+ Increase candor.
Talented employees have an enormous amount to learn from one another. But the normal polite human protocols often prevent employees from providing the feedback necessary to take performance to another level. When talented staff members get into the feedback habit, they all get better at what they do while becoming implicitly accountable to one another, further reducing the need for traditional controls.
With these two elements in place you can now . . .
- Reduce controls.
Start by ripping pages from the employee handbook. Travel policies, expense policies, vacation policies—these can all go. Later, as talent becomes increasingly denser and feedback more frequent and candid, you can remove approval processes throughout the organization, teaching your managers principles like, “Lead with context, not control,” and coaching your employees using such guidelines as, “Don’t seek to please your boss.”
Best of all, once you start developing this type of culture, a virtuous cycle kicks in. Removing controls creates a culture of “Freedom and Responsibility” (a term Netflix employees use so much that they now just say “F&R”), which attracts top talent and makes possible even fewer controls. All this takes you to a level of speed and innovation that most companies can’t match. But you can’t reach this level in one go.
The first nine chapters of this book cover this three-step implementation approach through three cycles, each cycle making a section. The tenth chapter looks at what happened when we began to take our Corporate culture into a variety of national cultures—a transition that has led to interesting and important new challenges.
Of course, virtually every experimental project includes both successes and failures. Life at Netflix—like life in general—is a little more complicated than this tornado-shaped diagram suggests. That’s why I asked someone from the outside to study our culture and write this book with me. I wanted an impartial expert to take a close look at how the culture actually plays out, day to day, within our walls.
I thought of Erin Meyer, whose book The Culture Map I had just finished reading. A professor at INSEAD business school outside of Paris, Erin had recently been selected by the Thinkers50 as one of the world’s most influential business thinkers. She writes frequently about her research on cultural differences in the workplace for Harvard Business Review, and I learned in her book that she was also a Peace Corps volunteer teacher in Southern Africa ten years before I was. I sent her a message.
* * *
• • •
In February 2015, I read an article in the Huffington Post titled, “One Reason for Netflix’s Success—It Treats Employees Like Grownups.” The article explained:
Netflix assumes that you have amazing judgment, . . . . And judgment is the solution for almost every ambiguous problem. Not process.
The flip side . . . is that people are expected to work at a super-high level or be quickly shown the door (with a generous severance package).
I became increasingly curious as to how an organization could operate successfully, in real life, following the stated methodology. A lack of process is bound to create pandemonium, and showing employees the door if they don’t operate at a super-high level is bound to instigate terror in the workforce.
Then, a few months later, I woke up to find the following email in my inbox:
From: Reed Hastings
Date: May 31, 2015
Subject: Peace Corps and book
Erin,
I was Peace Corps Swaziland (1983–85). Now I’m the CEO of Netflix. I loved your book and we are having all of our leaders read it.
I’d love to have coffee sometime. I’m in Paris often.
Small world!
Reed
Reed and I got to know each other and eventually he suggested I interview Netflix employees to get a firsthand glimpse of what the Netflix culture is really like, and to gather data in order to write a book with him. This was a chance to find out how a company with a culture in direct opposition to everything we know about psychology, business, and human behavior can have such remarkable results.
I have conducted over two hundred interviews with current and past Netflix employees in Silicon Valley, Hollywood, São Paulo, Amsterdam, Singapore, and Tokyo, speaking with employees at every level, from executives to administrative assistants.
Netflix generally doesn’t believe in anonymity, but I insisted that during my interviews all employees be given the option to conduct these interviews anonymously. Those who chose that option are referred to in this book by fictional first names only. However, true to the “honesty-always” culture at Netflix, many were happy to share all sorts of surprising and sometimes unflattering opinions and stories about themselves and their employer, while being identified openly.
YOU HAVE TO CONNECT THE DOTS DIFFERENTLY
In his famous commencement speech at Stanford University, Steve Jobs said: “You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something—your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.”
Jobs is not alone. Sir Richard Branson’s mantra is said to be “A-B-C-D,” or “Always be connecting the dots.” And David Brier and Fast Company released a fascinating video that claims the way we connect life’s dots defines how we see reality, and thus how we make decisions and reach conclusions.
The point is to encourage people to question how the dots are connected. In most organizations, people join the dots the same way that everyone else does and always has done. This preserves the status quo. But one day someone comes along and connects the dots in a different way, which leads to an entirely different understanding of the world.
That’s what happened at Netflix. Despite Reed’s experience at Pure Software, he didn’t exactly set out to build a company with a unique ecosystem. Instead, he sought organizational flexibility. Then a few things happened that led him to connect the dots of corporate culture differently. Gradually, as these elements came together, he was able—in hindsight only—to understand what it was about the culture that helped drive Netflix’s success.
