SET CONTEXT UP FRONT AND KEEP AN EYE ON SPENDING OUT BACK
New recruits to Netflix are eager to understand what they should and shouldn’t spend money on, and we provide them with the context to make good choices. During the ten years that David Wells was CFO he set the first round of context for incoming recruits at our “New Employee College.” He explained it like this:
Before you spend any money imagine that you will be asked to stand up in front of me and your own boss and explain why you chose to purchase that specific flight, hotel, or telephone. If you can explain comfortably why that purchase is in the company’s best interest, then no need to ask, go ahead and buy it. But if you’d feel a little uncomfortable explaining your choice, skip the purchase, check in with your boss, or buy something cheaper.
This is what I mean by “context at the front end.” David’s instruction to imagine explaining your purchases to your bosses is not a simple exercise in make-believe. If you aren’t careful with your spending, you likely WILL have to explain your purchases.
At Netflix you don’t have to complete a purchase order and wait for approval to buy something. You just buy it, take a photo of the receipt, and submit it directly for reimbursement. But that doesn’t mean no one pays attention to what you spend. The finance team offers two routes for eradicating unwise expenditure. Managers can choose which route to take or can combine the two. The first method leans lightly toward an ethos of Freedom and Responsibility (or F&R, as we say at Netflix). The second choice jumps all in.
If the manager chooses to lean lightly toward F&R, it works like this: At the end of every month the finance team sends a link to each manager listing all receipts per employee for the previous weeks. The manager can click on those expenses and drill down to see what each person spent. Patty McCord, who chose this route while she worked for Netflix, diligently opened the email from finance on the thirtieth of each month and carefully reviewed the expenses of all employees in the HR department. Often, she found people were overspending. Patty recounts an incident from 2008 involving Jaime, a recruiter on her HR team:
Late Friday afternoon I was getting ready to go home when a couple of the product folks came by to pick Jaime up to go to Dio Deka, the fancy Michelin-starred Greek restaurant in Silicon Valley. I said “You are going out for drinks?” But Jaime responded, “No, we’re having a dinner meeting.”
The next month when I received my team’s expenses, I saw a Dio Deka receipt from Jaime for four hundred dollars. That did not feel right. I said, “Hey Jaime, is this the bill from when you went out with the product team a few weeks ago?” And it was! She explained that John had ordered a nice bottle of wine: “John and Greg like good wine.” That just made me go ballistic!
I said: “If those two want to drink hundred-dollar bottles of wine they’re welcome to! We pay them enough money to buy it themselves!”
That’s when Patty set the context Jaime needed to hear:
“You can spend this kind of money taking a candidate out to dinner. And if the candidate orders a nice bottle of wine, okay, that’s fine. That’s part of your job. But here we paid for you all to go out drinking and dining on the company. That’s crap! If you want to go have fun with your colleagues you pay yourself. If you need a place for a meeting, get a conference room. This was not in Netflix’s best interest! Use good judgment.”
Usually after just one or two conversations clarifying context your employees will get the hang of how to spend the company’s money wisely and that will pretty much take care of it. When employees realize their managers are keeping an eye on expenses, they aren’t likely to test the limits much. This is one way to curb spending, but many Netflix managers prefer a more radical version of Freedom and Responsibility.
For those managers who are ready to jump all in with F&R, there is another route, eliminating the administrative hassle of looking over receipts and leaving it to our internal auditing department to find abuse. But if they do find abuse, it’s all over for the employee.
Leslie Kilgore explains it like this:
My marketing team was on the road nonstop. They selected their own flights and their own hotels. I went through a number of scenarios with them to help them make spending choices. If you’re flying overnight and have to be operational the next morning, flying business makes sense. If you can fly overnight in economy to save money and arrive a day earlier, that’s better and Netflix will pay for the extra hotel night. It’s almost never in Netflix’s best interest to fly business for short flights.
I told them I would never look at their expense reports, but that finance audits ten percent of all expenses annually. I trust them to behave frugally and carefully with the company’s money and if finance finds any monkey business, that employee will be immediately fired. It’s not one strike and a warning; it’s “abuse the freedom and you’re out”—plus you’ll be used as an example to others for what not to do.
This is the nub of F&R. If your people choose to abuse the freedom you give them, you need to fire them and fire them loudly, so others understand the ramifications. Without this, freedom doesn’t work.
SOME PEOPLE WILL CHEAT, BUT THE GAINS OUTWEIGH THE LOSSES
When you offer freedom, even if you set context and clarify the ramifications of abuse, a small percentage of people will cheat the system. When this happens, don’t overreact and create more rules. Just deal with the individual situation and move forward.
Netflix has had its cheaters. The most talked-about case concerned an employee in Taiwan who traveled a lot for business and was slipping in numerous luxurious vacations on the company’s dime. His manager didn’t check his receipts and finance didn’t audit him for three full years. By the time he was caught he had spent over $100,000 on personal travel. Needless to say, he was fired.
In most instances, employees aren’t so much defrauding the company as finding what they can get away with. The vice president of corporate operations, Brent Wickens, oversees all the company’s office spaces around the world. One spring, a woman on his team, Michelle, made several business trips to Las Vegas. Brent did spot-check his own department’s expenses, but it was only a few times a year.
