In 2014, Zappos’s CEO Tony Hsieh surprised many observers in the business world by announcing to his 1,500 or so employees that the e-retailer famous for its shoes was doing away with job titles, managers, and other artifacts associated with traditional top-down management and replacing it with a system where employees are expected to act like entrepreneurs. This new approach or holacracy encourages employees to self-manage and self-organize, thus eliminating the need for bosses. One of the management system’s overarching goals is to “create a dynamic workforce where everyone has a voice and bureaucracy doesn’t stifle innovation.”

Why did Zappos adopt this new way to organize itself?

As the company grew in size, it became more difficult to provide customers with a “WOW” or exceptional customer experience. Responding to customer feedback slowed as layers of employees and managers increased. Holacracy empowers employees to quickly surface and act on customer feedback.

How does a holacracy works? According to advocate Brian Robertson, a holacracy functions when employees know what they are responsible for and have the freedom to deliver those results as they see fit. This approach works best when the organization encourages changes and improvements to be made beyond what is required.

Holacracy organizes employees into circles of responsibility—

similar to functional areas (like marketing and customer service) and employee special interest areas

(like career development and so forth). Though democratic and self-governing, the circles do not operate in a vacuum because they are arranged in a hierarchy (circles report to higher-level circles) and follow detailed procedures for running meetings and making decisions. Employees are free to choose which circles to which they want to belong and on what projects they would like to work. The circles are responsible for achieving a specific set of responsibilities.

At meetings, employees are encouraged to address and resolve in a proactive manner “tensions” or problems related to internal (e.g., unfair workloads) or external (e.g., a way to enhance the customer experience) issues. Rather than reporting to a manager with the power to hire or fire, as is the case in hierarchically organized companies, a “lead link” helps employees accomplish the circle’s responsibilities and communicates between circles.

Zappos is not the first company in history to experiment with employee self-management. For example, Gore

& Associates (maker of Gore-Tex) has no formal chain of command and provides its associates with freedom to selfselect work projects and choose associates with relevant expertise to assist in the development of those projects.

Semco Partners, a Brazilian industrial machinery manufacturer, engages its 3,000-plus employees through participative management, where employees set their own work hours and pay levels, hire and review their supervisors, and decide which new businesses to enter. Johnsonville Sausage Company eliminated its hierarchy and introduced

“self-managed, self-organizing teams throughout the company.”

Ralph Styer, the CEO who championed this radical change, believed that “helping human beings fulfill their potential is of course a moral responsibility, but it’s also good business practice.” He believed in the connection between employee happiness and organizational performance:

“Learning, striving people are happy people and good workers.”

Were the employees at Zappos happy about their expanded responsibilities and freedom to self-govern? How did the managers accept this change? It was mixed. In an email to all staff at the company, Hsieh said that everyone had a choice to make: either embrace the new holacratic system or accept a three-month severance package and resign. Two hundred and ten (or 14 percent) of the staff resigned. Of those who left the company, 20 (or 7 percent)

were managers. Does that mean that the 86 percent of staff who decided to stay did so because they believe in the new holacratic approach? Time will tell. One may speculate that the individuals who chose to remain at Zappos did so because they are either “believers” or lack the interest or motivation to switch jobs at the moment.

Of the employees who stayed, some shared concerns about the new management approach like using the complicated new lingo, adjusting to the rapidly changing work roles and expectations, and the “ever-expanding number of circles and the endless meetings” that take employees away from achieving their work goals. On the upside, holacracy promotes employees’ ownership and encourages even the lowest-paid employees to add items to meeting agendas that are subsequently discussed and acted upon.

What became of the 267 ex-managers at Zappos? The company created a new circle titled “Reinventing Yourself”

that helped many of these individuals find new roles. Some eventually moved on.

There may be an irony in the way that Zappos shifted from a hierarchical management structure to one that is based on democratic, self-organizing circles. The mandate for this change came from Tony Hsieh, the CEO. Those employees and managers who did not agree with the “topdown”

change were asked to leave the company. This irony suggests that even for visionary business leaders like Hsieh, radical change may not be easy to accomplish in a consensus-

driven manner.

Five years later, Zappos and its employees continue to adapt to the new holacratic system of management. John Bunch, an employee who helped the company make the transition, is patient and is taking the long view: “We believe that, over time, the ability for people to be empowered and entrepreneurial will make people happy.”

DISCUSSION QUESTIONS 1. To what degree do you think that Zappos’s new holacratic approach to organizing will enhance its competitive advantage in innovation, quality, service, speed, and cost competitiveness? Explain.
2. Think about how a current or former employer is organized.
To what degree would a holacracy approach work in that setting? What would be the benefits of switching to the new system? What objections would likely be offered to resist the change?