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Zappos CEO Tony Hsieh: Adopt Holacracy Or Leave

An internal memo provided to Fast Company by Zappos.

[Photo: Flickr user Martin Fisch]

Last week, Zappos CEO Tony Hsieh sent his employees the following memo, provided to Fast Company by Zappos. In it he offers his employees an ultimatum: adopt Holacracy or quit. Below is the (very long) memo in its entirety. Read more about Holacracy here.

This is a long email. Please take 30 minutes to read through the email in its entirety.

We’ve been operating partially under Holacracy and partially under the legacy management hierarchy in parallel for over a year now. Having one foot in one world while having the other foot in the other world has slowed down our transformation towards self-management and self-organization. While we’ve made decent progress on understanding the workings of the system of Holacracy and capturing work/accountabilities in Glass Frog, we haven't made fast enough progress towards self-management, self-organization, and more efficient structures to run our business. (Holacracy is just one of many tools that can help move us towards self-management and self-organization, but simply abiding by the rules of Holacracy does not equal self-management or self-organization.)

After many conversations and a lot of feedback about where we are today versus our desired state of self-organization, self-management, increased autonomy, and increased efficiency, we are going to take a "rip the bandaid" approach to accelerate progress towards becoming a Teal organization (as described in the book Reinventing Organizations).

Something key to note here is that Holacracy just happens to be our current system in place to help facilitate our move to self-organization, and is one of many tools we plan to experiment with and evolve with in the future. Our main objective is not just to do Holacracy well, but to make Zappos a fully self-organized, self-managed organization by combining a variety of different tools and processes. Reinventing Organizations calls this type of organization a Teal organization. You’ll learn examples of successful Teal organizations below and in the book. Each of the companies cited below and in the book have different tools and processes to help with self-management and self-organization. We won’t necessarily adopt all of them, but instead we will experiment and figure out the right tools and processes for Zappos, using Holacracy as the initial starting point and continually evolving as we dive deeper into the world of self-management and self-organization.

Our immediate plan over the next few months:

- Teal organizations attempt to minimize service provider groups and lean more towards creating self-organizing and self-managing business-centric groups instead. As of 4/30/15, in order to eliminate the legacy management hierarchy, there will be effectively be no more people managers. In addition, we will begin the process of breaking down our legacy silo’ed structure/circles of merchandising, finance, tech, marketing, and other functions and create self-organizing and self-managing business-centric circles instead by starting to fund this new model with the appropriate resources needed to flourish. Functions that were previously silo’ed will be embedded inside these business-centric circles instead — this structure will require fewer roles that primarily manage expectations and drive alignment across legacy silos. We will continue using Holacracy's systems and processes for prioritization and resource allocation, so it’ll be extremely important for all of us to keep Glass Frog up to date.

- To be clear, managers were absolutely necessary and valuable to the growth of Zappos over the years under our previous structure. Without managers, we would not have gotten to where we are today. Historically at Zappos the "manager" position contained a number of different responsibilities including people management, overseeing and approving decisions, budgeting, and professional development, as well as direct work on projects and goals for the good of the team. The people management aspects of the manager role are valuable in what the book refers to as Orange and Green organizations, but do not make sense in a self-organized and self-managing Teal organization. While we know that the full role of managers will no longer be necessary in a Teal organization, we’re also looking forward to seeing what new exciting contributions will come from the employees who were previously managers. All former managers who remain in good standing will still keep their salary through the end of 2015 even though their day-to-day work that formerly involved more traditional management will need to change. A new circle called Reinventing Yourself has been created to help guide former managers to new roles that might be a good match for their passions, skills, and experience. Hollie is the lead link of that new circle. (On our backend HRIS system, employees will still have "reporting" relationships solely for the purposes of maintaining compliance (e.g. SOX) requirements because we are part of a public company. This compliance requirement will be largely invisible to most employees and should not be confused with legacy reporting structures which will no longer exist.)

- Self-management and self-organization is not for everyone, and not everyone will want to move forward in the direction of the Best Customers Strategy and the strategy statements that were recently rolled out. As such, there will be a special version of "the offer" to everyone who reads Reinventing Organizations and/or meets some other criteria (outlined towards the end of this email).

- For better context, please read the two articles below first: Misperceptions of Self-Management and Five Crucial Competencies of Self-Management

MISPERCEPTIONS OF SELF-MANAGEMENT
Content is from: http://www.self-managementinstitute.org/misperceptions-of-self-management
June 12, 2014
By Frederic Laloux

Say "Self-Management" and almost everyone gets the wrong idea.