One night I couldn’t sleep so I clicked on the link in my email titled “Departmental expenses broken down by employee.” I perused through a bunch of people in my group when something unusual popped out. Michelle had a travel expense listed as Food and Drink at the Wynn casino in Las Vegas for twelve hundred dollars. That was a lot of food and drink for a two-day trip! So, then I got curious and started looking at her expenses from past months. I saw several small items that didn’t seem aboveboard. She’d gone to Boston for a Thursday conference and spent the weekend with her family. Friday night there was a restaurant expense for $180. Had she expensed her family’s dinner?
I waited until Michelle and I were both in the office to ask her about these charges. But when I did, she froze. She had no explanation. No apology, no excuse, nothing to say. I let her go the next week. When she was packing her boxes, she kept saying that this was all a big mistake. I felt horrible and still don’t understand clearly what happened. She’s gone on to have a great career somewhere else. The freedom we offer wasn’t a good match for her.
At the next Quarterly Business Review (QBR) leadership meeting, Netflix’s chief talent officer at the time got up onstage and told Michelle’s story to the 350 attendees, detailing the abuse but not identifying her by name or department. She asked participants to share the situation with their teams so everyone understood the gravity of cheating the system. Netflix brings these things out in the open for others to learn from. Brent felt bad for Michelle, but he understood the importance of telling everyone what had happened. Without this degree of transparency, freedom from expense approvals doesn’t work.
The biggest expense resulting from the freedom is probably the number of people choosing to fly busin
ess class. Netflix has ongoing debates about whether to create a policy restricting business class travel, but senior managers still prefer the current approach. David Wells, while CFO, estimated travel expenses are about 10 percent higher than if Netflix had a formal approval system. But, according to Reed, that 10 percent is a small price to pay for the significant gains that come with it.
GREAT GAINS: FREE, FAST, AND (SURPRISINGLY) FRUGAL
Remember Grant, the sales director from my days at Pure Software? When he came to complain about his taxi bill, he was angry. He felt like the company had pinned down his wings with all our red tape. He couldn’t do what was right without feeling dragged down by a rule or policy.
When he said all that, I realized it was about our entire workforce. I had an image of our hundreds of employees, all as sparrows longing to fly, with big wads of red packaging tape fixing their wings to their desks. I hadn’t intended to kill employee creativity and speed with bureaucracy. Spending policies had just seemed like a good way to minimize risk and save money.
But this is the most important message of this chapter: even if your employees spend a little more when you give them freedom, the cost is still less than having a workplace where they can’t fly. If you limit their choices by making them check boxes and ask for permission, you won’t just frustrate your people, you’ll lose out on the speed and flexibility that comes from a low-rule environment. One of my favorite examples is from 2014, when a junior engineer saw a problem that needed to be solved.
Friday morning April 8, Nigel Baptiste, director of partner engagement, arrived at the Netflix Silicon Valley office at 8:15. a.m. It was a warm, sunny day, and Nigel whistled as he grabbed a cup of coffee in the open kitchen on the fourth floor and strolled back to the area where he and his team test Netflix streaming on TVs made by official partners like Samsung and Sony. But when Nigel arrived at his work space, he stopped whistling and froze. What he saw, or, rather, what he didn’t see, sent him into a panic. He remembers it like this:
Netflix had invested a big chunk of money so that our customers could watch House of Cards on new 4K ultra high definition TVs. The problem was that until this moment basically no TVs supported 4K. We had this fresh super-crisp look, but few could see it. Now, our partner Samsung had come out with the only 4K television so far on the market. These TVs were expensive, and it wasn’t clear if customers would buy them. My big goal that year was to work with Samsung to get lots of people watching House of Cards in 4K.
We had a minor media coup when journalist Geoffrey Fowler, who reviews high-tech products for the Washington Post and has about two million readers, agreed to test House of Cards on Samsung’s new TV. His review would need to be great for 4K to take off. On Thursday Samsung engineers had come to Netflix with the 4K TV and checked it with my engineers to make sure Mr. Fowler would have a terrific viewing experience. Thursday evening, the TV tested, we all went home.
But Friday morning, when I arrived at the office, the TV was gone. After checking with facilities, I realized it had been disposed of with a bunch of old TVs we’d told them to get rid of.
This was serious. That TV was due in Fowler’s living room in two hours. It was too late to call the Samsung people. We’d have to buy another TV before ten a.m. I started calling every electronic store in town. The first three calls resulted in: “I’m sorry sir, we don’t have that TV.” My heart was pounding in my throat. We were going to miss the deadline.
I was almost in tears when Nick, the most junior engineer on our team, sprinted into the office. “Don’t worry, Nigel,” Nick said. “I solved that. I came in last night, and I saw the TV had been disposed of. You didn’t respond to my calls and texts. So I drove out to the Best Buy in Tracy, bought the same TV, and tested it this morning. It cost twenty-five hundred dollars, but I thought it was the right thing to do.”
