At Zappos, Pushing Shoes and a Vision - Photo

At Zappos, Pushing Shoes and a Vision
Photo

Tony Hsieh, chief executive of Zappos, at the trailer park in Las Vegas that he both
owns and calls home. Credit Brad Swonetz for The New York Times

On a sizzling June morning in Las Vegas, 10 Zappos.com employees sat in an
air-conditioned conference room decorated with “Star Wars” memorabilia and
a mural of Darth Vader. They had gathered for a weekly meeting to discuss new
internal software, the sort of routine get-together that keeps corporate America
humming.

But like all meetings these days at Zappos, the online merchant best known for
its shoes, this one followed a strict format determined by a radical self-
management system called Holacracy. The goal of Holacracy is to create a
dynamic workplace where everyone has a voice and bureaucracy doesn’t stifle
innovation.

At Zappos, this means traditional corporate hierarchy is gone. Managers no
longer exist. The company’s 1,500 employees define their own jobs. Anyone can
set the agenda for a meeting. To prevent anarchy, processes are strictly
enforced. At the June meeting, a trained facilitator, in this case a young bearded
man wearing a blue baseball hat, followed the Holacratic method by asking
attendees to “get here, get present, get now,” and encouraged everyone in the
room to briefly check in.

Photo

A shopping area made out of shipping containers is part of an effort to enliven downtown Las Vegas.
Credit Brad Swonetz for The New York Times

“I’m a little sleepy,” said a wiry man.

“It’s warm out,” was the next reply. “I’m also sleepy.”

“I’m doing a Zumbathon for three hours this afternoon,” one woman said.

“My hands smell like oranges, so I’m a little distracted by that,” said Danielle
Kelly, a former call center worker who is helping bring self-management to
Zappos. “Also, I’m in this room for five straight hours of meetings.”

Next up was Tony Hsieh, 41, who has run Zappos for 16 years and is the person
who insisted that the company adopt Holacracy. “I feel Danielle is being
overdramatic,” he deadpanned. “But I prefer her being overdramatic to passive-
aggressive.”

Mr. Hsieh (pronounced Shay) is a minor celebrity in the technology industry. A
son of Taiwanese immigrants and a graduate of Harvard, he sold his first
company, LinkExchange, to Microsoft for $265 million. He then invested in
Zappos, became its chief executive and sold it to Amazon for $1.2 billion in
2009.

Since then, Mr. Hsieh has managed to preserve Zappos’s reputation as a fun
place to work. The youthful work force is heavily tattooed; the dress code is
aggressively casual. Desks are cluttered with giant stuffed animals, and sound-
emitting sculptures designed by the Blue Man Group line the walls. “Create fun
and a little weirdness” is written in the Zappos corporate charter.

But as Zappos grew, innovation slowed. The staff expanded, more managers
joined the ranks, and the freewheeling culture lost momentum. “We had gone
from being a fast speedboat to a cruise ship,” one longtime employee said.

The boss felt it too. “A lot of people in the organization, including myself, felt
like there were more and more layers of bureaucracy,” Mr. Hsieh said.

Photo

A trailer park in Las Vegas. In addition to introducing a self-management system at his company, Mr.
Hsieh is spending $350 million to revitalize the city’s downtown. Credit Brad Swonetz for The New York
Times

Mr. Hsieh knew his company needed a fix. But at Zappos, conventional team-
building exercises would not suffice. He needed to get weird. After learning
about Holacracy in 2012, he decided it was just the thing for Zappos.

At the same time, Mr. Hsieh embarked on another lofty project: an attempt to
revitalize downtown Las Vegas, a dilapidated area miles from the Strip.

He has invested $350 million of his money in real estate, redevelopment, small
businesses and venture capital funds. A former casino became a hangout for
Zappos employees, stocked with board games instead of slot machines. A
vacant lot is now a trailer park crammed with shiny silver Airstreams that are
rented out to visiting computer coders. He moved into one trailer a few months
ago and keeps a pet alpaca there. He calls the community Llamalopolis. It is the

anti-Vegas.

Either one of these undertakings could be a full-time job for an idealistic
multimillionaire. But Mr. Hsieh has fully immersed himself in both the
transformation of his company and adopted city. “A lot of companies talk about
work-life balance,” Mr. Hsieh said. “We’re more about work-life integration. At
the end of the day, it’s life.”

These days, Mr. Hsieh has one other job as well: quelling the doubters.

Neither of his paradigm-changing projects has proceeded smoothly. Two years
into Holacracy, Zappos is no workplace utopia. Downtown Las Vegas has some
new shops and restaurants, but problems like homelessness and unemployment
persist.

