At Zappos, Pushing Shoes and A Vision

At Zappos, Pushing Shoes and a Vision - The New York Times
7/17/15, 3:11 PM
http://nyti.ms/1fQ5CJH
BUSINESS DAY
At Zappos, Pushing Shoes and a Vision

By DAVID GELLES
JULY 17, 2015
On a sizzling June morning in Las Vegas, 10 Zappos.com employees sat in an airconditioned conference room decorated with Star Wars memorabilia and a mural
of Darth Vader. They had gathered for a weekly meeting to discuss new internal
software, the sort of routine get-together that keeps corporate America humming.
But like all meetings these days at Zappos, the online merchant best known for
its shoes, this one followed a strict format determined by a radical selfmanagement system called Holacracy. The goal of Holacracy is to create a dynamic
workplace where everyone has a voice and bureaucracy doesnt stifle innovation.
At Zappos, this means traditional corporate hierarchy is gone. Managers no
longer exist. The companys 1,500 employees define their own jobs. Anyone can set
the agenda for a meeting. To prevent anarchy, processes are strictly enforced. At
the June meeting, a trained facilitator, in this case a young bearded man wearing a
blue baseball hat, followed the Holacratic method by asking attendees to get here,
get present, get now, and encouraged everyone in the room to briefly check in.
Im a little sleepy, said a wiry man.
Its warm out, was the next reply. Im also sleepy.
Im doing a Zumbathon for three hours this afternoon, one woman said.
My hands smell like oranges, so Im a little distracted by that, said Danielle
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Kelly, a former call center worker who is helping bring self-management to Zappos.
Also, Im in this room for five straight hours of meetings.
Next up was Tony Hsieh, 41, who has run Zappos for 16 years and is the
person who insisted that the company adopt Holacracy. I feel Danielle is being
overdramatic, he deadpanned. But I prefer her being overdramatic to passiveaggressive.
Mr. Hsieh (pronounced Shay) is a minor celebrity in the technology industry.
A son of Taiwanese immigrants and a graduate of Harvard, he sold his first
company, LinkExchange, to Microsoft for $265 million. He then invested in
Zappos, became its chief executive and sold it to Amazon for $1.2 billion in 2009.
Since then, Mr. Hsieh has managed to preserve Zapposs reputation as a fun
place to work. The youthful work force is heavily tattooed; the dress code is
aggressively casual. Desks are cluttered with giant stuffed animals, and soundemitting sculptures designed by the Blue Man Group line the walls. Create fun and
a little weirdness is written in the Zappos corporate charter.
But as Zappos grew, innovation slowed. The staff expanded, more managers
joined the ranks, and the freewheeling culture lost momentum. We had gone from
being a fast speedboat to a cruise ship, one longtime employee said.
The boss felt it too. A lot of people in the organization, including myself, felt
like there were more and more layers of bureaucracy, Mr. Hsieh said.
Mr. Hsieh knew his company needed a fix. But at Zappos, conventional teambuilding exercises would not suffice. He needed to get weird. After learning about
Holacracy in 2012, he decided it was just the thing for Zappos.
At the same time, Mr. Hsieh embarked on another lofty project: an attempt to
revitalize downtown Las Vegas, a dilapidated area miles from the Strip.
He has invested $350 million of his money in real estate, redevelopment,
small businesses and venture capital funds. A former casino became a hangout for
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Zappos employees, stocked with board games instead of slot machines. A vacant lot
is now a trailer park crammed with shiny silver Airstreams that are rented out to
visiting computer coders. He moved into one trailer a few months ago and keeps a
pet alpaca there. He calls the community Llamalopolis. It is the anti-Vegas.
Either one of these undertakings could be a full-time job for an idealistic
multimillionaire. But Mr. Hsieh has fully immersed himself in both the
transformation of his company and adopted city. A lot of companies talk about
work-life balance, Mr. Hsieh said. Were more about work-life integration. At the
end of the day, its life.
These days, Mr. Hsieh has one other job as well: quelling the doubters.
Neither of his paradigm-changing projects has proceeded smoothly. Two years
into Holacracy, Zappos is no workplace utopia. Downtown Las Vegas has some
new shops and restaurants, but problems like homelessness and unemployment
persist.
Mr. Hsieh has already proved he can build and run successful companies. He
translated that experience into a second career as a business visionary, the author
of the book Delivering Happiness and a motivational speaker. But now, while
betting his fortune and reputation on his most ambitious visions to date, Mr.