Self-managing structures are appearing everywhere, and get increasing attention in the media. They seem to be much more adaptative, agile, motivating than traditional pyramidal organizations, and they appear to achieve spectacular results. But is this a simple fad, or a new phenomenon destined to spread? And why are most people dismissive when you mention the possibility to run organizations "without a boss"?

Even though we are only now starting to get our heads around it, Self-Management is not a startling new invention by any means. It is the way life has operated in the world for billions of years, bringing forth creatures and ecosystems so magnificent and complex we can hardly comprehend them. Self-organization is the life force of the world, thriving on the edge of chaos with just enough order to funnel its energy, but not so much as to slow down adaptation and learning.

Leading scientists believe that the principal science of the next century will be the study of complex, autocatalytic, self-organizing, non-linear, and adaptive systems. This is usually referred to as "complexity" or "chaos theory". For a long time, we thought the world operated based on Newtonian principles. We didn’t know better and thought we needed to interfere with the life’s self-organizing urge and try to control one another.

It seems we are ready now to move beyond rigid structures and let organizations truly come to life. And yet self-management is still such a new concept that many people frequently misunderstand what it is about and what it takes to make it work.

MISPERCEPTION 1: THERE IS NO STRUCTURE, NO MANAGEMENT, NO LEADERSHIP

People who are new to the idea of Self-Management sometimes mistakenly assume that it simply means taking the hierarchy out of an organization and running everything democratically based on consensus. There is, of course, much more to it. Self-Management, just like the traditional pyramidal model it replaces, works with an interlocking set of structures, processes, and practices; these inform how teams are set up, how decisions get made, how roles are defined and distributed, how salaries are set, how people are recruited or dismissed, and so on.

What often puzzles us at first about self-managing organizations is that they are not structured along the control-minded hierarchical templates of Newtonian science. They are complex, participatory, interconnected, interdependent, and continually evolving systems, like ecosystems in nature. Form follows need. Roles are picked up, discarded, and exchanged fluidly. Power is distributed. Decisions are made at the point of origin. Innovations can spring up from all quarters. Meetings are held when they are needed. Temporary task forces are created spontaneously and quickly disbanded again. Here is how Chris Rufer, the founder and president of Morning Star, talks about the structure of self-managing organizations:

Clouds form and then go away because atmospheric conditions, temperatures, and humidity cause molecules of water to either condense or vaporize. Organizations should be the same; structures need to appear and disappear based on the forces that are acting in the organization. When people are free to act, they’re able to sense those forces and act in ways that fit best with reality.

The tasks of management―setting direction and objectives, planning, directing, controlling, and evaluating―haven’t disappeared. They are simply no longer concentrated in dedicated management roles. Because they are spread widely, not narrowly, it can be argued that there is more management and leadership happening at any time in self-managing organizations despite, or rather precisely because of, the absence of fulltime managers.

MISPERCEPTION 2: EVERYONE IS EQUAL

For as long as human memory goes back, the problem of power inequality has plagued life in organizations. Much of the pervasive fear that runs silently through organizations―and much of the politics, the silos, the greed, blaming, and resentment that feed on fear―stem from the unequal distribution of power.

Interestingly, the interlocking structures and processes allowing for self-organization do not resolve the question of power inequality; they transcend it. Attempting to resolve the problem of power inequality would call for everyone to be given the same power. Cooperatives, for instance, have sought in equal ownership a method to divide power equally. Interestingly, none of the organizations I have researched for the book Reinventing Organizations are employee-owned; the question of employee ownership doesn’t seem to matter very much when power is truly distributed.

The right question is not: how can everyone have equal power? It is rather: how can everyone be powerful? Power is not viewed as a zero-sum game, where the power I have is necessarily power taken away from you. Instead, if we acknowledge that we are all interconnected, the more powerful you are, the more powerful I can become. The more powerfully you advance the organization’s purpose, the more opportunities will open up for me to make contributions of my own.

Here we stumble upon a beautiful paradox: people can hold different levels of power, and yet everyone can be powerful. If I’m a machine operator―if my background, education, interests, and talents predispose me for such work―my scope of concern will be more limited than yours, if your roles involve coordinating the design of a whole new factory. And yet, if within what matters to me, I can take all necessary actions using the advice process, I have all the power I need.