Mr. Hsieh has already proved he can build and run successful companies. He
translated that experience into a second career as a business visionary, the
author of the book “Delivering Happiness” and a motivational speaker. But
now, while betting his fortune and reputation on his most ambitious visions to
date, Mr. Hsieh’s hot hand appears to be at risk of going cold.

In 2012, Mr. Hsieh traveled to Austin, Tex., to give the keynote speech at the
Conscious Capitalism C.E.O. Summit, a gathering of progressive executives.
There, he heard a presentation that was strange enough to get his attention.

On the stage was Brian Robertson, who invented Holacracy at his start-up,
Ternary Software. Mr. Robertson, a computer programmer with no training in
human resources, let alone occupational psychology, seems an unlikely
candidate to lead a workplace revolution. At Ternary, Mr. Robertson innovated
his practices on the fly, testing his approach to self-management . The end
result was what he refers to as an “operating system” for organizations.

Photo

The offices of Zappos are meant to encourage “fun and a little weirdness.” Credit Brad Swonetz for The
New York Times

After peppering Mr. Robertson with questions, Mr. Hsieh was convinced.
Zappos would go Holacratic. The transformation began in 2013 in certain
departments, but only in recent months has the entire company taken the
plunge.

Nothing about Holacracy is easy to understand. In place of a traditional
organizational chart are concentric circles of responsibility. Employees get to
choose which circles they belong to and what projects they work on. The jargon
is relentless. At meetings, “tensions” are resolved. People don’t have one job;
they have multiple “roles.” “Lead links” are designated to communicate
between circles. Everyone must use the Holacracy software, called Glass Frog.

Such self-management remains the exception in the workplace today, yet its
advocates constitute a small but growing movement. Holacracy has other
adherents, including the David Allen Company, a consultancy, and Medium,
the blogging platform started by the Twitter co-founder Evan Williams, though
none of the other users are as large as Zappos.

“I feel like I’m in control without being controlling all the time,” said Ruben
Timmerman, who adopted Holacracy at Springest, a 25-person online
education company he founded in Amsterdam. “The team is more efficient and
more creative because of the sharing, and also more accountable. It has
definitely helped us.”

At Zappos, Mr. Hsieh seems to regard Holacracy as a way to revive the close-
knit community feeling that made the company so special 10 years ago, when it
was just a few hundred people taking on the giants of e-commerce. “Once you
have that level of friendship, there’s higher levels of trust,” he said.
“Communication is better; you can send emails without fear of being
misinterpreted; people do favors for one another.”

If only it were so simple. Holacracy has been met with everything from cautious
embrace to outright revulsion at Zappos, but little unequivocal enthusiasm.

“There’s no putting rose-colored glasses on it,” said John Bunch, who is leading
the Holacracy push throughout Zappos. “We’re just taking baby steps.”

“It is really painful and slow at first,” said Christa Foley, a 10-year Zappos
veteran.

Even Josh Pedro, who is in charge of managing Zappos’s public relations,
doesn’t sugarcoat the situation. “It was a weird transition,” he confessed.

Photo

The offices of Zappos. Credit Brad Swonetz for The New York Times

Ms. Kelly, the former call center worker, applauded Holacracy for giving even
the lowest-paid workers a voice. “A person who just takes phone calls can
propose something for the entire company,” she said. “It’s empowering
everybody to have the same voice.”

But she said that the procedural formality of Holacracy, the ever-expanding
number of circles and the endless meetings were a drain on productivity. “It’s
taking time away from getting the actual work done,” she said. This was the
same day as the software meeting, and as if still in disbelief, she said once
again, “I have five hours of meetings today.”

Nonetheless, Zappos is pushing ahead with Holacracy.

Later in the day, Mr. Hsieh was back in the “Star Wars” conference room with a

different group of employees. For the animating force behind a billion-dollar
company, Mr. Hsieh is disarmingly understated. He wears a uniform of a black
Zappos T-shirts and jeans, and speaks to colleagues in a soft monotone. He
works for just $36,000 a year, forgoing a big salary or stock options in
exchange for the autonomy to run Zappos however he sees fit.

The meeting’s agenda centered on compensation. As Zappos went Holacratic,
employees were initially encouraged to keep doing their existing jobs, or roles,
and assigned to circles with their colleagues. Salaries would remain the same
for the time being, too. But two years in, employees are leaving their original
circles and taking on new roles. Priorities are shifting, and no one, not even Mr.
Hsieh, is sure how to pay people at a company with no job titles and fluid roles.

At the meeting, Mr. Hsieh wanted someone to investigate a new system that
would allow everyone at the company to see how many hours any employee had
worked on a particular task, in keeping with the Holacracy vision of radical
transparency. No one volunteered.