Hsiehs hot hand appears to be at risk of going cold.
In 2012, Mr. Hsieh traveled to Austin, Tex., to give the keynote speech at the
Conscious Capitalism C.E.O. Summit, a gathering of progressive executives. There,
he heard a presentation that was strange enough to get his attention.
On the stage was Brian Robertson, who invented Holacracy at his start-up,
Ternary Software. Mr. Robertson, a computer programmer, with no training in
human resources, let alone occupational psychology, seems an unlikely candidate
to lead a workplace revolution. At Ternary, Mr. Robertson innovated his practices
on the fly, testing his approach to self-management as he went. The end result was
what he refers to as an operating system for organizations.
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After peppering Mr. Robertson with questions, Mr. Hsieh was convinced.
Zappos would go Holacratic. The transformation began in 2013 in certain
departments, but only in recent months has the entire company taken the plunge.
Nothing about Holacracy is easy to understand. In place of a traditional
organizational chart are concentric circles of responsibility. Employees get to
choose which circles they belong to and what projects they work on. The jargon is
relentless. At meetings, tensions are resolved. People dont have one job; they
have multiple roles. Lead links are designated to communicate between circles.
Everyone must use the Holacracy software, called Glass Frog.
Such self-management remains the exception in the workplace today, yet its
advocates constitute a small but growing movement. Holacracy has other
adherents, including the David Allen Company, a consultancy, and Medium, the
blogging platform started by the Twitter co-founder Evan Williams, though none of
the other users are as large as Zappos.
I feel like Im in control without being controlling all the time, said Ruben
Timmerman, who adopted Holacracy at Springest, a 25-person online education
company he founded in Amsterdam. The team is more efficient and more creative
because of the sharing, and also more accountable. It has definitely helped us.
At Zappos, Mr. Hsieh seems to regard Holacracy as a way to revive the closeknit community feeling that made the company so special 10 years ago, when it
was just a few hundred people taking on the giants of e-commerce. Once you have
that level of friendship, theres higher levels of trust, he said. Communication is
better; you can send emails without fear of being misinterpreted; people do favors
for one another.
If only it were so simple. Holacracy has been met with everything from
cautious embrace to outright revulsion at Zappos, but little unequivocal
enthusiasm.
Theres no putting rose-colored glasses on it, said John Bunch, who is
leading the Holacracy push throughout Zappos. Were just taking baby steps.
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It is really painful and slow at first, said Christa Foley, a 10-year Zappos
veteran.
Even Josh Pedro, who is in charge of managing Zapposs public relations,
doesnt sugarcoat the situation. It was a weird transition, he confessed.
Ms. Kelly, the former call center worker, applauded Holacracy for giving even
the lowest-paid workers a voice. A person who just takes phone calls can propose
something for the entire company, she said. Its empowering everybody to have
the same voice.
But she said that the procedural formality of Holacracy, the ever-expanding
number of circles and the endless meetings were a drain on productivity. Its
taking time away from getting the actual work done, she said. This was the same
day as the software meeting, and as if still in disbelief, she said once again, I have
five hours of meetings today.
Nonetheless, Zappos is pushing ahead with Holacracy.
Later in the day, Mr. Hsieh was back in the Star Wars conference room with
a different group of employees. For the animating force behind a billion-dollar
company, Mr. Hsieh is disarmingly understated. He wears a uniform of a black
Zappos T-shirts and jeans, and speaks to colleagues in a soft monotone. He works
for just $36,000 a year, forgoing a big salary or stock options in exchange for the
autonomy to run Zappos however he sees fit.
The meetings agenda centered on compensation. As Zappos went Holacratic,
employees were initially encouraged to keep doing their existing jobs, or roles, and
assigned to circles with their colleagues. Salaries would remain the same for the
time being, too. But two years in, employees are leaving their original circles and
taking on new roles. Priorities are shifting, and no one, not even Mr. Hsieh, is sure
how to pay people at a company with no job titles and fluid roles.
At the meeting, Mr. Hsieh wanted someone to investigate a new system that
would allow everyone at the company to see how many hours any employee had
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worked on a particular task, in keeping with the Holacracy vision of radical

transparency. No one volunteered.
This is not getting anywhere, he said. Theres no easy short- or mediumterm answer.
