No Rules Rules: Netflix and the culture of reinvention
Title: No Rules Rules: Netflix and the culture of reinvention
Author: Reed Hastings & Erin Meyer
Publisher: WH Allen
Reed and Erin tell us how to be successful in 9 steps. Unfortunately, most companies struggle with the first 3.
Unlimited vacations, as long as it is planned in advance and within your team’s capacity. Expense as much as you need, as long as you “act in the company’s best interest”. Say what you think, but with positive intent. All these sentences start with a progressive premise but require something from you in return. You can’t simply get freedom without responsibility.
No rules rules, is a book about what it takes to achieve worldwide success by focusing on talent density, a culture of candour (openness, honesty) and eliminating most controls on your employees. All three of these areas are carefully illustrated with examples from Netflix itself, with the consequences that each one has on your company, and it reinforces what you already know about what happens when you don’t apply them.
As we can see below, the summarised steps seem pretty obvious. But there is a catch, they require you, the team lead, manager or director, to change your workflow and (most probably) the organisation to implement them successfully. Each step builds on top of the previous ones, so if you plan to introduce only the ones you want, you might be setting yourself up for failure.
|Phase I||Phase II||Phase III|
|Build up talent density
by creating a workforce of high performers
|Strengthen talent density
by paying top of market
|Max-up talent density
by implementing the Keeper Test
by encouraging loads of feedback
by emphasizing organizational transparency
by creating circles of feedback
such as vacations, travel, and expense policies
|Release more controls
such as decision-making approvals
|Eliminate most controls
by leading with context not control
“Policies and control processes became so foundational to our work that those who were great at coloring within the lines were promoted, while many creative mavericks felt stifled and went to work elsewhere.
Then two things occurred. The first is that we failed to innovate quickly. We had become increasingly efficient and decreasingly creative. In order to grow we had to purchase other companies that did have innovative products. That led to more business complexity, which in turn led to more rules and process.” - (pp. XIX)
Build talent density
The first step towards success is building a team of high performers. This might seem obvious at first, but look carefully, and you’ll notice that I didn’t say a high-performance team. These two concepts are fundamentally different because you can have a high-performance team with a few average performers or a low-performance team even though all your employees are high performers.
The authors start by describing a situation in which “one individual’s bad behaviour brought down the effectiveness of the entire team”. So much so that average performers usually require high performers to support them in different ways (tutoring, in meetings, in projects), effectively slowing down the team and each individual’s energy levels. After a layoff in 2001, Netflix noticed this phenomenon when they had to let go 30% of the workforce, and the company started doing more work than ever before. Even though employees were working longer hours, Reed says that they were happier and with higher spirits.
To this day, Netflix still keeps the same philosophy of hiring and retaining high performers by doubling down on strategies that we will see below, but I have to be sceptic of the idea that all 7000 employees are high performers. The fact that I’ve personally felt a sense of happiness and responsibility to be better and do more when working with the android/mobile engineers at Babylon makes me believe that there is some truth to this strategy.
“With a climate of candor, the boss is no longer the primary individual to correct an employee’s undesirable behavior.”
Reed states that “Voicing opinions and feedback openly, reduces the backstabbing and politics”, which is obvious, but the problem is that dishonest feedback or no feedback at all is the result of a myriad of reasons. From politics to culture, personal history, or avoiding conflict, giving negative feedback seldom brings any good results besides triggering group exclusion feelings. “Tell him exactly what you’ve said to me”, might seem scary, but when done correctly, it can dramatically increase trust and respect between both parties.
Genuine and honest feedback is one of the most challenging components to instil in corporate culture. As the book says, the truth has to be accompanied by positive intent and a genuine willingness to help the other person by giving actionable steps that the other person can take. Without it, feedback can easily derange into resentment.
More than truth and actionable steps, Netflix wants its employees to give feedback “exactly when and where it will help the most”, even if it means in front of everyone. The book then describes a situation where someone was called out during a presentation because the presenter was “losing the audience”. It is not hard to guess that to overcome this situation, one must have very high self-confidence levels, a soft skill that is usually overlooked in interviews. Lack of confidence to speak up and ask questions can lead to more problems than those it is trying to avoid. More often than not, several issues could easily be traced back to particular interactions where one of the parties didn’t intervene when it should have.