“This is not getting anywhere,” he said. “There’s no easy short- or medium-term
answer.”

Finally, Mr. Hsieh asked Mr. Bunch if he would look into it. Mr. Bunch
demurred, saying he had too much to do. Mr. Hsieh pushed again, and Mr.
Bunch relented. Zappos may not have a hierarchy, but it was clear who was in
charge.

In 2013, Mr. Hsieh moved Zappos from a comfortable campus in the suburbs to
the former Las Vegas city hall, in the center of the downtown mix of dive bars,
weekly motels and vacant lots. This decision did not deliver happiness to all his
employees.

Photo

Tony Hsieh, center, has been the company’s chief executive for 16 years. Credit Brad Swonetz for The
New York Times

But Mr. Hsieh had a vision. In the same way that Holacracy might get Zappos
employees collaborating again, injecting bodies and businesses might revitalize
a blighted neighborhood. Mr. Hsieh also had $350 million of his own money to
spend on the idea.

While moving the company, Mr. Hsieh also founded the Downtown Project,
allocating $200 million to buy about 60 acres of real estate. The remaining
money was split into thirds, $50 million each for small-business investments,
venture capital stakes in technology companies and support for education and
the arts.

By 2013, new life was coursing through downtown. A few upscale restaurants
sprang up. Then came a complex constructed out of shipping containers that is
home to a salon, a bar, a toy store and a candy shop. Now there is an
independent bookstore, a gourmet doughnut shop, a vegan restaurant, a sushi

bar and a yoga studio. Foot traffic is up, and crime is down. Last year, Mr.
Hsieh gave up his sprawling condominium on the 23rd floor of a luxury
apartment building and moved into the trailer park.

Mark Guadagnoli, a kinesiology professor of the University of Nevada, Las
Vegas, who also specializes in optimizing performance and communication in
the workplace, has lived in the city for 20 years. “When I moved here, I would
go downtown and be uncomfortable. Then it got worse and worse,” he said.
“Now it’s a really fun place to go. It’s a destination. Anyone who says the
Downtown Project has not made a significant and lasting impact on Las Vegas
is crazy.”

Still, change in downtown Las Vegas is slow going. Homelessness remains
endemic. Quality housing is in short supply. As a result, many Zappos
employees are still living in the suburbs and commuting to work. Building
street life in a city where the temperature routinely hits 100 degrees has its
challenges. Shops and restaurants catering to a new creative class have opened,
but few are brimming with business. Many are hemorrhaging money. Some,
including a co-working space and a flower shop, have closed.

As for the start-ups funded by Mr. Hsieh — who personally lured many
entrepreneurs to Las Vegas with pitches about starting a Silicon Valley in the
desert — a few seem to be doing well, but several have shut down. And in a
devastating blow to the community, three entrepreneurs funded by the
Downtown Project committed suicide from January 2013 to May 2014.

Last September, the Downtown Project fired 30 of 100 support staff employees,
and Mr. Hsieh reportedly stepped away from his leadership role. That
prompted David Gould, a liberal arts professor at the University of Iowa whom
Mr. Hsieh had persuaded to move to Las Vegas for the Downtown Project, to
write an open letter accusing his patron of incompetence and mismanagement.

“We have not experienced a string of tough breaks or bad luck,” Mr. Gould
wrote, just before he quit and moved back to Iowa. “Rather, this is a collage of
decadence, greed and missing leadership.”

In late May, Mr. Hsieh took the stage at a Zappos all-hands meeting at a theater
in downtown Las Vegas. These are usually jovial affairs featuring circus
performers and the like, but this gathering was more reflective. By some
measures, Zappos was thriving, Mr. Hsieh said, sharing business updates from
the quarter. But he also acknowledged that the transition to Holacracy had not
been going smoothly.

Six weeks earlier, Mr. Hsieh sent a 4,700-word email to the entire company
with an ultimatum: Embrace Holacracy or accept a buyout. The financial terms
were generous, and 210 employees, or some 14 percent of the work force, took
the offer.

Photo

John Bunch is leading the adoption of Holacracy at Zappos. The company acknowledges that it has
been a bumpy transition. Credit Brad Swonetz for The New York Times

After many employees left, Mr. Hsieh acknowledged that some of the remaining
staff members wanted him to resign from the company he built.

The brewing employee discontent reflects the paradox at the heart of any
company’s move to Holacracy. For all of the talk of self-management and
consensus building, the decision to go down this path was Mr. Hsieh’s alone.

Mr. Robertson, the Holacracy creator, frames this choice as the pinnacle of
great management. “By heroically releasing authority into the system’s
embrace, the leader paves the way for an authentic distribution of power

through every level of the organization,” he writes in his book, “Holacracy.”

