Case-Zappos Eliminates Managers

Online shoe retailer Zappos (an Amazon company) is known for its exceptional customer service, a strong culture based on 10 core values, and encouraging the individuality of employees. Tony Hsieh, Zappos CEO and co-founder, has become well known for his mantra of “delivering WOW!” to the company’s many satisfied customers and recognizing employees as a key component of the firm’s overall success.

Typically earning a spot 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 business strategy called holacracy, in which management jobs and titles are eliminated, and self-managed teams are the core of a flat organizational structure.

Created by software engineer Brian Robertson, holacracy replaces a typical vertical hierarchy with a series of self-managed work circles that operate with a certain amount of overlap when it comes to employees’ roles. Each circle is led by people called “lead links,” responsible for making sure the team gets its work done; however, these leads have little or no formal authority and cannot force employees to do anything they don’t want to do.

In 2013, Zappos’ HR department was the first group to implement the new holacratic approach. But Hsieh thought the implementation process was too slow, and the company was left operating with both the old management structure for some departments and new work teams in other parts of the organization. So Hsieh decided to “rip the band-aid off” and accelerate the implementation of holacracy throughout the entire organization. Effective April 30, 2015, in an effort to eliminate the company’s management hierarchy, there would be no more people managers, and certain departments within the organization (e.g., merchandising, finance, technology, and marketing) would be phased out and those jobs would transfer to roles in the appropriate work circles.

As part of the process, Hsieh sent a lengthy e-mail to employees, explaining why he believed holacracy was important and how it would help spark innovation. Recognizing that not everyone would thrive in a team atmosphere, Hsieh offered employees the opportunity to leave the company with a minimum of three months of severance pay and paid health care benefits for a specific period of time. For some Zappos veterans, the offer was even more generous: one month of pay for Page 278every year worked at the company. To date, more than 30 percent of the company’s 1,600 employees have either taken the offer to leave or left on their own to seek employment elsewhere.

Hsieh hopes holacracy will help employees operate more like entrepreneurs and less like cogs in a bureaucratic structure. He also thinks this new team approach could help create unlikely collaborations that could lead to more innovation and creativity in the organization.

The changeover has not been without obstacles. In addition to losing experienced employees (including former managers), the new approach continues to cause confusion among employees who were use to seeking advice and direction from their supervisors—who are now gone or who are now co-workers in the flat organizational structure. Also, in the coming year, former managers who have new roles at the company will, in all likelihood, experience pay cuts because their responsibilities as managers have been eliminated in the new team approach. Some critics say there is little or no motivation for people to stay at Zappos if there is no opportunity for advancement up the corporate ladder.

Although he regrets not implementing holacracy sooner, Hsieh says it’s too early to tell whether the self-managed teams approach will be a success. (Holacracy’s creator says it takes between 5 and 10 years before a company will know whether the new team approach will be successful.) Hsieh firmly believes that the company’s core values and strong culture provide a solid foundation for such an exciting and bold move to self-managed teams. However, Zappos’ employees don’t seem convinced that the team experiment will lead to success. In addition to losing nearly one-third of its employees, for the first time in eight years, Zappos did not earn a spot on Fortune’s “100 Top Companies” list in 2016, where employees’ positive evaluations of their company count heavily in the final rankings.

Questions

Do you think the new self-managed team approach at Zappos helps employees become more innovative in their new roles? Explain.

If you were Hsieh, how would you respond to critics who say people have little or no incentive to stay with Zappos because there is no opportunity for advancement?

If you were a manager at Zappos, would you take the offer to leave the company?