For example, some years ago, I was involved in a workgroup that conducted a series of meetings and workshops that turned out to waste time and money. When looking back at what went wrong, the responsible people (a specialist and a manager) admitted to each other, to their surprise, that they believed it wasn’t the best time to do those work sessions but still proceeded anyway. The problem? One didn’t dare to question the (newly appointed) manager’s authority, and the manager thought that the workshops were what the specialist wanted.
“After all, you could help the business—but you are choosing not to.”
I broadly agree with Netflix’s steps to create a good culture of candour, like building feedback moments into regular meetings, Coaching employees to give and receive feedback efficiently, for leaders to solicit feedback frequently and mainly, getting rid of jerks. However, I wish the book would detail how long it took to implement these mechanisms and how we would know they’ve been implemented successfully.
Finally, the chapter describes a situation with Paula, a former Original Content Specialist who used to speak forcefully to make herself heard. Even though the story serves as a good illustration of when they fired someone, I believe it is bad taste to name the ex-employee in this context.
I guess the road is paved with good intentions?
Unlimited vacation policies are not common but are not rare either in the tech industry, especially in the startup world. Policies like these give a false sense of freedom to prospective employees because these policies might signal a relaxed and progressive workplace when reality can be quite different.
All the testimonials I’ve seen in recent years go along the lines of what Reed mentions in the book. That people still take the average amount of days off or take even less of what they could. Reed says that if employees are taking less than what they should, they might merely be modelling what their bosses do.
“If the CEO is taking only two weeks' vacation, of course his employees feel the unlimited plan doesn’t give them much freedom. They’re bound to take more time off with three allotted weeks than with an indefinite number and a boss who models just two. In the absence of a policy, the amount of vacation people take largely reflects what they see their boss and colleagues taking.”
Another common source of abuses and lack of boundaries in companies is their expense policies. But here, Netflix sets up an excellent guideline. “Act in the company’s best interest” and if in doubt, ask yourself if you would have any trouble explaining that particular expense to your boss.
Not setting an expense and a vacation limit might not change much in practice but sends a powerful message to employees. “The freedom signals to employees that we trust them to do the right thing, which in turn encourages them to behave responsibly.”. If even so, an employee abuses the system, fire that person so that others understand that without responsibility, freedom doesn’t work.
Fortify talent density
LinkedIn and professional social circles are full of posts and engineering job offers, looking for “rock-star” developers. As if it wasn’t strange enough, recruiters started to “innovate” by using terms like “ninja” and “superhero” in their advertisements instead, which only pushes professionals away.
However, these terms seem to be rooted in a famous study with nine trainee programmers where the best was “(…) twenty times faster at coding, twenty-five times faster at debugging, and ten times faster at program execution than the programmer with the lowest marks”. I can understand the need for professionals like these in algorithmic-based or performance-critical jobs, but in a software engineering industry, soft skills play a big part in product development. Given that, it is not clear what the authors mean by “High performing talent” in their software engineering positions. However, Reed is right in the dilemma that it presents:
“With a fixed amount of money for salaries and a project I needed to complete…I could hire ten to twenty-five average engineers or I could hire one “rock-star” and pay significantly more than what I’d pay the others.”
Top talent is scarce and paying top of the market is a requirement if you plan to retain your employees, given that most would happily move to another place when presented with a significant salary raise, especially in the fast-moving and competitive tech industry. However, the majority of companies offers a bonus incentive tied to performance as a retention strategy instead. Reed explains why Netflix got rid of those:
“But at Netflix, where we have to be able to adapt direction quickly in response to rapid changes, the last thing we want is our employees rewarded in December for attaining some goal fixed the previous January. The risk is that employees will focus on a target instead of spot what’s best for the company in the present moment.”
Moreover, setting bonuses in most cases will not change the performance of (already) high performers. Bonuses might make sense in a sales department because it directly impacts the financial sheets, but they rarely change professionals in creative fields for the better.