* * *
• • •
In this book we’ll be connecting the dots chapter by chapter, in the order that we discovered them at Netflix. We will also look at how they play out in the current Netflix work environment, what we’ve learned along the way, and how you might apply your own version of freedom and responsibility to your organization.
SECTION ONE
FIRST STEPS TO A CULTURE OF FREEDOM AND RESPONSIBILITY
First build up talent density . . .
1 ▶ A Great Workplace Is Stunning Colleagues
Then increase candor . . .
2 ▶ Say What You Really Think (with Positive Intent)
Now begin removing controls . . .
3a ▶ Remove Vacation Policy
3b ▶ Remove Travel and Expense Approvals
This section demonstrates how a team or organization can begin to implement a culture of Freedom and Responsibility. These concepts build on one another. Although you may try implementing elements of each chapter in isolation, such an approach can be risky. Once you have built up talent density, you can safely address candor. Only then can you safely begin removing policies that control your staff.
FIRST BUILD UP TALENT DENSITY . . .
1
A GREAT WORKPLACE IS STUNNING COLLEAGUES
In the 1990s, I liked to rent VHS videos from the Blockbuster down the street from our house. I’d take two or three at a time and return them quickly to avoid late fees. Then one day I moved a pile of papers on the dining room table and saw a cassette that I’d watched weeks ago and forgotten to return. When I took the movie back to
the store, the woman told me the fee: $40! I felt so stupid.
Later, that got me thinking. Blockbuster made most of its margin from late fees. If your business model depends on inducing feelings of stupidity in your customer base, you can hardly expect to build much loyalty. Was there another model to provide the pleasure of watching movies in your own living room without inflicting the pain of paying a lot when you forgot to return them?
In early 1997, when Pure Software was acquired, Marc Randolph and I started thinking about opening a movies-by-mail business. Amazon was having good luck with books. Why not films? Customers would rent VHS cassettes from our website and be able to return them via the mail. Then we learned it would cost $4 to mail the VHS cassette each way. There wasn’t going to be a big market. It was too expensive.
But a friend told me about a new invention called DVDs, which would be coming that fall. “They’re like CDs but hold a movie,” he explained. I raced to the post office and mailed myself several CDs (I couldn’t find an actual DVD for my test). Each cost thirty-two cents to mail. Then I went back to my place in Santa Cruz and waited anxiously for them to arrive. Two days later they dropped through the mail slot, unharmed.
In May 1998, we launched Netflix, the world’s first online DVD rental store. We had thirty employees and 925 movie titles, which was almost the entire catalog of DVDs available at the time. Marc was the CEO until 1999, when I took over and he became one of our executives.
By early 2001, we’d grown to 400,000 subscribers and 120 employees. I tried to avoid the leadership fumbles of my Pure Software days, and although we avoided implementing excessive rules and controls this time, I also couldn’t characterize Netflix as a particularly great place to work. But we were growing, business was good, and work for our employees was OK.
LESSONS FROM A CRISIS
Then, in the spring of 2001, crisis struck. The first internet bubble burst, and scores of dot-coms failed and vanished. All venture capital funding stopped, and we were suddenly unable to raise the additional funds we needed to run the business, which was far from profitable. Morale in the office was low, and it was about to get lower. We had to lay off a third of our workforce.
I sat down with Marc and Patty McCord—Patty had come with me from Pure Software and was head of Human Resources—and we studied the contribution of each employee. We didn’t have any obviously poor performers. So we divided the staff into two piles: the eighty highest performers who we would keep and forty less amazing ones we would let go. Those who were exceptionally creative, did great work, and collaborated well with others went immediately into the “keepers” pile. The difficulty was that there were many borderline cases. Some were great colleagues and friends but did adequate rather than great work. Others worked like crazy but showed uneven judgment and needed a lot of hand-holding. A few were exceptionally gifted and high performing but also complainers or pessimists. Most of them would have to go. It wasn’t going to be easy.
In the days before the layoffs, my wife remarked how on edge I was, and she was right. I worried that motivation in the office would plummet. I was convinced that, after I’d let go of their friends and colleagues, those who stayed would think that the company wasn’t loyal to employees. It was bound to make everyone angry. Even worse, the “keepers” would have to shoulder the work of those let go, which seemed certain to lead to bitterness. We were already short on cash. Could we bear a further collapse in morale?