This paradox cannot be understood with the unspoken metaphor we hold today of organizations as machines. In a machine, a small turn of the big cog at the top can send lots of little cogs spinning. The reverse isn’t true―the little cog at the bottom can try as hard as it pleases, but it has little power to move the bigger cog. The metaphor of nature as a complex, self-organizing system can much better accommodate this paradox. In an ecosystem, interconnected organisms thrive without one holding power over another. A fern or a mushroom can express its full selfhood without ever reaching out as far into the sky as the tree next to which it grows. Through a complex collaboration involving exchanges of nutrients, moisture, and shade, the mushroom, fern, and tree don’t compete but cooperate to grow into the biggest and healthiest version of themselves.

It’s the same in self-managing organizations: the point is not to make everyone equal; it is to allow all employees to grow into the strongest, healthiest version of themselves. Gone is the dominator hierarchy (the structure where bosses hold power over their subordinates). And precisely for that reason, lots of natural, evolving, overlapping hierarchies can emerge―hierarchies of development, skill, talent, expertise, and recognition, for example. This is a point that management author Gary Hamel noted about Morning Star:

Morning Star is a collection of naturally dynamic hierarchies. There isn’t one formal hierarchy; there are many informal ones. On any issue some colleagues will have a bigger say than others will, depending on their expertise and willingness to help. These are hierarchies of influence, not position, and they’re built from the bottom up. At Morning Star one accumulates authority by demonstrating expertise, helping peers, and adding value. Stop doing those things, and your influence wanes—as will your pay.

So really, these organizations are anything but "flat," a word often used for organizations with little or no hierarchy. On the contrary, they are alive and moving in all directions, allowing anyone to reach out for opportunities. How high you reach depends on your talents, your interests, your character, and the support you inspire from colleagues; it is no longer artificially constrained by the organization chart.

MISPERCEPTION 3: IT’S ABOUT EMPOWERMENT

Many organizations today claim to be empowering. But note the painful irony in that statement. If employees need to be empowered, it is because the system’s very design concentrates power at the top and makes people at the lower rungs essentially powerless, unless leaders are generous enough to share some of their power. In self-managing organizations, people are not empowered by the good graces of other people. Empowerment is baked into the very fabric of the organization, into its structure, processes, and practices. Individuals need not fight for power. They simply have it. For people experiencing Self-Management for the first time, the ride can be bittersweet at first. With freedom comes responsibility: you can no longer throw problems, harsh decisions, or difficult calls up the hierarchy and let your bosses take care of it. You can’t take refuge in blame, apathy, or resentfulness. Everybody needs to grow up and take full responsibility for their thoughts and actions―a steep learning curve for some people. Former leaders and managers sometimes find it is a huge relief not having to deal with everybody else’s problems. But many also feel the phantom pain of not being able to wield their former positional power.

Many leading thinkers and practitioners in the field of organizational design focus their energy today on the question of how leaders can become more conscious. The thinking goes as follows: if only leaders could be more caring, more humble, more empowering, better listeners, more aware of the shadow they cast, they would wield their power more carefully and would create healthier and more productive organizations. Brian Robertson, the founder of Holacracy, put it well in a blog post:

We see attempts for leaders to develop to be more conscious, aware, awake, servant leaders that are empowering. … And yet, the irony: … If you need someone else to carefully wield their power and hold their space for you, then you are a victim. This is the irony of empowerment, and yet there is very little else we can do within our conventional operating system other than try our best to be conscious, empowering leaders.

If we can’t think outside the pyramid, then indeed, as Robertson notes, the best we can do is try to patch up the unhealthy consequences of power inequality with more enlightened leadership. Pioneer self-managing organizations show that it’s possible to transcend the problem of power inequality and not just patch it up. We can reinvent the basic structures and practices of organizations to make everyone powerful and no one powerless.

MISPERCEPTION 4: IT’S STILL EXPERIMENTAL

Another common misconception is that Self-Management might still be an experimental form of management. That is no longer true: Self-Management has proven its worth time and again, on both small and large scales and in various types of industry. W. L. Gore, a chemical manufacturing company best known for its Gore-Tex fabrics, has been operating on self-organizing principles since its founding in the late 1950s. Whole Foods, with its 60,000 employees and $9 billion [≈ cost of Spanish-American War] in revenue, operates its more than 300 stores with self-governing units (the rest of the organization has more traditional hierarchical structures). Each store consists of roughly eight self-managing units, such as produce, seafood, and check-out (central services are run with a traditional, albeit empowered hierarchy).

The Orpheus Chamber Orchestra has operated since its founding in 1972 on entirely self-managing principles. The orchestra, with residence in New York’s Carnegie Hall, has earned rave reviews and is widely regarded as one of the world’s great orchestras. It operates without a conductor. Musicians from the orchestra make all artistic decisions, from choosing the repertoire to deciding how a piece ought to be played. They decide who to recruit, where to play, and with whom to collaborate.