Finally, Mr. Hsieh asked Mr. Bunch if he would look into it. Mr. Bunch
demurred, saying he had too much to do. Mr. Hsieh pushed again, and Mr. Bunch
relented. Zappos may not have a hierarchy, but it was clear who was in charge.
In 2013, Mr. Hsieh moved Zappos from a comfortable campus in the suburbs
to the former Las Vegas city hall, in the center of the downtown mix of dive bars,
weekly motels and vacant lots. This decision did not deliver happiness to all his
employees.
But Mr. Hsieh had a vision. In the same way that Holacracy might get Zappos
employees collaborating again, injecting bodies and businesses might revitalize a
blighted neighborhood. Mr. Hsieh also had $350 million of his own money to
spend on the idea.
While moving the company, Mr. Hsieh also founded the Downtown Project,
allocating $200 million to buy about 60 acres of real estate. The remaining money
was split into thirds, $50 million each for small-business investments, venture
capital stakes in technology companies and support for education and the arts.
By 2013, new life was coursing through downtown. A few upscale restaurants
sprang up. Then came a complex constructed out of shipping containers that is
home to a salon, a bar, a toy store and a candy shop. Now there is an independent
bookstore, a gourmet doughnut shop, a vegan restaurant, a sushi bar and a yoga
studio. Foot traffic is up, and crime is down. Last year, Mr. Hsieh gave up his
sprawling condominium on the 23rd floor of a luxury apartment building and
moved into the trailer park.
Mark Guadagnoli, a kinesiology professor of the University of Nevada, Las
Vegas, who also specializes in optimizing performance and communication in the
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workplace, has lived in the city for 20 years. When I moved here, I would go
downtown and be uncomfortable. Then it got worse and worse, he said. Now its
a really fun place to go. Its a destination. Anyone who says the Downtown Project
has not made a significant and lasting impact on Las Vegas is crazy.
Still, change in downtown Las Vegas is slow going. Homelessness remains
endemic. Quality housing is in short supply. As a result, many Zappos employees
are still living in the suburbs and commuting to work. Building street life in a city
where the temperature routinely hits 100 degrees has its challenges. Shops and
restaurants catering to a new creative class have opened, but few are brimming
with business. Many are hemorrhaging money. Some, including a co-working
space and a flower shop, have closed.
As for the start-ups funded by Mr. Hsieh who personally lured many
entrepreneurs to Las Vegas with pitches about starting a Silicon Valley in the
desert a few seem to be doing well, but several have shut down. And in a
devastating blow to the community, three entrepreneurs funded by the Downtown
Project committed suicide from January 2013 to May 2014.
Last September, the Downtown Project fired 30 of 100 support staff
employees, and Mr. Hsieh reportedly stepped away from his leadership role. That
prompted David Gould, a liberal arts professor at the University of Iowa whom Mr.
Hsieh had persuaded to move to Las Vegas for the Downtown Project, to write an
open letter accusing his patron of incompetence and mismanagement. We have
not experienced a string of tough breaks or bad luck, Mr. Gould wrote, just before
he quit and moved back to Iowa. Rather, this is a collage of decadence, greed and
missing leadership.
In late May, Mr. Hsieh took the stage at a Zappos all-hands meeting at a
theater in downtown Las Vegas. These are usually jovial affairs featuring circus
performers and the like, but this gathering was more reflective. By some measures,
Zappos was thriving, Mr. Hsieh said, sharing business updates from the quarter.
But he also acknowledged that the transition to Holacracy had not been going
smoothly.
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Six weeks earlier, Mr. Hsieh sent a 4,700-word email to the entire company
with an ultimatum: Embrace Holacracy or accept a buyout. The financial terms
were generous, and 210 employees, or some 14 percent of the work force, took the
offer.
After many employees left, Mr. Hsieh acknowledged that some of the
remaining staff members wanted him to resign from the company he built.
The brewing employee discontent reflects the paradox at the heart of any
companys move to Holacracy. For all of the talk of self-management and
consensus building, the decision to go down this path was Mr. Hsiehs alone.
Mr. Robertson, the Holacracy creator, frames this choice as the pinnacle of
great management. By heroically releasing authority into the systems embrace,
the leader paves the way for an authentic distribution of power through every level
of the organization, he writes in his book, Holacracy.
But at Zappos, it seems that many wish Mr. Hsieh had never made the choice.
It turns out some people want a boss after all.
Pressed for instances of Holacracys achievements at Zappos, employees could
offer only pedestrian examples. Mr. Hsieh had shut down the bridge connecting
Zapposs office to a parking garage, hoping staff would experience more
serendipitous encounters if they all used the same main entrance.