Determining your employees' market value and adjust it every year is complicated and will certainly require some extra work on your side. I also understand that giving raises to particular people might open the “Pandora’s” box and create precedents in the future. But what is the cost of not doing it compared to recruiting, hiring and training new professionals? Today, I can perform specific tasks that would take me twice the time a year ago, not because I have evolved, but mainly because I now have a mental model of the codebase and its data flows. The current domain knowledge that your employee possesses might not be useful for your competitor, but it must be factored in when you decide to hire someone else instead.
As a result, Netflix says without reservations that “In a high-performance environment, paying top of market is most cost-effective in the long run”.
Pump up candor
Following the strategy of creating a culture of candour, it comes to no surprise that Netflix also proposes “opening up the books”. Reed argues that giving low-level employees access to information reserved for high-level executives creates a greater sense of ownership and commitment within employees.
“If you have the best employees on the market and you’ve instituted a culture of open feedback, opening up company secrets increases feelings of ownership and commitment among staff. If you trust your people to handle appropriately sensitive information, the trust you demonstrate will instigate feelings of responsibility and your employees will show you just how trustworthy they are.”
I’m sure there will always be employees that will leak sensitive information, but those should be few and far between. When that happens, deal with them appropriately and firmly instead of punishing the majority.
Finally, the Netflix CEO advocates that your leads should outline their mistakes in detail to their subordinates since that will further increase trust and understanding. Being open about your mistakes might be too much if you are the type of boss that fears being seen as a failure and likes to hold power and moral high ground in any group interaction. But chances are, you will fail at some point, and covering the truth will only make you lose the respect and authority you fought so hard for. There is one exception, though, if you are untrusted or unproven, you should “build trust in your competency before shouting your mistakes”.
Release more controls
We started this review with reed’s quote regarding his previous company, where more processes and controls led to a loss in innovation and an increase in business complexity. We have seen how releasing controls and reducing processes speed teams up and increases responsibility. But this section perfectly connected both extremes:
“Netflix does not operate in a safety-critical market, like medicine or nuclear power. In some industries, preventing error is essential. We are in a creative market. Our big threat in the long run is not making a mistake, it’s lack of innovation. Our risk is failing to come up with creative ideas for how to entertain our customers, and therefore becoming irrelevant.”
Reed is careful to say that not all industries, or even jobs inside one company, can be control-free. If your job requires precision, high-efficiency and error prevention, processes and controls are necessary. You can’t release controls when your job is to drive a plane or deliberately take risks when doing a heart transplant. Even inside Netflix, some jobs require processes and controls.
A culture of candour and freedom sounds good in theory, but many behaviours do not change overnight. Erin notes that even though you’ve created a culture of candour, very few employees will stand-up to the boss or express disagreements. To prevent this, Netflix now requires everyone to seek different opinions before making any major decision. Netflix calls this farming for dissent. To the point that it says that “it is disloyal to Netflix when you disagree with an idea and do not express that disagreement. By withholding your opinion, you are implicitly choosing to not help the company.”
Ask yourself, how many times have you stood up to express your disagreement in a strategy that you considered careless or deemed to fail? I’m sure you’ve been in situations where you’ve benefited from one of your colleagues questioning your decisions or proving that some of your assumptions were incorrect. So, no matter your position, you should actively seek dissident opinions and express your concerns.
One of the most interesting elements in Netflix’s candour culture is the responsibility and trust in each employee. If your employees are the “top talent” in the industry, why does every decision has to go through you? Someone that hasn’t have as much context or knowledge about a particular problem? To avoid a decision bottleneck and a high dependency on the top of the hierarchy, Netflix implemented a distributed system of decisions based on a limited number of bets:
“When new employees join the company, tell them they have a handful of metaphorical chips that they can make bets with. Some gambles will succeed, and some will fail. A worker’s performance will be judged on the collective outcome of his bets, not on the results from one single instance.”
How many projects have you worked on in which you wouldn’t bet one of your three annual bets?
Max talent density
I’ve voiced my disagreement with the “we are a family” mindset in my last review of Delivering Happiness. Besides bosses usually using this to take advantage of their employees, Reed argues that it also makes it harder to let go of someone when you know you can find a better fit. A professional sports team is a better metaphor because athletes:
- Demand excellence, counting on the manager to make sure every position is filled by the best person at any given time.
- Train to win, expecting to receive candid and continuous feedback about how to up their game from the coach and from one another.