Virtual and volunteer-driven organizations practice Self-Management on staggering scales. In 2012, Wikipedia had 100,000 active contributors. It is estimated that around the same number―100,000 people [≈ population of Luxembourg, capital city of Luxembourg]―have contributed to Linux. If these numbers sound large, they are dwarfed by other volunteer organizations. Alcoholics Anonymous currently has 1.8 million members participating in over 100,000 groups worldwide―each of them operating entirely on self-managing principles, structures, and practices.

I believe it is because we have grown up with traditional hierarchical organizations that we find it so hard to get our heads around Self-Management. Young people, on the other hand, who have grown up with the Web (variously referred to as Millennials, Generation Y) "get" self-management instinctively. On the web, management writer Gary Hamel notes:

No one can kill a good idea
Everyone can pitch in
Anyone can lead
No one can dictate
You get to choose your cause
You can easily build on top of what others have done
You don’t have to put up with bullies and tyrants
Agitators don’t get marginalized
Excellence usually wins (and mediocrity doesn’t)
Passion-killing policies get reversed
Great contributions get recognized and celebrated

Many organizational leaders and human resource managers complain that Millennials are hard to manage. Indeed, this generation has grown up in the disruptive world of the Internet, where people’s influence is based on contribution and reputation, not position. Why would they want to put up with anything other than self-management in the workplace? Why would anyone else, for that matter?

FIVE CRUCIAL COMPETENCIES OF SELF-MANAGEMENT
Content is from: http://www.self-managementinstitute.org/five-crucial-competencies-of-self-management
April 17, 2014
By Doug Kirkpatrick

While there are many competencies that enable effective self-management (excellent communication skills, solid teamwork, good judgment), there are many other, less obvious competencies that impact one’s ability to navigate and perform at a high level in a self-managed ecosystem. Here are five candidates for consideration.

1) Taking Initiative. This characteristic is expressly called for in the Morning Star Colleague Principles. It’s very hard to deliver constructive feedback to colleagues or cause positive change in processes without a willingness to take the initiative to do so. Taking initiative includes the willingness and ability to speak up when necessary.

2) Tolerance for Ambiguity. Self-management can be messy as new colleagues meet new people, engage with new processes, and learn a new way of working. Negotiating a Colleague Letter of Understanding (CLOU) that clearly communicates one’s mission, process stewardships and performance metrics with affected stakeholders takes time and effort. Choices must be made regarding what requests to make of other colleagues and the timing and scope of those requests. Self-management is never as clear-cut as just going up to the boss with a comment or complaint.

3) Consciousness. It takes real effort to locate the energy needed to pursue one’s personal commercial mission consistently, every day. It is akin to the energy that entrepreneurs use to create entirely new enterprises out of ideas. Consciousness gives rise to awareness and presence, and is the source of confidence in one’s ability to get things done—even in the face of adversity. Awareness goes right to the heart of the Morning Star Colleague Principles—understanding one’s Rings of Responsibility requires a clear scope of awareness, especially in the primary ring.

4) Contribution Mindset. Peter Drucker talked about a contribution mindset in his 1966 book, The Effective Executive. A half-century later, that mindset applies to everyone who wants to be an effective self-manager in a self-managed enterprise. This competency is referenced in the Morning Star Colleague Principles, which create an affirmative obligation for individuals to share relevant information with colleagues even when not expressly requested.

5) Low Power Distance Sensitivity. Power distance refers to the concept of deferring to individuals perceived to have more power than oneself. In a self-managed environment (where collaboration is highly valued), there is an unofficial hierarchy of credibility, which springs from experience, trust, communication, and a host of other factors. This is not the same thing as a hierarchy of power based on command authority or control of others. Effective self-managers will find ways to express themselves to anyone in the organization, and will listen to anyone and everyone who wishes to talk with them. To cut off colleagues based on perceived status is to cut off information, the lifeblood of a self-managed organization. Communication is everything.

More information about the above from the author is in this video:
https://www.youtube.com/watch?v=Ej4n3w4kMa4

From Tony:
I was on a Skype call with Frederic Laloux, the author of Reinventing Organizations. During our call, he said that as we move towards a Teal, no-manager organization, there are two really important things that we should make sure we have in place to make sure employees still perform and are still accountable to the organization even though there are no more managers.