But that meant employees had to venture onto the seedy streets to get to and
from their cars, leaving some, especially those working late shifts, feeling unsafe.
So one employee proposed that the bridge be reopened, a motion that was accepted
by the circle that controlled campus operations, essentially overriding the C.E.O.
Or as a Zappos spokesman described the process, using Holacratic terms: An
employee (unknown) brought it to the road block role with safety being the
tension. The road block role then took it to the grease and disrupt circle where it
went through the process and was eventually passed with no objections.
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In another case, a shuttle bus driver was able to add an agenda item to a
meeting, requesting that employees not leave trash on the bus. So far, however, no
one could point to any innovations that have improved customer service or
increased sales. Critical issues like how to hire, fire and pay people in a company
with no job titles have emerged as sticking points.
Mr. Hsieh and his acolytes remain adamant that self-management will unlock
the potential of Zappos employees, allowing them to be more productive and
creative. We believe that, over time, the ability for people to be empowered and
entrepreneurial will make people happy, Mr. Bunch said.
A tinge of defensiveness in Mr. Bunchs answers was understandable after a
wave of negative press coverage, with headlines like Holacracy or Hella Crazy?
Banishing the Bosses Brings Confusion, and A Holacracy of Dunces.
And even Mr. Robertson concedes that his operating system for the
organization is not easy, at least not at first. All the negatives? Those are all true,
he said. It can be a long moment of pain and agony.
But he emphasized that learning Holacracy was like learning a sport it
would take years to get good at it.
Mr. Hsieh expressed impatience with questions about Holacracys rocky start
at Zappos, repeating Mr. Robertsons mantra that the transition would take time.
Imagine 10 or 20 aboriginals and you gave them a football rule book, he said.
Its going to take them a while to understand the game.
After a long day of Holacracy meetings, Mr. Hsieh was relaxing in a temporary
aboveground swimming pool at Llamalopolis, not far from a chicken coop. The
alpaca, named Marley, lingered nearby. (Mr. Hsieh has an affinity for llamas but
says alpacas are friendlier.) With the sun still hanging above the palm trees, the
temperature hadnt budged, but the heat and daylight didnt dissuade Mr. Hsieh
from getting the party started. Out came a bottle of Fernet-Branca, a bitter herbal
liqueur, and everyone present took shots out of tiny plastic cups. As he soaked, the
Holacracy sales pitch continued.
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The main thing is that everyones voice is heard, he said.

The idea that all voices in an organization are equally valuable is antithetical to
the way most companies are run. Inexperienced employees, the conventional
wisdom goes, should learn from managers who know what theyre doing.
By contrast, Mr. Hsieh and other proponents of Holacracy argue that by
marginalizing large swaths of the organization, important issues go unresolved and
potential goes untapped.
Similarly, he hopes that with a little economic stimulus, the people of Las
Vegas can create vibrant civic life.
But Mr. Hsieh cant succeed alone, even with all his money. For Holacracy to
work, he needs buy-in from the 1,500 Zappos employees who chose to stay. For
downtown Las Vegas to thrive, he needs buy-in from the city, from real estate
developers, from the neighbors.
There are glimmers of hope. One Zappos team member said that after months
of torturous meetings, her circle, which promotes Zappos culture, was running
more efficiently. A couple of small businesses were opening up downtown without
funding from Mr. Hsieh.
Just up the street from Llamalopolis was an abandoned motel. Mr. Hsieh had
purchased the property and was hoping that Virgin Hotels or the Ace Hotel group
would take it over. He bought another parcel a few blocks farther down the road,
where he hoped to erect housing. Ideally, Zappos employees would move in, then
spend their salaries whenever they figure out how to pay themselves at
businesses backed by the Downtown Project.
Mr. Hsieh is a high-stakes gambler, and shooting for the moon is what he
does, said Mr. Guadagnoli, the University of Nevada, Las Vegas, professor, who has
worked with Mr. Hsieh over the years.These are pretty crazy experiments, but its
Tony, he said. Sometimes he says things that dont make any sense, but a few
years later, they make sense. Maybe this is one of those.
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Maybe.
2015 The New York Times Company
http://www.nytimes.com/2015/07/19/business/at-zappos-selling-sule=second-column-region&region=top-news&WT.nav=top-news&_r=0
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JULY 17, 2015