Zappos and Holacracy

Tony Hsieh has long been a management hero of mine. He is an experimenter, an innovator in management. In 2014, he began an experiment with the management structure at Zappos, shifting from a hierarchical management structure to a structure called “Holacracy.”

Holacracy is an extreme form of organizational flattening, which involved no job titles and no managers. In 2015, the firm switched entirely to Holacracy, resulting in a loss of some 30% of their workforce. Hsieh issued a kind of ultimatum; either get on board with the new structure, or take 5.5 months severance and leave the company.

The firm then organized itself into 500 nested “circles,” without formal leaders or managers, in order to approach different functions and processes.

Zappos was not the first business to implement Holacracy, but it was the largest at the time. This makes it a fascinating case study unfolding before our eyes, not to judge the effectiveness of Holacracy itself, but to observe the effect of flattening organizational hierarchies.

The Results

Implementation of Holacracy at Zappos was not without its problems. There was a great deal of confusion at first; employees wanted a manager to run important decisions by. Organizing payroll was challenging without job titles.

But the flattened organization has several strengths to offer. Roles shift over time, based on employee strengths and weaknesses and the work being done at any one time. This makes the organization itself more agile from the smallest circles to the largest, which enables them to respond quickly to changing conditions. Dynamic roles also allows the business to exploit the talents and skills of their workforce more effectively. Self-managing teams allow leaders (a Holacracy lacks managers, but not leaders) to crop up in different functions within the company, as needed, based on the situation.

Zappos is now, several years later, drifting away from strict implementation of Holacracy, instead encouraging a kind of free market exchange of skills between departments. However, their management structure remains more flattened than most companies of comparable size.

The end result of Holacracy seem to be that employees take on various microroles, based on their skillset and company need. This creates a great deal of flexibility but also introduces complexity, from the process of actually doing the work itself, to compensation, to hiring. These complexities must be managed. In fact, it’s complexities like this that drive growing firms to start implementing stratified and rigid management systems in the first place. Because of this it is reasonable to assume that the removal of rigid management structures simply reveals these sources of complexity, rather than creating them.

This is an important distinction, because what a flattened organizational system must do is devise ways to manage complexity without contributing to structures that strangle agility.

The Agility-Reliability Spectrum

There are benefits to hierarchical systems of management. They provide stability and reliability to the firm. They ensure a specific flow of information, and a predictable chain of command. There’s accountability built into the system for decision makers and for those in charge of implementing those decisions.

That reliability comes with a cost, however.

The rigid traditional hierarchy stifles innovation and limits agility. The business is slower to respond to changes in the market or industry, and as a result can miss out on big opportunities, or fail to adjust to catastrophes.

Managing Relationships

There’s more to it than that. A research study by University of Amsterdam found that rigid hierarchy stifled teamwork. More egalitarian teams feel as though they are all in the same boat, with the same goals and the same accountability, while hierarchical teams tend to underperform due to infighting. This idea may feel counterintuitive, but it makes sense in light of the fact that those with power may struggle against those beneath them to assert and maintain power, whereas those who are managed may seek to gain more power and responsibility, creating friction within the group.

Simply put, reducing or eliminating hierarchical structures in management allows incentives for workers to more closely align with the goals of the organization. When you are separated from top management by a dozen layers of management staff, your goals tend to be about self-advancement. Promotions, pay raises, increased power and responsibility. When on an egalitarian team, those pressures are reduced, and workers tend to take on goals in line with those of the organizations. They have more responsibility and accountability and take greater pride in their work as a result.

Removing layers of management also puts top management in closer proximity to their employees. This creates more transparency, allowing workers to have a better understanding of how their work fits into company objectives. It is more likely that members of top management will meet and know their employees, resulting in better management. This also results in greater mutual trust between worker and management, reducing pressures to look out for number one and allowing goals to align.

You can’t effectively manage relationships when there is no relationship, and the more layers of management that divide front-line workers from the firm’s decision makers, the harder it is for those two parts of the firm to know each other in a way that inspires trust and alignment.

Talent and Leadership

Flattened hierarchies tend to be more fluid, allowing workers to move from role to role as the situation demands. Different team members may take on leadership roles when tackling projects that benefit from their specific skill set, for example. This fluidity means that anyone has a chance to lead. This can allow management to access sources of intrinsic motivation, such as pride in one’s work, or a sense that one’s work matters, resulting in higher productivity and better quality of work.

It also allows workers to better demonstrate their abilities, giving management a better idea of who their team members are. Skills needed in an organization-wide project may be stuck in a front-line position, and with strict hierarchies, these skills may never be discovered, and the worker in question may never be able to work at their fullest potential for the firm. Flattened structures allow management to make more effective use of human assets in this way.

Flattened hierarchies also tend to foster decision-making from the bottom up, not to the exclusion of top-down decision making, but in addition to it. This means more ideas going into the problem solving process, and more buy-in from those who will be responsible for executing the decision in question. Decision making also becomes more efficient (to a point) because there are fewer layers of management for the decision to go through.

Words of Caution

There are times in which flattened hierarchies complicate things. Flattened hierarchies are difficult to scale to large firms, as more organization is often needed to ensure that even basic business functions, such as accounting and payroll, are done correctly. There are times in which flattened hierarchies actually reduce the drive to perform in employees, as they see no opportunities for individual advancement. Flattened hierarchies ask more from employees and from managers, requiring flexibility and internal drive. In essence, flat organizations require traits classically considered to be entrepreneurial traits in their employees and their managers. Flattened hierarchies can be more confusing, which was a problem in Zappos’ Holacracy experiment.

The goal, rather than flattening all hierarchies, is for firms to seek out and find the balance that works best for their industry, their managers, and their employees. This includes striking a balance between the confidence and comfort of employees, as well as making the right trade-offs between reliability and agility for the firm as a whole. Hierarchy springs naturally from human organization, and will always be present in some form. But the strict, rigid hierarchies that Frederick Taylor codified in his Scientific Management should be left in the past, and more human, humane, and flexible systems put in its place.

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