Zappos’ Holacracy Shrewd Move to Improve Return on People

Tony Hsieh’s latest move to downsize 14% of Zappos employees in a shift to holacracy, or self-directed, manager-less teams, is being watched with interest by corporate middle managers everywhere. Story: http://www.businessinsider.com/tony-hsieh-self-management-memo-to-zappos-employees-2015-4.

Hsieh has a successful history of thinking outside the (shoe) box. A successful experiment replacing bosses with teams who step up to take on more accountability to create a bright future for the company they love will likely lead to a domino effect in Silicon Valley and beyond.

The interesting element to all of this is the effect on Zappos’ Return on People. Each year, I construct the Return on People Report (watch for it here in late June), which is based on calculating the Profit Per Employee for over 500 companies in 72 industry categories. The average profit per employee in recent years has been in the range of 65K, with some firms achieving over $1M… and some firms LOSING hundreds of thousands of dollars per employee.

Many small to mid-size companies that I speak to initially have a profit per employee in the 5-10K range – not even enough to give everyone a good raise, let alone fund growth and impact! Many set the bar higher after seeing what’s really possible. I have numerous emails from companies who have doubled or even quadrupled their profitability as a result.

In speaking engagements, I always ask participants what the fastest way to increase profit per employee is. The “right answer” of course is to decrease the number of employees! Now, for most organizations, that’s exactly the WRONG approach, because employees are the sole source of the talent, ideas, imagination, creativity, and sheer “roll up your sleeves and get your hands dirty” WORK that adds value to customers and creates competitive advantage. As long as your people are creating value, you want MORE of them in order to improve your Return on People (and, after all, we measure ROI, ROA, ROE, ROC and more… why not ROP?)

Throughout the recession, there was a clear trend by leading companies to increase or maintain their staff, while sub-performing companies took the easy way out and downsized to improve short-term numbers. As a veteran of an organization that downsized 120,000 people worldwide in the mid 1990s and eventually vanished because you can’t cut your way to growth, I’m not a fan of downsizing to cut costs.

Yet in a couple of specific instances, downsizing makes perfect sense because it increases the value of the company beyond just the short-term impact of cutting costs. Automation and outsourcing are two of these instances where more value can be created for customers AND the company through those strategies.

Hsieh now offers a third strategy that should have everyone paying attention. What if downsizings are purely removing unnecessary overhead – costs that shouldn’t be there in the first place – while unleashing a “behave like owners” accountability amongst talented employees who are capable of being self-directing? Again, from experience, I know what it feels like to be merely overhead – during the downsizing I mentioned, I ended up with less than a handful of employees – great folks who were actually driving revenues, while I was not. Thus, I volunteered for a downsizing package, realizing that I was not delivering much value to the organization and that my team was perfectly capable of stepping up and getting the job done.

The downside is that not every employee is what I call a Racehorse player who lives the culture AND performs at a high level. Too many employees are show horses, plow horses (B players who either destroy the culture or fail to achieve their goals), or downright donkeys (those who fail on culture AND performance). Those are NOT the folks who should ever be turned loose to be part of a self-directed team.

Unlike Zappos, which has a fully engaged and talented workforce, most companies have too many marginal players and too few racehorses to create and sustain a successful holacracy. However, the takeaway is that every company should strive to attract the kind of talent that would thrive in a holacracy structure. In doing so, companies will automatically increase their Return on People. With a higher return on people, a lot more investment and growth becomes possible in your business!