Hold on to your Manolo Blahniks. Zappos is going flat. And that's a good thing.
Despite a lot of talk about empowering employees, holacratic organizations—self-governing systems with no job titles and no managers—are rare.
The influential management guru Peter Drucker wrote often about substituting "management by self-control for management by domination." Yet few companies today operate that way.
A recent survey of more than 36,000 employees in 18 countries by the consulting firm LRN, found that only 3 percent of companies can be characterized as substantially self-governing.
That may explain the keen interest in a 2013 announcement by Zappos CEO Tony Hsieh that the billion-dollar online retailer would be going holacratic. The company, owned by Amazon and headquartered in downtown Las Vegas, has about 1,500 employees. In 2013 it was number 31 on Fortune's list of the best 100 companies to work for.
When the rollout of the new structure is complete in December 2014, Zappos no longer will be a top-down hierarchy, but a collection of "circles" made up of employees who choose their own roles. In a holacracy, Hsieh said, "There's no hiding under titles; radical transparency is the goal."
"There will be a limited hierarchy," explains Hollie Delaney, who is transitioning from her role as director of HR to several roles in different circles. "We will have a system of distributed authority," she says. "You own your roles and have accountability for them. In the old world, as director of HR, I was responsible for recruiting, employee relations, benefits, training, and so forth. If I saw people in my group taking us down the wrong path, I had authority to make it different."
In the new Zappos world, Delaney will be creating autonomous roles for others. For example, she can create a recruiting role and give it to a recruiting manager who would have complete authority, autonomy, and accountability for that role. He also could distribute authority to his recruiters.
If Delaney wanted to change something he was doing, she would use a process for resolving differences, or "tensions" as they are known in a holacracy. Operational differences are handled in tactical meetings, while structural differences are handled in governance meetings, using negotiation and communication skills being taught to all employees.
Delaney also is the "lead link" of a few circles, including people operations, which is considered a "super circle." Lead links have five accountabilities that can't be changed or added to: differentiating a circle's overall work into segmented roles; assigning people to circle roles, monitoring the fit between partners and their roles, and providing feedback; adding and removing people from circles; allocating resources; assessing and defining strategies and priorities; and defining metrics.
"To make management by self-control a reality requires more than acceptance of the concept as right and desirable," Drucker observed in The Practice of Management, his 1954 classic. "It requires new tools and far-reaching changes in traditional thinking and practices."
Zappos employees are learning new skills for their new way of working in a flat organization. Some courses teach the practice of authority—how to give it up as well as how to assume it. "People who are accustomed to making decisions are learning to trust others to pick up authority. And people who are less accustomed to making decisions are building confidence and the ability to make and communicate decisions," says Delaney.
Work with a pilot group helped determine what kind of training to develop, such as classes about holacracy and its rules, how to conduct meetings, and how to resolve tensions, which are described as the difference between what is and what could be.
"We just built some classes on how to lead in this system. Everyone is taking this class because now everybody is a leader," says Delaney. And all employees are being trained in how to tolerate change.
When the roll-out process is complete at the end of 2014, all employees will have equal authority and accountability in the roles they own. And they will know how to change things through governance and tactical meetings.
Creating new metrics is another aspect of moving to a holacratic culture. "It's taking time," says Delaney, "because the new way of working is so different. The first six to 12 months is about changing our mindset and building new skills." Using the pilot group, Delaney is working with a social scientist to determine whether the changes are increasing or decreasing their efficiency and engagement.
A rare breed
A company often cited for operating successfully as a holacracy is Morning Star, a large California-based tomato-processing plant. Privately held Morning Star has strong growth, solid profits, low turnover, and a record of innovation. No one at Morning Star has a boss or a title. Employees negotiate and set individual responsibilities with one another. Everyone has spending authority, and compensation is peer-based.
Morning Star founder Chris Rufer built the company to be holacratic from the start. Retrofitting a traditional company to be a holacracy is much more difficult, according to Forbes blogger Rick Wartzman of the Drucker Institute.
"Getting most organizations to do away with top-down, command-and-control systems is next to impossible," he writes, especially if that requires taking perks and high salaries from people at the top.
At Morning Star the highest-paid employee makes just six times what the lowest-paid earns (including seasonal hires). The salary spread between a CEO and an average worker at an S&P 500 company is 380 to 1.
Gortex maker W.L. Gore, another flat organization, has no org charts, no chains of command, and no predetermined channels of communication. Company founder Bill Gore set the company up in 1958 as a "flat-lattice" organization. Instead of bosses, employees have sponsors who guide them toward opportunities and projects that match their skills. Leaders "emerge" from these projects.
The unusual mix of skills and attitudes required to make a holacracy work rules out this path for most companies. Being small or created from scratch is a plus; there's no old thinking to undo. Being open to new learning and continual change is a given.
The switch to distributed authority also can be a show-stopper for employees who frankly want power and perks. The rewards of negotiating rather than ordering change are subtle and unfamiliar in many organizations.
Proponents of holacracies, such as the consulting group HolacracyOne, say that the rewards of working in a purpose-driven organization are worth the effort of changing.
Many will be watching to see if Zappos keeps its position on the Fortune list of best companies to work for, and maintains its financial success.
What Is a Holacracy?
The term holacracy is derived from the term holarchy, coined by Arthur Koestler in his 1967 book The Ghost in the Machine. A holarchy is composed of holons, a Greek word meaning things that are simultaneously a whole and a part, or units that are autonomous and self-reliant, but also dependent on the greater whole of which they are part. Thus a holarchy is a hierarchy of self-regulating holons that function both as autonomous wholes and as dependent parts.
It is also a term that has been trademarked by HolacracyOne, a consulting firm.