Safe enough to try: An interview with Zappos CEO Tony Hsieh

Here is a substantial excerpt from an extended interview of Tony Hsieh for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

To learn more about the McKinsey Quarterly, please click here.

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Organizations are more likely to innovate and thrive when they unleash the potential of individuals and the power of self-organizing teams, says the online retailer’s CEO.

Tony Hsieh [pronounced “Shay”], the CEO of Zappos for more than 17 years, is not afraid to create “a little weirdness.” In fact, that is among Zappos’s core values. The company that got its start selling shoes online, became known for its near-fanatical devotion from customers, and was acquired in 2009 by Amazon has more recently been pushing the envelope in another area: its organization. Four years ago, Zappos kicked off its high-profile adoption of holacracy, an organizational model that distributes decision-making authority in self-organizing circles, made up of employees who hold roles (often more than one at a time) rather than job descriptions, with each circle arranged around a purpose statement. These experimental approaches, Hsieh hopes, will enable every employee to act as a “human sensor,” and the organization as a whole to be more adaptable, innovative, and resilient. While Hsieh doesn’t claim Zappos is an easily emulated model, the company has become a thought-provoking test bed for organizational ideas whose ultimate impact will become clearer in the future.

In May 2017, Hsieh sat down with McKinsey senior partners Aaron De Smet and Chris Gagnon to share his views on organizational values, purpose, and decision making; the importance of the individual; and the potential for self-organization to generate innovation. The interview, which took place on the Zappos corporate campus, in Las Vegas, Nevada, gave Hsieh an opportunity to get beyond the headlines as he described the philosophy behind Zappos’s evolving organization.

The Quarterly: What does holacracy mean for Zappos?

Tony Hsieh: People can get caught up a little too much in the technical details of what holacracy is or what tools we’re using. We’ve always encouraged employees to move around to find the intersection of what they are passionate about, what they are good at, and what adds value to the company, even in the “old days.” For me personally, calling it “holacracy” was more a way of codifying or making explicit what was already implicit in our culture. We shouldn’t have to be dependent on a benevolent manager or CEO to allow employees to move around within the organization, because that’s a single point of failure. Our org chart is available in real-time online and changes probably 50 times a day, and every one of our 1,500 employees can transparently view what every employee’s purposes and accountabilities are. We have self-organized governance methods and meetings that happen on a regular basis, and it’s all browsable and updateable online, along with, occasionally, policy updates—all of which enables any employee to contribute to the evolving structure of the organization. So it’s not so much about “holacracy” as it is about “self-organization.”

The Quarterly: If a company is self-organizing, and being dependent on a CEO can be considered a point of failure, how does the company keep its bearings?

Tony Hsieh: Imagine a greenhouse with lots of plants, and each plant represents an employee. Maybe at a typical company, the CEO is the tallest, strongest plant that the other plants aspire to one day become. That’s not how I think of my role. Instead, I think of my role as the architect of the greenhouse, and to help figure out the right conditions within the greenhouse to enable all of the other plants to flourish and thrive.

Cities are another example of self-organization. Cities are the man-made organizations that have best stood the test of time. Cities last much longer than companies. Cities are resilient. Cities are adaptable. And cities aren’t hierarchical the way most companies are. I read somewhere that all of Manhattan has literally three days of food supply. But there’s no central food planner for Manhattan. Instead, you’ve got consumers and businesses “selfishly” consuming food in a self-organized manner, which creates opportunities for suppliers and so on. And that self-organized system works if there is a natural disaster; a bridge can go out and Manhattan still doesn’t run out of food.

Not only do cities stand the test of time, there’s plenty of evidence they actually scale in terms of productivity and innovation. One interesting statistic is that whenever the size of a city doubles, innovation or productivity per resident increases 15 percent. But in companies you get the opposite effect. As companies get bigger, they usually get more bureaucratic and less innovative per employee.

The mayor of a city doesn’t tell its residents what to do or where to live; there is a certain infrastructure that a city must provide, such as the grid: water, power, and sewage. And there are certain basic laws that a city enforces. But for the most part, what happens when a city grows and innovates is a result of the self-organization that happens with a city’s residents, businesses, and other organizations.

The Quarterly: What are the key principles of Zappos?

Tony Hsieh: The way I think about it, there are three different pillars, or dimensions, that are foundational to us at Zappos. And we need to make sure that all are working well.

The first is culture and values. Now, we’re not saying that other companies should adopt our values. One of the interesting things I’ve learned from the research is that it actually doesn’t matter what your values are. What matters is that you have them and you commit to them and align the entire organization around them. That means you’re willing to hire and fire based on them. Most large companies have things called core values or guiding principles and so on. But I think what employees find at those companies is that the principles read like PR statements. You see them on the company’s website, and maybe on the lobby wall in reception, but then no one really pays attention to them.

We have ten core values that serve as a formalized definition of our culture. And these ten were crowdsourced—I asked our employees what our values should be. Then we went back and forth for about a year and came up with our ten. They’ve become part of our culture. They’re part of our employees’ everyday language. Our core values actually just come up naturally in everyday conversation. And once they become part of the language, they become part of the mind-set. So that’s our first pillar: values alignment.

The second pillar is purpose. Both on the individual level and on the organizational level, we are very explicit about purpose statements. And one of the things that holacracy enables is a hierarchy of purpose statements. There’s the purpose of the company, which for us is “To Live and Deliver WOW.” We have something we refer to as the general company circle [GCC]that holds the company purpose statement. And within that circle, there are subcircles and roles, and we cascade down from there into a hierarchy of more subcircles and roles. But you can pick any role anywhere in the hierarchy, and there’s an entire set of purpose statements that all link ultimately back up to the company purpose. The purpose statements are something that we do think about occasionally, but I’d like us to get to the point where our purpose hierarchy is as top of mind as our core values. Right now, purpose statements aren’t part of our everyday language, at least the way our core values are. I think that’s a big opportunity for us.

The third pillar I’ll call “market-based dynamics.” Just like in a city, it’s important to have a true market, to break up monopolies, and to have different internal teams become customers of each other. We’re building an internal currency as well as the internal tools and systems to support an underlying infrastructure to allow for multiple participants, fast feedback loops, and things like crowdsourced participation. Imagine the equivalent of, say, the stock market, but for inventory purchasing. What if employees or teams could bet on inventory the same way people and organizations bet on the stock market in the real world today?

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Here is a direct link to the complete interview.

To learn more about Tony Hsieh, please click here.

As noted redundantly, he is the CEO of Zappos. As indicated, this interview was conducted by Aaron De Smet, a senior partner in McKinsey’s Houston office, and Chris Gagnon,a senior partner in the New Jersey office.

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