Case 10.1 Zappos Eliminates Managers
Online shoe retailerZappos (an Amazon company) is known for its exceptional customerservice, a strong culture based on 10 core values, and encouragingthe individuality of employees. Tony Hsieh, Zappos CEO andco-founder, has become well known for his mantra of “deliveringWOW!” to the company’s many satisfied customers and recognizingemployees as a key component of the firm’s overall success.
Typically earning aspot on Fortune’s annual “100 Best Companies to Work For”list, Zappos has recently been in the news for other reasons.Several years ago, Hsieh decided to implement a new businessstrategy called holacracy, in which management jobs andtitles are eliminated, and self-managed teams are the core of aflat organizational structure.
Created by softwareengineer Brian Robertson, holacracy replaces a typical verticalhierarchy with a series of self-managed work circles that operatewith a certain amount of overlap when it comes to employees’ roles.Each circle is led by people called “lead links,” responsible formaking sure the team gets its work done; however, these leads havelittle or no formal authority and cannot force employees to doanything they don’t want to do.
In 2013, Zappos’ HRdepartment was the first group to implement the new holacraticapproach. But Hsieh thought the implementation process was tooslow, and the company was left operating with both the oldmanagement structure for some departments and new work teams inother parts of the organization. So Hsieh decided to “rip theband-aid off” and accelerate the implementation of holacracythroughout the entire organization. Effective April 30, 2015, in aneffort to eliminate the company’s management hierarchy, there wouldbe no more people managers, and certain departments within theorganization (e.g., merchandising, finance, technology, andmarketing) would be phased out and those jobs would transfer toroles in the appropriate work circles.
As part of theprocess, Hsieh sent a lengthy e-mail to employees, explaining whyhe believed holacracy was important and how it would help sparkinnovation. Recognizing that not everyone would thrive in a teamatmosphere, Hsieh offered employees the opportunity to leave thecompany with a minimum of three months of severance pay and paidhealth care benefits for a specific period of time. For some Zapposveterans, the offer was even more generous: one month of pay forPage 278every year worked at the company. To date, more than 30percent of the company’s 1,600 employees have either taken theoffer to leave or left on their own to seek employmentelsewhere.
Hsieh hopes holacracywill help employees operate more like entrepreneurs and less likecogs in a bureaucratic structure. He also thinks this new teamapproach could help create unlikely collaborations that could leadto more innovation and creativity in the organization.
The changeover has notbeen without obstacles. In addition to losing experienced employees(including former managers), the new approach continues to causeconfusion among employees who were use to seeking advice anddirection from their supervisors—who are now gone or who are nowco-workers in the flat organizational structure. Also, in thecoming year, former managers who have new roles at the companywill, in all likelihood, experience pay cuts because theirresponsibilities as managers have been eliminated in the new teamapproach. Some critics say there is little or no motivation forpeople to stay at Zappos if there is no opportunity for advancementup the corporate ladder.
Although he regretsnot implementing holacracy sooner, Hsieh says it’s too early totell whether the self-managed teams approach will be a success.(Holacracy’s creator says it takes between 5 and 10 years before acompany will know whether the new team approach will besuccessful.) Hsieh firmly believes that the company’s core valuesand strong culture provide a solid foundation for such an excitingand bold move to self-managed teams. However, Zappos’ employeesdon’t seem convinced that the team experiment will lead to success.In addition to losing nearly one-third of its employees, for thefirst time in eight years, Zappos did not earn a spot onFortune’s “100 Top Companies” list in 2016, whereemployees’ positive evaluations of their company count heavily inthe final rankings.
Questions
Do you think the newself-managed team approach at Zappos helps employees become moreinnovative in their new roles? Explain.
If you were Hsieh, howwould you respond to critics who say people have little or noincentive to stay with Zappos because there is no opportunity foradvancement?
If you were a managerat Zappos, would you take the offer to leave the company?
