Netflix and The Culture of Reinvention
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No Rules Rules is a story of how Reed Hastings, founder of Netflix, created a company that flipped the status quo. Instead of creating more rules as Netflix grew in popularity, Hastings gave his employees more freedom. At Netflix, adequate performance gets a generous severance, and hard work is irrelevant. At Netflix, you don’t try to please your boss, you practice radical candor instead. At Netflix, employees never need approval, and the company always pays the top of the market rates.
Reed Hastings’ Perspective
Reed Hastings co-founded Netflix in 1997. Today the company develops, licenses, and delivers entertainment across various genres and languages to 193 million people in 190 countries. In 1991, he founded Pure Software, which created tools for software developers. After a 1995 IPO and several acquisitions, Pure was acquired by Rational Software in 1997.
Hastings is an active educational philanthropist and served on the California State Board of Education from 2000 to 2004. He is on the board of several educational organizations, including DreamBox Learning, KIPP, and Pahara. He’s also a board member of Facebook and was on the board of Microsoft from 2007 to 2012.
Erin Meyer‘s Perspective
Erin Meyer is a professor at INSEAD, one of the leading international business schools. Her work focuses on how the world’s most successful managers navigate the complexities of cultural differences in a global environment. Erin has taught thousands of executives from five continents to decode cross-cultural complexities impacting their success and to work more effectively across these differences. Erin frequently publishes in Harvard Business Review. In 2019 Erin was listed by the Thinkers50 for the second time as one of the fifty most impactful business writers globally. In 2018, she was selected by HR magazines as one of the top 30 most influential HR thinkers of the year.
A Great Workplace Is Stunning Colleagues
“Once you have high talent density in the workplace and have eliminated less-than-great performers, you’re ready to introduce a culture of candor.”– Reed Hastings
Dream Teams Consist of Stunning Colleagues
The authors argue your first priority should be to build a workplace that consists of stunning colleagues. A stunning colleague is creative, passionate, and productive. Once most of your team is built on stunning colleagues, you can safely call your team a dream team. As well as dream teams performing effectively, individual stunning colleagues will feel valued and satisfied when they are part of a dream team. Therefore, the authors believe an excellent workplace for Netflix is one where the team is pursuing ambitious common goals.
Developing a dream team is the optimum; however, the authors admit that developing these teams can be challenging. The process of creating a dream team starts with effective recruitment. After this, encourage collaboration, a diversity of viewpoints, and discourage politics within the workplace. Netflix’s emphasis on collaboration means they have no rules surrounding cutting the bottom percentage of employees. In doing so, they avoid having employees who are worried about losing their job and instead worry about helping others within their team.
How Netflix Builds Dream Teams
Additionally, Netflix does not have rules around the acceptable topics of conversation to have with managers. Instead, team members are safe to talk to their managers about any topic without fear of retribution. Plus, they are safe to make mistakes as long as they search for improvement after making these mistakes. On top of this, if you have performed well in the past, Netflix gives you greater leeway if your performance is taking a dip.
Successful dream teams are not built on hard work. Instead, success is about being effective. A stunning colleague is not measured against how hard they work but their contributions to the team. When you identify stunning colleagues who are effective, you have to pay these employees at the top of their personal market. This pay should be the maximum end of an estimate of the highest compensation each employee could make at peer firms. Therefore, instead of merely giving a standard raise, the authors suggest giving your employees raises in-line with the market. Similarly, never reduce your employees’ pay if you are experiencing financial difficulty.
Say What You Really Think
Feedback is essential for your teams to become successful. Crucially, you must not hold back information when you are offering feedback due to fear of combat. Frequent candid feedback will help your team consistently grow. The most effective approach is instigating regular feedback sessions. In these sessions, all employees are encouraged to offer candid feedback on all facets of the team’s performance. Coach your employees to give and take feedback effectively.
A Circle of Feedback
Netflix also introduced the concept of a circle of feedback, which was their dedicated sessions for feedback. Every six to twelve months, they ensured all employees took part in a circle of feedback. This is not the same as performance reviews, as these sessions do not encourage people to be candid. Performance reviews are for leaders, while a circle of feedback is for all employees. Therefore, sit your teams in a circle and avoid anonymity and numeric ratings. If you talk about outcomes, do not link them to raises or promotions. Plus, make sure the floor is open to all team members to comment on the team’s current state.
This circle of feedback was inspired by a personal experience of the author, Reed Hastings. Before joining Netflix, Hastings was still extremely busy and frequently away from home. Subsequently, his relationship with his wife also grew distant. It was in couples’ therapy that Hastings learned the importance of being honest and accepting criticism.
The Four As
The authors recommend implementing the 4As to improve the feedback utilized by your team.
Aim to Assist
Your feedback should always be driven by a positive purpose. You should never be giving feedback based on frustration or hate. You can always turn a traditionally negative comment into a positive one by being careful with your words.
Your feedback should always have a potential action. Feedback without an action that could be taken is useless.
As well as effectively giving feedback, you must also learn how to accept feedback. Instead of looking for an excuse when giving feedback, try to relax, and appreciate that feedback is coming from a positive place.
Accept or Discard
Although positive feedback should be accepted, you will also sometimes receive non-constructive feedback. Non-constructive feedback can be discarded.
A Culture of Freedom and Responsibility
Businesses are often filled with ways to control employees. However, the authors argue that Netflix is so successful they have reduced their number of controls and rules as they have grown. One of the best controls you can remove is travel and expense approvals. Design your vacation policy in a way that there’s no need for prior. Neither the traveling employee nor their managers are supposed to keep track of their days on vacation.
When removing travel and expense policies, set the context for spending money upfront, and checking employee claims at the back-end. Suppose people end up overspending, set more context. Encourage your finance department to audit a portion of receipts regularly. This context is necessary for others to understand the results of irresponsible behavior.
Although you will likely encounter expense increases after policy changes, you will make up for this through the gains associated with freedom.
The authors offer one example of a Netflix employee in Taiwan who had been reimbursed for more than $100,000 over three years. He was able to do this without his manager catching it. He was canned after Netflix’s finance department ran an audit of his receipts. Despite this, Netflix still benefited from loosening their expense policies.
“Many employees will respond to their new freedom by spending less than they would in a system with rules. When you tell people you trust them, they’ll show you how trustworthy they are.”– Reed Hastings
The Keeper Test
“If you have a team of five stunning employees and two adequate ones, the adequate ones will sap managers’ energy, so they have less time for the top performers, reduce the quality of group discussions, lowering the team’s overall IQ, force others to develop ways to work around them, reducing efficiency, drive staff who seek excellence to quit, and show the team you accept mediocrity, thus multiplying the problem.”– Reed Hastings
After the dot-com bubble burst, Netflix introduced a specific test allowing them to decide which employees to keep within their team. They had to lay off one-third of their then 120-person staff. Specifically, they decided to encourage leaders to ask themselves, ‘Which of my people, if they told me they were leaving for a similar job at another company, would I fight hard to keep?’ When you need to let someone go, do not waste money on some type of PIP. Give this money to the employee in the form of a generous severance payment. Finally, when someone is let go, speak openly about what happened and answer their questions candidly.
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