I was floored. Two and a half thousand dollars! Imagine, a junior engineer feeling so empowered that he spends that much without approval because he thinks it’s the right decision. I felt a wave of relief. Due to all the sign-off policies this could never have happened at Microsoft, HP, or any other company I have worked for.”
In the end, Fowler loved the high-definition streaming and wrote in his April 16 Wall Street Journal article: “Even the unflappable Francis Underwood perspires in ultra-high definition. I spotted sweat on the upper lip of Kevin Spacey’s fictitious vice president while streaming Netflix’s ‘House of Cards.’”
I don’t want rules that prevent employees from making good decisions in a timely way. Fowler’s review was worth hundreds of times more to both Netflix and Samsung than that TV. Nick had just five words to guide his actions: “Act in Netflix’s best interest.” That freedom enabled him to use good judgment to do what was right for the company. But freedom isn’t the only benefit of removing your expense policy. The second benefit is that the lack of process speeds everything up.
* * *
• • •
As companies grow from fast and flexible start-ups into mature businesses, they often create entire departments to monitor employee spending, which gives management a sense of control, but slows everything way down. Director of product innovation Jennifer Nieva provides an example from her time at Hewlett-Packard:
I loved working at HP, but that week in 2005 I was so frustrated my ears were practically smoking.
I’d been asked to run a big project, and it was understood from the outset that I would need to find several highly specialized outside consultants who would work with me for six months. I looked at eight consulting firms and chose one. They quoted me $200k for the six months of work and I was eager to get started. The consultants were available now, but if I waited too long, they’d be reassigned to another client.
I followed the process and entered a request for spending approval into the HP procurement system. Then I looked over everything. There were TWENTY names that needed to sign off before I could get started. My boss, my boss’s boss, my boss’s boss’s boss, but also over a dozen names I’d never heard of, people I soon learned were sitting in our procurement department in Guadalajara, Mexico.
Was I going to lose these consultants I’d taken so long to find? My boss signed, her boss signed, his boss signed. Then I started calling the procurement department, first daily and later hourly. Most of the time no one answered. Finally, I called a woman named Anna who picked up. I used every ounce of charm I could to get her to help me. The approval took six weeks and I called Anna so many times that, when she made the next step in her career, she asked me to write a LinkedIn recommendation for her.
Think of the impact on organizational speed of having hundreds—maybe thousands—of Jennifer’s dealing with the same barricades on a monthly basis. Processes provide management with a sense of control, but they slow everything way down. Jennifer’s story has a second half, which is more satisfying:
In 2009, I joined Netflix as a marketing manager. After three months I prepared a three-million-piece direct-mail campaign. We were using snail mail to send out brochures with photos of our most popular movies. The project had a sticker price of almost a million dollars. I printed the Statement of Work and found my boss. “Steve, how do I get the approval process started for this million-dollar expense?” I asked, braced for the worst. “You just sign it and fax it back to the vendor,” he told me. I kid you not. I nearly hit the floor.
From Nigel’s and Jennifer’s examples, we see how a simple expense guideline like “act in the company’s best interest” gives your employees both freedom of choice and the ability to move fast. But freedom and speed aren’t the only benefits. A third, and more surprising benefit, is that some employees actually spend less when the expense policy is lifted. Claudio, a Hollywood-based director in the consumer insight department, supplied an example that illustrates why:
My job requires customer entertaining. At Viacom, my last employe
r, there was a clear policy explaining what kind of restaurants we could take clients to, who should pay for what, and how much alcohol the company was willing to reimburse. I liked that. It made me feel safe that I was coloring within the lines. The rule was that, while dining with a client, I could pay for the first bottle of wine only. So I would say at the beginning of the meal, “Viacom will pay for dinner and for the first bottle of wine. After that we each pay for our own drinks.” Knowing the rule, sometimes we might spend to the limit, by ordering lobster and a particularly expensive bottle of wine. But the rule was clear from the start, so we could work with it.
After a few weeks at Netflix, I was preparing for my first customer dinner. I asked my boss, Tanya, “What’s the policy for expensing meals with customers?” Her response was infuriating: “There’s no policy. Use your best judgment. Act in Netflix’s best interest.” I felt she was testing to see if I had good judgment.
At that meal I was determined to show Tanya how frugal I was. I ordered one of the cheaper meals on the menu and decided to have just one beer (less expensive than wine). At the end of the meal, when I saw the clients were getting ready for a round of drinking I made an excuse, paid the bill, and said good night. No way was I going to pay for their party.
Throughout my time at Netflix, I’ve come to see that Tanya was not trying to test me. She doesn’t analyze my dinner receipts at all. Still, without a rule you never know when your judgment will come into question. I feel safest sticking to the same practice of careful ordering I used that first night. No lobster and no expensive wine.
Claudio’s story demonstrates the curious impact of rules. When you set them, some people will look eagerly for a way to take advantage of them. If Viacom told employees, “Order one starter, one main course, and one bottle of wine for two people,” they might order caviar, lobster, and a bottle of champagne. That’s within the rules but very expensive. When you tell people to behave in the company’s best interest, they order Caesar salads, chicken breasts, and a couple of beers. The organization with the policy is not necessarily the one saving money.
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