First, in the human body, there are antibodies that get activated when there's a virus or disease. We need to make sure we have the same thing in our organization. We need to figure out what the antibodies are for when a small number employees take advantage of the freedom gained from being in a no-manager organization, or else it will demoralize the other employees. He said that in general, research has shown that peer-pressure based systems work the best. For certain types of job functions where there are easy metrics to measure performance, a public leaderboard ranking will naturally create peer pressure by showing which teams are performing and which aren't. For other types of job functions where metrics are more difficult to come by, regular peer-based presentations have been shown to be really effective, where each team presents to the other teams (once a quarter) what they are working on and why it is adding value to the company, and that will create a natural peer pressure. He suggested simply asking employees for their ideas on how to create the peer pressure and to give them the antibody analogy/framework and encourage employees to figure out the antibody systems themselves rather than try to design it from the top down.

Second, as we move towards self-management and self-organization, we need to have a clear process for conflict resolution. There's already a clear system described in the book (meet 1-1, and if that doesn’t work escalate to peer council, and if that doesn't work then escalate to the CEO), which seems like an easy starting point that we can adjust as we learn what works and doesn't work. However, conflict resolution starts with the expectation that employees are responsible for taking the first step and having a 1:1 conversation with whomever they are having a conflict with (instead of going to their manager for example). He said the most important thing is the need to have a strong conflict resolution process clearly communicated and clearly understood by everyone so employees know what to do.

As previously stated, self-management and self-organization is not for everyone, and not everyone will necessarily want to move forward in the direction of the Best Customers Strategy and the strategy statements that were recently rolled out. Therefore, there will be a special version of "the offer" on a company-wide scale, in which each employee will be offered at least 3 months severance (and up to 3 months of COBRA reimbursement for benefits) if he/she feels that self-management, self-organization, and our Best Customers Strategy and strategy statements as published in Glass Frog are not the right fit. (For employees that have been with Zappos for 4 or more years, the offer will be 1 month for every year worked at Zappos, along with up to 3 months of COBRA reimbursement for benefits.)

To qualify for the offer, you must:

- Be an employee in good standing
- Watch video of talk by the author of Reinventing Organizations - https://www.youtube.com/watch?v=gcS04BI2sbk
- Read Reinventing Organizations by 4/15/15 (here is a private link for Zappos employees only to download a digital copy) or email a statement of non-intention to read to Arun and Hollie
- Give notice of your intention to leave anytime during the month of April 2015 if you intend to take the offer (exact last day of work TBD)
- Ensure a smooth transition of your prior responsibilities and accountabilities (as approved by Arun - please note that if you are working on a critical project, a longer transition time might be required)

Arun, Fred, Hollie, and I will be doing Q&A town hall sessions about our strategy statements and our new direction on Wednesday, 3/25/15, at 12 PM-12:30 PM, 1-1:30 PM, 2-2:30 PM, and 3-3:30 PM in the Council Chambers. Please attend any of these four town halls if you have any additional questions.

We won't have all the answers to everything, and there are still plenty of important things for all of us to figure out together, including answers to the questions below (please email me any suggestions or if you’d like to be involved in helping figure out any of the areas below):

- What’s the right method for implementing the advice process as described in Reinventing Organizations?
- How is the contribution of each employee assessed and what are the compensation framework/processes in this new world of no managers?
- What is not currently captured in Glass Frog that we should make sure is captured?
- Should we update our purpose statement, and if so, what should our new purpose statement be?
- In light of these changes, should we delay and/or modify the next zPrize competition? (Prize-based competition is an example of another tool that can help accelerate self-organization.)
- What are the peer-pressure "antibody" systems we want to implement for the different types of job functions?
- What is the right conflict-resolution set of processes for Zappos?
- How do we support employee development and growth as a Teal organization?
- How do we ensure that we continue to meet our financial and Super Cloud commitments to Amazon for 2015 and beyond?

While I hope that there will be a lot of reflection around this email and our upcoming changes, we will still need to continue to execute on our Best Customers Strategy and honor our financial and Super Cloud commitments for 2015 and beyond. We still need to execute, so it will feel somewhat like trying to upgrade an airplane while we’re still flying in the air.

This is a new, exciting, and bold move for Zappos. Like all the bold steps we’ve done in the past, it feels a little scary, but it also feels like exactly the type of thing that only a company such as Zappos would dare to attempt at this scale. With our core values and culture as the foundation for everything we do, I'm personally excited about all the potential creativity and energy of our employees that are just waiting for the right environment and structure to be unlocked and unleashed.

I can’t wait to see how we reinvent ourselves, and I can’t wait to see what unfolds next.

-Tony

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