If you're a big believer in traditional hierarchy, you might have felt a bit of schadenfreude on hearing the news that Zappos is losing about 14 percent of its workforce--210 of its 1,500 employees--as the online retailer transitions to the flattened style of management known as Holacracy.

Specifically, Zappos told the The Wall Street Journal that those 210 employees had accepted buyout packages including three months of severance pay.

But if you've experienced or studied the indelicate art of management transitions, you know it's way too early to judge Zappos's move one way or the other. It's also flat-out wrong to make that judgment based on the departure of those employees, or the headaches of those who remain.

The Clashing of Core Values

Zappos CEO Tony Hsieh believes the transition could take up to five years. And he put a believably positive spin on the 14 percent attrition rate: "Another way to look at it is that 86 percent of employees chose to walk away from the 'easy money' and stay with the company," he told the Journal.

Examine Zappos's list of 10 core values, and you'll see that--because of the Holacracy transition--two of them are now in something of a conflict. 

The second core value is "Embrace and Drive Change." Which is perfectly aligned with any managerial transitions. But at Zappos, pursuit of that second core value is now precluding fulfillment of the third core value: "Create Fun and a Little Weirdness." The reason? Transitions are not always fun.

For example, in an effort to learn the new system of flattened management, employees are spending five extra hours a week in meetings. Other employees are wondering about their career trajectories. If a company is ridding itself of hierarchical layers in an attempt to embrace Holacracy, then what is supposed to serve as motivation--and recognition of a job well done--in lieu of traditional promotions and pay raises? 

And perhaps, for Hsieh and Zappos, the stakes of happiness are a little higher, given how much the leader and his organization have invested in branding themselves as happiness providers. Hsieh's 2010 book, Delivering Happiness, explained his philosophy in building an organization in which the first core value is to "deliver wow through service." The successful execution of these philosophies helped Zappos grow to the point where Amazon acquired it for $1.2 billion in 2009.

The Pros and Cons of Holacracy

Today, Zappos acts as an independent subsidiary. Its service-oriented philosophies have helped to create a department within Zappos called Zappos Insights, which consults other companies on how to make their cultures more Zappos-like.

Viewed from that perspective, you have to applaud Hsieh and his team for attempting to improve on a culture that was far from broken--a culture they had literally monetized. If anything, Zappos's service-first culture had joined the pantheon of business cultures cited frequently in case studies as examples of how you can breed fun in the workplace and inspire customer loyalty. Scan a typical article about the topic, and you'll find Zappos listed as a stellar example, along with the other usual suspects (Southwest Airlines, Whole Foods, Patagonia).

Still, the larger question looms: Is Holacracy effective? You can find strong arguments on both sides. 

In its favor are the successful businesses that have adopted similar structures: medical device companies like Davita, manufacturers like Semco and W. L. Gore, service companies like Buurtzorg and Precision Nutrition, and tech companies like Menlo Innovations and Valve Software. "All of them are highly profitable with lower turnover because they have self-managed people who don't report to managers," notes Chuck Blakeman, founder of the Crankset Group, which also operates without managers.

On the flip side is the case made not long ago by Bob Sutton, professor of organizational behavior at the Stanford Graduate School of Business. Sutton argues that even organizations claiming to be flat have power structures. He is skeptical about Holacracy as an antidote to hierarchies. In an essay on LinkedIn, he notes:

Eliminating titles such as "manager" or "supervisor" doesn't make the hierarchy disappear. For example, there has been a lot of talk lately about Zappos's ongoing reorganization into something they call a "Holacracy." Some headlines suggest that the company is getting rid of bosses--that isn't quite right. While more power is being pushed down the hierarchy, it persists under the new structure.... And, while Zappos is getting rid of a lot of titles, note that Tony Hsieh is still called the CEO.

But that doesn't mean Zappos is wrong to experiment with its management structure. Today, we accept managerial roles and titles as a fait accompli. It's easy to forget that many of the modern-day management structures for knowledge workers originated in widget-making factories at the turn of the previous century.

Indeed, the hierarchical structures of many high-tech service companies are rooted in Frederick Winslow Taylor's notions of wringing every last ounce of efficiency from a factory's mechanical processes and its workers' physical movements.

As central as Taylor's work has become to the management canon, there's no denying that he lived--and managed--in a different United States. His country was less democratic and more reliant on manual labor. You can debate whether Zappos's experiment in Holacracy will prove to be the best thing for the company, but you can't blame Hsieh for experimenting.

That's what entrepreneurs are supposed to do. Under Hsieh's leadership, the company has: 

  • Stopped posting many jobs online, replacing the postings with an immersion program exposing job candidates to life behind-the-scenes at the company.
  • Announced plans to test "surge pricing" pay for its customer-service employees. Just as Uber uses an algorithm to up its rates at busy hours, Zappos will use an algorithm to pay employees more than their average ($14.50 an hour) during busy shifts.
  • Provided every new hire with the opportunity to leave the company with a month's pay if they're unhappy. About 1 percent to 3 percent take the money, notes the Journal.

Now think about how much you can learn about hiring and managing employees because Zappos has nurtured a culture like this. Zappos's track record strongly suggests that when it comes to experimentation and employee happiness, the company knows what it's doing. You could argue its move toward Holacracy is off to a rough start. You could argue that it's quixotic. You could even argue that it's sheer branding. But it's probably wiser to view these early aches as a transitional hiccup of adversity that the company will eventually overcome.

Published on: May 21, 2015