But at Zappos, it seems that many wish Mr. Hsieh had never made the choice.
Some people want a boss after all.

Pressed for instances of Holacracy’s achievements at Zappos, employees could
offer only pedestrian examples. Mr. Hsieh had shut the bridge connecting the
office to a parking garage, hoping staff would experience more serendipitous
encounters if they all used the same entrance.

But that meant employees had to venture onto the seedy streets to get to and
from their cars, leaving some, especially those working late shifts, feeling
unsafe. So one employee proposed that the bridge be reopened, a motion that
was accepted by the circle that controlled campus operations, essentially
overriding the C.E.O.

Or as a Zappos spokesman described the process, using Holacratic terms: “An
employee (unknown) brought it to the road block role with safety being the
tension. The road block role then took it to the grease and disrupt circle where
it went through the process and was eventually passed with no objections.”

In another case, a shuttle bus driver was able to add an agenda item to a
meeting, requesting that employees not leave trash on the bus. So far, however,
no one could point to any innovations that have improved customer service or
increased sales. Critical issues like how to hire, fire and pay people in a
company with no job titles have emerged as sticking points.

Mr. Hsieh and his acolytes remain adamant that self-management will unlock
the potential of Zappos employees, allowing them to be productive and creative.
“We believe that, over time, the ability for people to be empowered and
entrepreneurial will make people happy,” Mr. Bunch said.

Photo

Danielle Kelly said the self-management system could be both empowering and a drain on productivity.
Credit Brad Swonetz for The New York Times

A tinge of defensiveness in Mr. Bunch’s answers was understandable after a
wave of negative press coverage, with headlines like “Holacracy or Hella
Crazy?” “Banishing the Bosses Brings Confusion,” and “A Holacracy of Dunces.”

And even Mr. Robertson concedes that his operating system for the
organization is not easy, at least not at first. “All the negatives? Those are all
true,” he said. “It can be a long moment of pain and agony.”

But he emphasized that learning Holacracy was like learning a sport — it would

take years to get good at it.

Mr. Hsieh expressed impatience with questions about Holacracy’s rocky start at
Zappos, repeating Mr. Robertson’s mantra that the transition would take time.
“Imagine 10 or 20 aboriginals and you gave them a football rule book,” he said.
“It’s going to take them a while to understand the game.”

After a long day of Holacracy meetings, Mr. Hsieh was relaxing in a temporary
aboveground swimming pool at Llamalopolis, not far from a chicken coop. The
alpaca, named Marley, lingered nearby. (Mr. Hsieh has an affinity for llamas
but says alpacas are friendlier.) With the sun still hanging above the palm trees,
the temperature hadn’t budged, but the heat and daylight didn’t dissuade Mr.
Hsieh from getting the party started. Out came a bottle of Fernet-Branca, a
bitter herbal liqueur, and everyone present took shots out of tiny plastic cups.
As he soaked, the Holacracy sales pitch continued.

“The main thing is that everyone’s voice is heard,” he said.

The idea that all voices in an organization are equally valuable is antithetical to
the way most companies are run. Inexperienced employees, the conventional
wisdom goes, should learn from managers who know what they’re doing.

By contrast, Mr. Hsieh and other proponents of Holacracy argue that by
marginalizing large swaths of the organization, important issues go unresolved
and potential goes untapped.

Similarly, he hopes that with a little economic stimulus, the people of Las Vegas
can create vibrant civic life.

But Mr. Hsieh can’t succeed alone, even with all his money. For Holacracy to
work, he needs buy-in from the 1,500 Zappos employees who chose to stay. For
downtown Las Vegas to thrive, he needs buy-in from the city, from real estate

developers, from the neighbors.

There are glimmers of hope. One Zappos team member said that after months
of torturous meetings, her circle, which promotes Zappos culture, was running
more efficiently. A couple of small businesses were opening up downtown
without funding from Mr. Hsieh.

Just up the street from Llamalopolis was an abandoned motel. Mr. Hsieh had
bought the property and was hoping that Virgin Hotels or the Ace Hotel group
would take it over. He bought another parcel a few blocks farther down the
road, where he hoped to erect housing. Ideally, Zappos employees would move
in, then spend their salaries — whenever they figure out how to pay themselves
— at businesses backed by the Downtown Project.

Mr. Hsieh is a high-stakes gambler, and shooting for the moon is what he does,
said Mr. Guadagnoli, the University of Nevada, Las Vegas, professor, who has
worked with Mr. Hsieh over the years. “These are pretty crazy experiments, but
it’s Tony,” he said. “Sometimes he says things that don’t make any sense, but a
few years later, they make sense. Maybe this is one of those.”

Maybe.