No Rules Rules

by Reed Hastings

  THE SIXTH DOT

  If you have high talent density and organizational transparency firmly in place, a faster, more innovative decision-making process is possible. Your employees can dream big, test their ideas, and implement bets they believe in, even when in opposition to those hierarchically above them.

  ▶ TAKEAWAYS FROM CHAPTER 6

  In a fast and innovative company, ownership of critical, big-ticket decisions should be dispersed across the workforce at all different levels, not allocated according to hierarchical status.

  In order for this to work the leader must teach her staff the Netflix principle, “Don’t seek to please your boss.”

  When new employees join the company, tell them they have a handful of metaphorical chips that they can make bets with. Some gambles will succeed, and some will fail. A worker’s performance will be judged on the collective outcome of his bets, not on the results from one single instance.

  To help your workforce make good bets, encourage them to farm for dissent, socialize the idea, and for big bets, test it out.

  Teach your employees that when a bet fails, they should sunshine it openly.

  Toward a Culture of Freedom and Responsibility

  Your company is now benefiting heavily from a culture of Freedom and Responsibility. You’re moving faster, innovating more, and your employees are happier. But as the organization grows, you may find that it’s difficult to maintain these cultural elements in which you have so carefully invested.

  This is what happened to us at Netflix. Between 2002 and 2008 we laid the foundation for most of the aspects outlined in the first six chapters of this book. But when we had dozens of new employees joining us from other companies every week, it became more challenging to shift people’s mind-sets to working in the Netflix way.

  For this reason, we have introduced a set of techniques for all managers in the company to use in order to assure that the critical elements of talent density, candor, and freedom persist despite change and growth. These techniques are the topic of section 3.

  SECTION THREE

  TECHNIQUES TO REINFORCE A CULTURE OF FREEDOM AND RESPONSIBILITY

  Max up talent density . . .

  7 ▶ The Keeper Test

  Max up candor . . .

  8 ▶ A Circle of Feedback

  And eliminate most controls . . . !

  9 ▶ Lead with Context, Not Control

  This section focuses on practical techniques you can implement in your team or organization in order to reinforce the concepts we’ve covered in the first two sections. In chapter 7 we’ll explore the Keeper Test, the primary device used at Netflix for encouraging managers to maintain high talent density. In chapter 8 we’ll look at two processes encouraging plentiful and ongoing feedback between bosses, employees, and peers. In chapter 9 we’ll consider exactly how to adjust your management style to provide greater decision-making freedom to the people you lead.

  MAX UP TALENT DENSITY . . .

  7

  THE KEEPER TEST

  It was the week between Christmas and New Year 2018, and at Netflix we had a lot to celebrate. The past six weeks had been some of the most successful in the history of the company. I was feeling great when I called up Ted Sarandos to congratulate him.

  In November Ted’s team released Roma, a film written and directed by Alfonso Cuarón, following the life of a live-in housekeeper for a middle-class Mexican family. Roma was called a “masterpiece” by The New York Times and hailed as the best Netflix original movie ever. The film went on to win Best Director and Best Foreign Language Film at the Oscars.

  A few weeks later Ted’s team released Bird Box, a thriller starring Sandra Bullock as a woman who must take a perilous journey with her children—blindfolded down a raging river—to save their lives. Bird Box was released on December 13 and within a week over forty-five million Netflix accounts had watched it, the best first seven days ever for any Netflix original.

  “Pretty amazing six weeks you’ve had!” I told Ted. He responded, “Yes, we’ve all picked well!” I must have looked puzzled because he clarified. “Well you picked me, and I picked Scott Stuber. Scott picked Jackie and Terril. Jackie and Terril picked Roma and Bird Box. That’s great picking!”

  Ted was right. With our dispersed decision-making model, if you pick the very best people and they pick the very best people (and so on down the line) great things will happen. Ted calls this the “hierarchy of picking” and it’s what a workforce built on high talent density is all about.

  Picking sounds primarily like it’s about hiring. Ideally, an organization could just pick carefully, and these well-chosen employees would flourish forever. The reality is tougher. No matter how careful you are, sometimes you will make hiring mistakes, sometimes people won’t grow as much as you had hoped, and sometimes your company’s needs change. To achieve the highest level of talent density you have to be prepared to make tough calls. If you’re serious about talent density, you have to get in the habit of doing something a lot harder: firing a good employee when you think you can get a great one.

  One of the reasons this is so difficult in many companies is because business leaders are continually telling their employees, “We are a family.” But a high-talent-density work environment is not a family.

  A FAMILY IS ABOUT STAYING TOGETHER REGARDLESS OF “PERFORMANCE”

  For many centuries, almost all businesses were run by families, so it’s no surprise that today the most common metaphor CEOs use for their companies is the family. The family represents belonging, comfort, and commitment to helping one another over the long term. Who wouldn’t want their employees to feel a deep fondness for and loyalty to the company they work for?

