Zappos Founder Says His Self-Management Experiment Only Cost Him A Tenth Of His Staff

This post appears courtesy of the Ferenstein Wire, a syndicated news service. Publishing partners may edit posts. For inquiries, please email author and publisher Gregory Ferenstein.

Amazon bought Zappos, an online shoe and apparel store, in 2009. Since then, it’s mostly let founder Tony Hsieh run the place. Most recently, Hsieh’s been running an experiment with a radical management theory called Holacracy. Holacracy sets up companies as self-managing teams with no titles or managers. Silicon Valley startups like GitHub and Medium have tried their own versions of Holacracy, but Zappos, with 1,500 employees and its headquarters in Las Vegas, has been a high-profile, standout case study.

After getting impatient with the pace of change from conventional, top-down management to Holacracy within Zappos, Hsieh offered severance packages to anyone at Zappos who didn’t want to stay and work under the new system. The packages were called the “Teal Offer,” based on a term used within Holacracy for organizations that have achieved self-governance.

Nearly one in 5 employees—18 percent—took the Teal Offer package and quit, leading to a slew of reports that the experiment was backfiring. 

Early on, I did a feature on Zappos’ move to Holacracy, a management method which, in its broadest form, abolishes traditional hierarchy and replaces “bosses” with an overlapping network of self-managed teams.

Employees split their time on teams dedicated to everything that one could do for the company, from managing the lunch menu to marketing strategy. Holacratic organizations are usually ruled by a “constitution,” and once its rules are enacted, no one can overrule a team in charge of a particular project—not even the person who formerly carried the CEO title. (More on that here.)

The Ferenstein Wire reached out to Hsieh for his take on the status of Holacracy at Zappos. (His responses have been edited for clarity and brevity.)

The Ferenstein Wire: How would you characterize the accuracy of the latest round of press on departures from Zappos?

Tony Hsieh: The ironic thing is that we didn’t actually have to make an offer. The reason we did was because it’s always been a part of our culture to treat our employees well and is consistent with our ongoing practice of making every single new employee an offer of several thousand dollars to quit the company during our 5-week new-hire training. The headline really should be “82% of employees choose NOT to take the offer.”

Here’s the data that most of the articles did not include for proper context:

  • Zappos annual turnover in 2013 and 2014 was each about 20%
  • Teal Offer takers totaled about 18% (including the delayed Super Cloud Teal Offer takers)
  • Our estimate is that roughly half of the Teal Offer takers took the offer not because of anything related to Holacracy or Teal, but because the economics of the offer were too good to pass up (minimum of 3 months severance or 1 month for every year worked (whichever was greater)). Some long-time employees were offered over a year of severance, plus they are still eligible to join Zappos again after 12 months, so it allowed people the opportunity to pursue their new startup ideas, or take time off to take care of their sick relative, for example.
  • Our total turnover for 2015 was about 30%
  • Based on the above numbers, our extra turnover was about 10% more in 2015 compared to what’s normal, and that 10% was mostly due to us giving long-time employees the opportunity to pursue their dreams (average severance paid out was about 5.5 months pay when we last analyzed the data).

And finally, a misinterpreted conversation with our COO Arun resulted in reports suggesting that we would had a layoff if enough folks had not taken the offer. This is factually incorrect.

Ferenstein: I thought that Zappos was a place where people stuck around, especially considering your company culture. Has your turnover always been around 20%, or has something changed over the years?

Hsieh: Our annual turnover has generally been around 20% (except for 2015 due to the Teal Offer). A quick Google search suggests this is well below the turnover for most call centers, but regardless, our goal has never been to hit a certain turnover metric. Instead, our goal is to maximize the number of employees that believe in the company mission, are passionate about customer service, and believe that this is the right culture for them.

This is why we make an offer to every single new hire (regardless of department) during their 5-week new hire training class, for example. We offer every new hire several thousand dollars to quit and leave the company before they start the actual job they were hired for. This obviously will increase our turnover compared to if we didn’t make the offer, but we think it’s the right thing to do to make sure employees don’t feel “stuck” in a job or company that’s not the right fit for them.

Ferenstein: Why did you take such a big risk when everything seemed to be going okay?

Hsieh: I think the real question should be about what happens if there is no innovation on how companies are structured? This isn’t just about Zappos, this is about all companies. The default future for companies under the traditional structure is death. Something like 88% of the companies that were on the Fortune 500 list in 1955 are no longer on that list.

The simple fact is that command-and-control structures do not stand the test of time, but self-organized and self-managed structures (such as cities) are resilient and do stand the test of time. In addition, research has shown that every time the size of a city doubles, innovation or productivity per resident increases by 15%. But with traditional companies, the opposite happens — innovation or productivity per employee generally goes down.

Holacracy just happens to be the technology that we are using today, but our ultimate goal is that we want to structure Zappos more like a city and less like a top-down bureaucratic command and control organization.

Our march towards self-organization and self-management isn’t an experiment. It’s the future of work and it’s the only structure that has stood the test of time. It’s the only structure that can become more innovative as it gets bigger (vs. typical corporate structures that become less innovative as they get bigger). Self-organization and self-management isn’t a theory. It exists in nature, and it exists in human-created cities.

At 1500 people, we just generally felt like things were moving slower compared to when we were 150 people. I don’t think it’s really anyone’s fault, I think it’s a byproduct of the normal hierarchical structure and processes. There’s never a good time to make a change like this, but I can tell you that it would have been a lot harder to do at 15,000 people than 1500 people, though I wish we had done it earlier.

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Photo by Silicon Prairie News

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