Operating an Ocean Liner Like a Speed Boat – the Zappos Journey

At this year’s Responsive Conference, John Bunch, Lead Organizational Designer at Zappos told the story of Zappos’ organizational journey.  Zappos is, first and foremost, a customer service operation, regardless of what they sell.  They are focused on establishing a healthy and sustainable organization that can weather the changes and disruptions that could undermine their existence. They want to be alive and well, not just now or 100 years from now, but 1,000 years from now.  Now that’s a long-term perspective!

Culture First and Foremost

As the organization transitioned from a small to a large business, Tony Hsieh and his team realized that they operated under a set of core values that were important to the DNA of the company and that they needed to ensure that employees shared and demonstrated those core values.  The leaders articulated the values they saw as critical to Zappos and engaged their employees in refining and finalizing them.  The values are posted throughout the office and appear on employees’ ID badges.

They hire and fire based on these values.  This means that every candidate is subject to a culture interview as well as a technical interview.  Even the most highly skilled technologists will be turned away if they don’t pass the culture fit interview.  During the first thirty-days of training, new hires take an intensive look at customer service and the DNA of the company. At the end of that period, Zappos offers the new hire money to quit. That is, if the new hire doesn’t feel that Zappos is a good fit for them, after this intensive, deep dive into the Zappos culture, they are paid to leave.

A Highly-Responsive Organization

When Zappos evolved from a small start-up to a large, mature organization, structures were put in place to allow them to operate efficiently, but they no longer had the ability to change course quickly in response to what customers told them.  They needed to figure out how to have both the benefit of scale and the flexibility of a smaller organization.  So, they conducted research to solve this challenge. 

One of the books that influenced them was the Triumph of the City by Edward Glaeser.  They learned that while, in organizations, productivity drops as it increases in size, in cities the opposite happens.  As cities grow, productivity grows. So, the organizational designers at Zappos asked themselves “how can we structure more along the lines of how cities are structured vs. a traditional organizational structure?”

They looked at Fredric Laloux’s Reinventing Organizations for clues. The mindset shifts Laloux presents for organizational transformation – bringing about more organic forms are organization are:

Traditional Organization Organic Organization
Profit Purpose
Hierarchy Network
Control Empowering
Planning Experimentation
Privacy Transparency

The qualities on the right-hand side became their design principles.  In looking for ways to bring about the characteristics on the right side, Zappos adopted Holacracy.  Holacracy shifts organization design from the traditional hierarchy of people to a hierarchy of purpose or work.  It asks the question “What is the work that needs to get done to fulfill the purpose?”  For Zappos, the purpose of work is to deliver “WOW”.  Work is organized in circles, and each circle contains the roles needed by the circle (and the best person to fulfill each discrete role).  Roles are specific to the work to be done, not necessarily to one individual.  An employee may have 14 areas of purpose (or circles) and 37 distinct roles within those circles. This form of organization permits Zappos to quickly respond to customers and effectively utilize the array of capabilities their employees possess.  It can sense needs coming from customers, develop innovative ideas, and take those ideas forward quickly. An example of this was the creation of Zappos Adaptive, a line of adaptive clothing for people who would otherwise need help to dress themselves.

Market-Based Dynamics  

With Holacracy, resource allocation continued to be a top-down process.  Zappos wanted to take more of a network approach to resource allocation.  They asked, “How do we understand what value each circle is providing and put the budget in the customer’s hands?”  Taking the perspective that everyone is a customer (including inside the organization), they are experimenting with customer-generated budgeting by implementing Market-Based Dynamics (MBD).   Transparency and technology are critical factors for MBD.  Instead of top down funding, each circle operates as a microenterprise and forms service level agreements with other circles.  For example, if a circle needs AV services, the AV circle has developed a set of services it provides and a price for each service.  The AV circle would create a service level agreement with the circle needing its services and, in that way, the AV circle “earns” its budget. 

Funding Innovation

While in most organizations, it takes just one “no” to shut down a new idea, at Zappos it takes just one “yes” to get it off the ground.  If a circle is willing to invest in an idea, the circle with the idea is “funded” to take it forward.  There are opportunities for people with ideas to pitch them to colleagues to get funded.

Zappos has established minimal constraints to enable maximum flexibility.  Decisions are guided by a triangle of accountability to live and deliver WOW. The three sides of the triangle are Culture/Values, Customer-focused Mindset, and Customer-generated budgeting.

In It For the Long Run

The organizational designers at Zappos are laser focused on creating a business that avoids extinction – one that will be around in 1,000 years.  For that to happen, the business needs to adapt to change.  Zappos’ organizational design continues to evolve as they experiment and learn.  With each new element, challenges arise that need to be understood and addressed.  For example, there will be circles that form around work that is in demand today but may not be in demand tomorrow.  Rather than let go of underutilized resources, Zappos will need to find effective ways to help people deliver value where there is demand.  Zappos’ organizational design puts its people in the position to sense shifts in the marketplace and respond quickly. As a result, they are likely to more quickly recognize and seize opportunities for the business and for employees.