  The people greeters at Walmart were encouraged for decades to think of themselves as part of the “Walmart family.” When trained how to greet customers, they were told they should welcome everyone as if they were receiving a guest in their own home.

  Former Netflix vice president of engineering, Daniel Jacobson, worked at National Public Radio (NPR) for a decade in Washington, DC, before working at Netflix for a decade. He explained the benefits of the family ethos at NPR like this:

  I began at NPR in late 1999 as the first full-time software engineer hired online. When I got there, I was super-pumped. People who want to work at NPR believe in the mission and love the organization’s dedication to news and information. That shared purpose resulted in a culture that at times felt more like a family than a workplace. It was very appealing, and I developed a lot of close relationships at work.

  NPR had such a strong family culture that many people turned it into their real family. One of the “founding mothers” of NPR, Susan Stamberg, maintained a “Met and Married List” for NPR employees. NPR is a relatively small organization and the list of couples who had met there was pretty long.

  Daniel also remembers some of his colleagues saying, “If you’re at NPR for three years, you’re at NPR for life.”

  Of course families aren’t just about love and loyalty. In families we cut each other slack and put up with quirks and crankiness because we are committed to supporting one another for the long term. When people behave badly, don’t pull their weight, or aren’t able to fulfill their responsibilities, we find a way to make do. We don’t have a choice. We are stuck together. That’s what family is all about.

  The second part of Daniel’s NPR story illustrates the problem with treating a workforce like a family:

  The culture at NPR has a lot of advantages and works for them. But after a while, I started to see the problems of having a family ethos at work. There was a software engineer on my team, Patrick. Although he was an experienced engineer, he didn’t have the skills to accomplish his job well. He would continually need extra time to complete his projects and would often have significant bugs or problems in his
code. Sometimes other engineers needed to be included in his projects to ensure that we could get the work done effectively.

  Patrick had a great attitude, which added complexity. He was eager to do the right thing and wanted to prove that he could operate independently. We all yearned for him to succeed and we would seek out opportunities that would fit well with his limited skills. But his work quality didn’t compare to that of his colleagues. Every day I needed to worry about him and I didn’t need to worry about them. He was a lovely person, but the deliverables weren’t there.

  Patrick took up so much of my time—and so much of the team’s time correcting his mistakes—that it became a real problem. The best engineers on the team were often frustrated and looking for me to intervene. I worried that some of them were becoming so irritated they might look for jobs elsewhere.

  I could see that the team would have been considerably more effective without Patrick. Even if I couldn’t replace him with someone else.

  I spoke to my boss, who encouraged me to seek out different kinds of work that would take advantage of Patrick’s strengths while shielding others from his weaknesses. Firing him wasn’t even part of the discussion. We didn’t have cause. He hadn’t done anything wrong. The organization was such a family the response was: “He’s one of us. We’re all in this together. We’ll work around him.”

  FROM FAMILY TO TEAM

  In the early Netflix days, our managers also worked to foster a family-like environment. But, after our 2001 layoffs, when we saw the performance dramatically improve, we realized family is not a good metaphor for a high-talent-density workforce.

  We wanted employees to feel committed, interconnected, and part of a greater whole. But we didn’t want people to see their jobs as a lifetime arrangement. A job should be something you do for that magical period of time when you are the best person for that job and that job is the best position for you. Once you stop learning or stop excelling, that’s the moment for you to pass that spot onto someone who is better fitted for it and to move on to a better role for you.

  But if Netflix wasn’t a family, what were we? A group of individuals looking out for ourselves? That definitely wasn’t what we were going for. After a lot of discussion Patty suggested that we think of Netflix as a professional sports team.

  Initially this didn’t sound very profound. The metaphor of team for company is just about as tired as the metaphor of family. But as she kept talking, I started to see what she meant:

  I just watched Bull Durham with my kids. On a pro baseball team, the players have great relationships. These players are really close. They support one another. They celebrate together, console one another, and know each other’s plays so well that they can move as one without speaking. But they are not a family. The coach swaps and trades players in and out throughout the year in order to make sure they always have the best player in every position.

  Patty was right. At Netflix, I want each manager to run her department like the best professional teams, working to create strong feelings of commitment, cohesion, and camaraderie, while continually making tough decisions to ensure the best player is manning each post.

  A professional sports team is a good metaphor for high talent density because athletes on professional teams:

  Demand excellence, counting on the manager to make sure every position is filled by the best person at any given time.

  Train to win, expecting to receive candid and continuous feedback about how to up their game from the coach and from one another.

