoming fundraiser, but if the mountain of filing, organizing, and complying is not completed, there can be significant and possibly damaging consequences for an organization. Hieih recognized his mistake and brought in an experienced HR executive to help him, but it might be too late to bail all the water out of the ship.
- Cultural impact: One side effect of massive restructuring is the spread of fear throughout the organization. By nature change has a certain amount of unpredictability inherent in it, and for many that leads to fear: is the company going to make it? Am I going to lose my jobs? How about my co-workers, are they going down? What will the new expectations look like? What will the new management be like? When there are cloudy and unclear answers to those questions, the fear grows even more. Another possible effect of this kind of change, one that seems to be at work at Zappos, is groupthink. For people who rejected his system, Hsieh offered a generous severance package to leave. This has happened a couple of times at this point, leaving only people absolutely committed. That might sound like a good thing, but the absence of any legitimate critique leaves a company incredibly vulnerable: blinds spots remain hidden, covering or spinning data or outcomes that are negative can occur, silencing or persecuting dissenters in the minority can grow. Groupthink is real and its outcomes can be very damaging.
- ‘Change Overload’: There’s no doubt that a robust ability to deal with and implement change is critical for the health and success of a modern organization. Technology and society are changing at ever greater speeds, so it is necessary to keep up. But there is little doubt that ‘change overload’ has had a negative effect at Zappos. Here’s Reinhold again: “Still there’s been a lot to get through lately. The shift to holacracy, combined with a wildly ambitious software project called Super Cloud – not to mention a reconceived business strategy – has left employees confused, demoralized, and whipsawed by the constant pace of change.” So an overhaul of the organizational, cultural, and governing philosophy, the introduction of a massive and complex new data system, and a totally reconceived business strategy – is it any wonder that a large number of Zapponians are confused, demoralized, and uncertain?
Conclusion
Does holacracy work? There are a number of companies that currently use this philosophy with apparent success. But on the whole the negatives appear to outweigh the positives. This is not to totally disregard the theory: employee participation in decision making is becoming more and more important every day, not just for employee satisfaction but for the success of the organization. A team centric approach to solving problems and completing tasks is also growing in importance. Furthermore, aligning employees in jobs that fit their skills and motivations is unbelievably important, and can generate immediate gains in productivity.
That being said, Hsieh’s experiment seems to be on the rocks. My advice would be to take a look at the advantages of hierarchy and see how they could be integrated into a new, hybrid system. His solution is to introduce even more change. We’ll see how it all turns out.