The day of the layoffs arrived, and it was awful, as expected. Those who we laid off cried, slammed doors, and shouted in frustration. By noon it was finished, and I waited for the second half of the storm: the backlash from the remaining employees. . . . But, despite some tears and visible sorrow, all was calm. Then, within a few weeks, for a reason I couldn’t initially understand, the atmosphere improved dramatically. We were in cost-cutting mode, and we’d just let go of a third of the workforce, yet the office was suddenly buzzing with passion, energy, and ideas.
A few months later the holidays arrived. DVD players were popular that Christmas, and by early 2002, our DVD-by-mail subscription business was growing rapidly again. Suddenly, we were doing far more work—with 30 percent fewer employees. To my amazement, those same eighty people were getting everything done with a passion that seemed higher than ever. They were working longer hours, but spirits were sky-high. It wasn’t just our employees who were happier. I’d wake up in the morning and couldn’t wait to get to the office. In those days, I drove Patty McCord to work every day and when I swung up to her house in Santa Cruz, she would practically leap into the car with this big grin: “Reed, what’s going on here? Is this like being in love? Are these just some wacky chemicals and this thrill is going to wear off?”
Patty had put her finger on it. The entire office felt like it was filled with people who were madly in love with their work.
I’m not advocating for layoffs, and fortunately we haven’t had to do anything like that at Netflix since. But in the days and months following those 2001 layoffs, I discovered something that completely changed the way that I understand both employee motivation and leadership responsibility. This was my road to Damascus experience, a turning point in my understanding of the role of talent density in organizations. The lessons we learned became the foundation of much that has led to Netflix’s success.
But before we go on to describe those lessons, I should give Patty a proper introduction because she played a critical role in the development of Netflix for over a decade, and her protégé, Jessica Neal, runs HR for Netflix today. I first met Patty McCord while at Pure Software. In 1994 she called the office out of the blue and asked to speak to the CEO. My younger sister was answering the phones in those days, and she put Patty right through. Patty was raised in Texas, which I could hear faintly in the way she spoke. She said she was currently working for Sun Microsystems in the HR department, but she’d like to come to Pure Software and run HR for us. I invited her in for a cup of coffee.
During the first half of the meeting, I couldn’t understand anything Patty was saying. I asked her to tell me her HR philosophy, and she said: “I believe that every individual should be able to draw a line between their contribution to the corporation and their individual aspirations. As the head of human capital management, I would work with you, the CEO, to increase the emotional intelligence quotient of our leadership and improve employee engagement.” My head started to spin. I was young and unpolished and after she stopped, I said: “Is that how all HR people speak? I couldn’t understand a word. If we are going to work together you are going to have to stop talking like that.”
Patty was insulted, and she told me so straight to my face. When she got home that evening and her husband asked her how the interview had gone, she told him, “Bad. I got in a fight with the CEO.” But I loved the way she told me exactly what she thought of me. So I gave her the job, and since then we have had a frank, long-lasting friendship, which has persisted even after her departure from Netflix. It may be partly because we’re so different: I’m a math wonk and a software engineer, she’s an expert in human behavior and a storyteller. When I look at a team, I see numbers and algorithms that connect the people and discussions. When Patty looks at a team, she sees emotions and subtle interpersonal responses that are invisible to me. Patty worked for me at Pure Software until we sold it in 1997, and she joined us early at Netflix.
Patty and I spent dozens of car rides following the 2001 layoffs trying to figure out why the work environment had taken a sharp turn for the better and how we could maintain this positive energy. We came to understand that what Patty referred to as our dramatic increase in “talent density” was behind the improvements.
TALENT DENSITY: TALENTED PEOPLE MAKE ONE ANOTHER MORE EFFECTIVE
Every employee has some talent. When we’d been 120 people, we had some employees who were extremely talented and others who were mildly talented. Overall we had a fair amount of talent dis
persed across the workforce. After the layoffs, with only the most talented eighty people, we had a smaller amount of talent overall, but the amount of talent per employee was greater. Our talent “density” had increased.
We learned that a company with really dense talent is a company everyone wants to work for. High performers especially thrive in environments where the overall talent density is high.
Our employees were learning more from one another and teams were accomplishing more—faster. This was increasing individual motivation and satisfaction and leading the entire company to get more done. We found that being surrounded by the best catapulted already good work to a whole new level.
Most important, working with really talented colleagues was exciting, inspiring, and a lot of fun—something that remains as true today with the company at seven thousand employees as it was back then at eighty.
In hindsight, I understood that a team with one or two merely adequate performers brings down the performance of everyone on the team. If you have a team of five stunning employees and two adequate ones, the adequate ones will
sap managers’ energy, so they have less time for the top performers,
reduce the quality of group discussions, lowering the team’s overall IQ,
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