  Know effort isn’t enough, recognizing that, if they put in a B performance despite an A for effort, they will be thanked and respectfully swapped out for another player.

  On a high-performing team, collaboration and trust work well because all the members are exceptionally skilled both at what they do and at working well with others. For an individual to be deemed excellent she can’t just be amazing at the game; she has to be selfless and put the team before her own ego. She has to know when to pass the ball, how to help her teammates thrive, and recognize that the only way to win is for the team to win together. This is exactly the type of culture we were going for at Netflix.

  This is when we started saying that at Netflix:

  WE ARE A TEAM, NOT A FAMILY

  If we are going to be a championship team, then we want the best performer possible in every position. The old notion is that an employee has to do something wrong, or be inadequate, to lose their job. But in a pro, or Olympic, sports team, the players understand the coach’s role is to upgrade—if necessary—to move from good to great. Team members are playing to stay on the team with every game. For people who value job security over winning championships, Netflix is not the right choice, and we try to be clear and nonjudgmental about that. But for those who value being on winning teams, our culture provides a great opportunity. Like any team successfully competing at the highest level, we form deep relationships and care about each other.

  THE KEEPER TEST

  Of course, managers at Netflix, like good people anywhere, want to feel positive about their actions. To get them to feel good about cutting someone they like and respect requires them to desire to help the organization and to recognize that everyone at Netflix is happier and more successful when there is a star in every position. So we ask the manager: Would the company be better off if you let go of Samuel and looked for someone more effective? If they say “yes,” that’s a clear sign that it’s time to look for another player.

  We also encourage all managers to consider each of their employees regularly and make sure they’ve got the best person in every spot. To help managers on the judgment calls, we talk about the Keeper Test:

  IF A PERSON ON YOUR TEAM WERE TO QUIT TOMORROW, WOULD YOU TRY TO CHANGE THEIR MIND? OR WOULD YOU ACCEPT THEIR RESIGNATION, PERHAPS WITH A LITTLE RELIEF? IF THE LATTER, YOU SHOULD GIVE THEM A SEVERANCE PACKAGE NOW, AND LOOK FOR A STAR, SOMEONE YOU WOULD FIGHT TO KEEP.

  We try to apply the Keeper Test to everyone, including ourselves. Would the company be better off with someone else in my role? The goal is to remove any shame for anyone let go from Netflix. Think of an Olympic team sport like hockey. To get cut from the team is very disappointing, but the person is admired for having had the guts and skill to make the squad in the first place. When someone is let go at Netflix, we hope for the same. We all stay friends and there is no shame.

  Patty McCord herself is one example. After working together for over a decade, I started feeling that it would be best for us to have someone new in the role. I shared these thoughts with Patty, and we talked about what was leading me there. As it turned out, she wanted to work less, so she left Netflix and it was very amicable. Seven years later we remain close friends and informal advisers to one another.

  In another case, Leslie Kilgore was incredible for us as chief marketing officer, and she was instrumental in our culture, our battle with Blockbuster, and our growth overall. She was, and is, a great business thinker. But with House of Cards launching, and a future of marketing titles rather than making offers, I knew we needed someone with deep Hollywood studio experience, partially to make up for my own lack of showbiz knowledge. So I let go of Leslie, but she was willing to serve on our board, so she has become one of my bosses and has been a great company director for many years.

  So the Keeper Test is real and all our managers at all levels in the company use it consistently. I tell my bosses, the board of directors, that I should be treated no differently. They shouldn’t have to wait for me to fail to replace me. They should replace me once they have a potential CEO who is likely to be more effective. I find it motivating that I have to play for my position every quarter, and I try to keep improving myself to stay ahead.

  * * *

  • • •

  At Netflix, you might be working your hardest to do your very best, giving your all to help the company succeed, man
aging to deliver pretty good results, and then you walk into work one day and boom . . . you’re unemployed. Not because there was some unavoidable financial crisis or big unforeseen layoffs, but because your deliverables are not as amazing as your boss had hoped they’d be. Your performance is merely adequate.

  In the introduction we looked at some of the most controversial slides of the Netflix Culture Deck that explains Reed’s philosophy:

  These slides pose tough questions. In order to make sure Reed answers those questions, we’ll set the rest of this chapter up like a Q and A:

  AN INTERVIEW WITH REED

  Question 1

  According to former chief product officer, Neil Hunt, “We are a team, not a family” has caused controversy at Netflix since the early days. He remembers:

  Back in 2002 Reed organized a leadership offsite meeting in Half Moon Bay, where he emphasized that we must continually go through the same rigorous exercise that he and Patty had gone through preparing for the layoffs. We must ask ourselves on an ongoing basis which employees were no longer the best choice for their positions and, if they were not able to become “best choice” after receiving feedback, we would need to have the courage to let them go.