Goodbye Hierarchy, Hello Holacracy?

Zappos recently gained attention-and lost some employees-after implementing holacracy, a system that eliminates managers and distributes authority and decision making among self-organizing teams. Can this model work, and will it catch on elsewhere?

Monday, June 1, 2015
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As CEOs go, Tony Hsieh is never going to be among the most traditional-minded.

Time and time again, the chief executive of Las Vegas-based online shoe retailer Zappos has shown a willingness to embrace the new and untested en route to becoming the top online seller of footwear and one of Fortune's "100 Best Companies to Work For."

For example:

Last year, the organization ditched job postings on sites such as Monster and LinkedIn, and introduced Zappos Insiders, a new social network where job seekers can converse with current Zappos employees and chat up recruiters directly.

Also in 2014, Zappos created the online scheduling platform Open Market-known colloquially as "Om"-that enables its call-center workers to set discretionary hours and uses an Uber-like surge-pricing payment model to compensate these employees.

And, speaking of compensation, Zappos famously pioneered the "pay-to-quit" program, offering employees financial incentives to resign, as a way to weed out those more interested in a paycheck than in doing meaningful work.   

Unconventional as such ideas may seem, it's hard to argue with the success Hsieh and Zappos have had. But his most recent unorthodox move has raised more than a few eyebrows, and has roiled a number of Zappos employees-at least 200 or so thus far-to the point that they're leaving the organization. April, he implemented the holacracy concept at Zappos, which effectively does away with managers within the organization, and distributes authority and decision-making among sovereign, self-organizing teams.

The company first began phasing in the holocracy system in 2013. Hsieh, however, felt Zappos wasn't moving quickly enough toward achieving "self-management, self-organization and more efficient structures to run our business," as he explained in an April 8 memo announcing to employees that the organization would be taking a "rip the Band-Aid approach" to accelerating holacracy's full implementation.

A key part of speeding up this process was eliminating "people managers," which officially became a thing of the past at Zappos on April 30. Meanwhile, Hsieh was quick to point out in the aforementioned memo that the company still has room for those giving up their managerial positions, and all former managers who remain in good standing will keep their salaries through the end of 2015, "even though their day-to-day work that formerly involved more traditional management will need to change."

Indeed, the coming months figure to be a period of adjustment for all Zappo employees, not just those removed from their supervisor roles. Between 10 percent and 15 percent of them, however, aren't sticking around to see how or if holacracy works out.

In May, less than one month after adopting the holacracy concept, Zappos reported that 210 of its approximately 1,500 employees would be leaving the company voluntarily.  

Nevertheless, this type of "no managers" model isn't without its proponents-exiting Zappos employees aside.

For instance, Twitter co-founder Evan Williams put the system in place at his new company Medium, while Whole Foods chief John Mackey has done the same at non-profit organization Conscious Capitalism Inc. W.L. Gore & Associates Inc., the maker of Gore-Tex fabric, boasts on its website that the 10,000-plus employee organization has "no traditional organizational charts, no chains of command, nor predetermined channels of communication."

Still, Zappos is among the most high-profile organizations to shun traditional hierarchy in favor of holacracy. Will other large companies follow its lead?

Don't count on it, experts say.

"As with any big new idea in management, we'll see firms flirt with it," says Rita Gunther McGrath, associate professor of management at the Columbia Business School in New York.

Most, however, figure to "get discouraged at how hard it is to transition to a totally new way of working, and will relapse into what they were doing before," says McGrath, pointing to Best Buy's Results Only Work Environment program as an example of an initiative that was quickly abandoned when Best Buy CEO Hubert Joly "determined that it needed to be all-hands on deck to turn the company around."

For that matter, the tenets that underpin holacracy aren't necessarily that new, says David Ulrich, the Rensis Likert Professor at the University of Michigan's Ross School of Business.

For generations, "we've learned that, by engaging employees in decisions, they become more committed and involved," says Ulrich, who describes the holacracy model as "looking a bit like old wine in new bottles."

This approach, he says, has gone by many names-participative management, quality circles, empowerment, circle organizations, to name a few.

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"I'm not sure of the unique twists of holacracy, but it looks like it is based on many of these enduring principles," continues Ulrich. "The basic insight is that employees should be more engaged in decision making-through teams or individual involvement-when they are able to make good decisions and willing to work hard on the right things."

Leaders' work, he says, is to "ensure employees have both competence and commitment, so that employees do the right work in the right way."

Of course, not all employees are cut out for such uncertain and ambiguous environments, says McGrath.

"It seems to me that, even with Zappos' culture of 'weirdness,' people are not necessarily happy with a flat organization in which authority and future career progression is not clearly spelled out," she says. "It is a lot of work to install a new management system, and clearly a fair number of people at Zappos were not bought into the idea."

All that said, there are components of the holacracy system that could potentially be applied in the right work environment, says Katalin Takacs-Haynes, an assistant professor of strategic management at the A. Lerner College of Business and Economics at the University of Delaware.

"Perhaps some companies will adopt this type of model for a division, or department, on a trial basis," says Haynes.

A "no-manager" approach could possibly enable tasks and projects to be handled in "a more organic fashion," bureaucratic and administrative tasks may decrease, and employees might have an easier time communicating across departments and projects without requiring managerial approval, adds Haynes.

Still, moving from a traditional hierarchical structure can be disruptive, she adds, noting that a holacracy-type structure might work well in start-ups or tech companies, even if more "conventional" employers aren't likely to go a similar route.

"Employees who want to be successful in such a structure must be very driven and able to organize their work and prioritize tasks well. Some managers might equate losing their job titles and structural leadership positions with being demoted," says Haynes.

"Changes in the job title that accompany such an organizational change might send the wrong message on a manager's resume as well. All this means that other employers need to carefully weigh the pros and cons of administrating structural changes such as moving to the holacracy system."

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