- Know effort isn’t enough, recognising that, if they put in a B performance despite an A for effort, they will be thanked and respectfully swapped out for another player.
If football teams ran as families, most teams would have 40-year olds as defenders and their 17-year old sons in the attack. It seems fun at first, but I doubt it would produce the results you are looking for.
To avoid this, Netflix applies the (now famous) “Keeper test”, which requires managers to question, “if a person on your team were to quit tomorrow, would you try to change their mind?”. If the answer is no, then you know what to do. The keeper test may sound extreme, but Reed is spot on when he says, “We pay our employees top of their personal market. Part of that agreement is that they will play on the team as long as they are the best player for the spot”.
The downside of the keeper test, according to its critics, is that it can get your employees scared of being let go. However, with a culture of candour, employees should prompt their managers for feedback from time to time. If we presume managers are honest and act with positive intent, they will get constructive feedback if their performance starts to decrease.
Now that you have a team of highly talented employees, it is time to ensure a higher level of candour. This step is necessary because even if you ask employees to provide feedback openly, a big part of them will not do it. To ensure frequent feedback, Netflix implemented regular (6-12 months) written 360 feedback sessions and live 360 dinners to guarantee different perspectives are discussed instead of the typical one-way feedback.
Moreover, Netflix wants leaders to share their own 360 evaluations with their teams so that everyone loses the fear of giving and receiving feedback. As mentioned before in the book, “The Netflix culture has great ideals but sometimes the gap between the ideals and practice is big, and what should bridge that gap is leadership.”
Just remember that “Live 360s work because of our high talent density and “no brilliant jerks” policy. If your employees are immature, have bad attitudes, or lack the self-confidence to show public vulnerability, you might not be ready to run these events.”
Eliminate most controls
The final and last step for an environment of innovation is leading with context and not control. Leading with control means leading with direct oversight, even if the employer lets employees choose “how” to approach a task, it still keeps control over the “what” and “when”.
Leading with context is harder and riskier but gives the employees significantly more freedom and responsibility. Leading with context is giving your employees all the available information and expecting them to do what is best for the business, at whatever moment and in the way they see fit. Leading with context means that you trust their judgement instead of micromanaging every single step.
It’s important to know that leading with context might not be for every company, as you also need to consider the industry in which you work and what are you trying to achieve. “If your focus is on eliminating mistakes, then control is best”. Several companies need “hundreds of safety procedures to minimise the risk of people getting hurt.”
The third step is making sure your system is “loosely coupled”. Loosely coupled systems have few interdependencies, which means that each team can change without impacting the others. However, the downside is that it requires teams to be highly aligned so that each employee knows how he/she and its team play a part in the organisation at every moment.
“Loose coupling works only if there is a clear, shared context between the boss and the team. That alignment of context drives employees to make decisions that support the mission and strategy of the overall organisation.”
The last chapter is a fascinating look into the difficulties Netflix faced to implement its ways of working in its offices worldwide. Behaviours and expectations change dramatically within different continents, and what works in the USA, and generally the western world, rarely does in its eastern part. From the Brazilian employee waiting for someone to join him for lunch to the Japanese that started to cry, this chapter proves that not everything we read on Twitter or even other tech industry books will work in your context.
With Erin’s help from “The culture map” book, Netflix mapped its culture against each of the countries in which it has an office and (slightly) adapted it’s the culture of candour to a more appropriate and local way. This means that, for example, with less direct cultures, there are more feedback mechanisms. On the other hand, cultural differences are discussed more openly in more direct cultures so that feedback is not misunderstood.
Reed admits that the path to going global is an ongoing work and that some workflows might still need improvement in the future. The chapter highlights some drastic differences between countries, but major cities like San Francisco, London, and Berlin now have more culturally diverse companies than ever before. As if this didn’t complicate things enough, personalities also vary immensely within individuals of the same nationality.
So what can you do in this case? Getting to know your employees, their culture and their background is an excellent first step.
No rules rules is an incredible book. Controversial and perhaps excessive at times, it proves that you need to implement radical measures if you want to achieve extreme results.
You might be tempted to say that Netflix can do what it does because it has the money to do so, and I would agree. I’m sure that luck also played a part along the way, but if there is one take away from this book is that if you trust your employees, they will trust you.