📗 No Rules Rules: Netflix and the Culture of Reinvention

No Rules Rules, by Reed Hastings and Erin Meyer

I loved the boldness of Netflix’s culture deck which did the rounds a few years ago, and Sheryl Sandberg said was “maybe the most important document to come out of Silicon Valley”. In particular:

  • Pointing out how many company values are complete hypocrisy, Enron had great sounding values etc.
  • The focus on hiring the best, and getting out of the way to let them do their job. The policy people talked about the most there being the unlimited holiday, which I witnessed first hand at Improbable

I think we all also hugely admire the two major “reinventions” Netflix has been able to go through:

  • Entering the market in the DVD-by-mail era to gain a customer base, but with the knowledge that streaming was around the corner (Hastings had previously exited a super low-level debugging software co) and the DVD-by-mail business would have to get killed to capitalise on streaming (which reminded me of the ruthless transition Facebook had to make towards mobile, where reportedly there were a couple of quarters where Zuck said he wouldn’t take any product meetings that weren’t about mobile)
  • Understanding that the streaming distribution model was getting commoditised and the importance of going “full stack” into content production, again with massive investments to the long term at a time when you could have grown quarterly profits more on the current business

So I was hyped to get some detail on what happens inside the co to enable this agility. My notes follow

Blockbuster’s miss

  • Blockbuster CEO declined $50m asking price from Hastings & Randolph in early 2000. Blockbuster was $6b co with 60k employees
  • By 2010 Blockbuster had declared bankruptcy

Lessons from Pure Software

  • From Wikipedia: “Pure Software was founded in October 1991 by Reed Hastings, Raymond Peck and Mark Box. The original product was a debugging tool for Unix/C engineers called Purify. After adding new products such as Quantify and PureLink, and doubling its revenue every year for four years, Pure Software went public with the help of Morgan Stanley in August 1995. In August 1996, Pure Software merged with Atria to form Pure Atria Corporation. Later in August 1997, Rational Software acquired Pure Atria, giving Hastings the capital to start Netflix.”
  • Company had become a place with lots of policies and control
  • The company failed to adapt from C++ to Java, Hastings thinks in large part because of the culture, and had to sell

Building up “Talent Density”

  • Patty McCord who ran HR coined the term
  • For top performers, a great workplace has nothing to do with perks, it’s all about the quality of the people around you
  • Performance is contagious. Pessimists, jerks, slackers, bring team down
  • Building a workplace with stunning colleagues should be #1 goal of leadership. Nothing trumps it.

Say what you really think

  • Increase candor, with positive intent
  • “At Netflix, it’s tantamount to being disloyal to the company if you fail to speak up when you disagree with a colleague or have feedback that could be helpful”
  • Importance of candid feedback loops, 360 feedback. Best way to kickstart it is to focus on employee to boss feedback
  • They also do “live 360 dinners”
  • “Only say about someone what you would say to their face”
  • Giving feedback: aim to assist, actionable
  • Receiving: appreciate, accept or discard
  • Do lots of feedback. Not just directs. Hastings received feedback from 71 people in his 2018 report!

Ted Sarandos

  • Chief content officer, pivotal person
  • As a teenager was working in a video store and watched 900 movies it stocked
  • After a low level employee sends a bunch of feedback and a new joiner thinks he’s crazy, Ted says. “Brian, the day you find yourself sitting on your feedback because you’re worried you’ll be unpopular is the day you’ll need to leave Netflix. We hire you for your opinions. Every person in that room is responsible for telling me frankly what they think”

Vacation policy

  • “Well before Netflix, I believed that the value of creative work should not be measured by time. This is a relic of an industrial age when employees did tasks that are now done by machines.”
  • 2017 Glassdoor survey. Americans workers took only 54% of their holiday days. Employees who take more holiday are more performant.
  • Some of their biggest innovations happened when people took time off. e.g Neil Hunt new recco algorithm
  • Crucial for the CEO / leadership to take the holiday to lead by example. Otherwise employees don’t take it

Remove travel and expense approvals

  • “There is no clothing policy at Netflix, but no one comes to work naked. You don’t need policies for everything”
  • Just replaced it broad principles “do what’s in Netflix’s best interest” and “spend money as if it was your own” and trust people
  • Otherwise policies get too complicated, it’s a waste of people’s time to comply
  • Some people will cheat, and overall probably higher cost to the company. CFO estimated 10% more than if there was a formal approval process. But they deemed the benefits and time saved was worth it
  • Cool story of an engineer debugging the app on a new Samsung TV he was able to buy the night before the launch of House of Cards because he didn’t have to go through approvals. Saved a big part of the launch
  • Same “no formal policy” goes for e.g marketing campaign spend
  • These policies are tied to the quality of your people, you need to be able to trust them
  • You still audit a sample of receipts annually and if find people are taking the piss you fire them, even if top performers, to show there are ramifications to cheating

Pay top of personal market

  • Rock-star principle. Study of group of programmers with an exercise, the best one was 20x faster than lowest one
    • Bill Gates: “a great lathe operator commands several times the wages of an average lathe operator, but a great writer of software is worth ten thousand times the price of an average software writer” (Hastings was on Msft board)
  • Netflix doesn’t use pay per performance bonuses “bonuses are bad for flexibility”. You may change goals after
    • Study that contingent pay works for routine tasks but actually decreases performance for creative work. Dan Ariely 2008 study
    • “People are most creative when they have a big enough salary to remove some of the stress from home”
  • Netflix wants to pay what will attract and keep talent, so find out what the prospective employee would make at any other company, and pay just above that
  • They encourage people to take calls from recruiters and ask for the salary offer, then tell your manager if it’s higher!
  • “It costs a lot more to lose people and to recruit replacements than to overpay a little in the first place”
  • Thought: Would have liked them to explain when they put this in place, as doesn’t seem tenable for early days. Presumably compensated by better stock packages at that stage

Open up the books

  • Overshare things, small things, big things, good, bad and others will do the same
  • They actually are radically transparent. All the company financials are published. Tech your employees how to read the P&L.
    • Risk that e.g something leaks or people do insider trading
    • But they feel this outweighs the benefits of people having context to do their job, and reduction in questions that have to go up the chain etc
  • This chapter has a handful of interesting case studies, difficult situations in which you have to decide what you tell employees
  • Talk a lot about your mistakes. People trust you more etc
  • But do it once you’ve established competency. Pratfall effect:

No decision-making approvals needed

  • Innovative cycle steps
    • 1. “Farm for dissent” or “socialize” the idea. Huge users of Gdoc comments for this 🙂
    • 2. For a big idea, test it out
    • 3. As the “informed captain” make your bet. If you have the most context (and because you often get context from above) you don’t need your boss’s approval
    • If it succeeds, celebrate. I fit fails, sunshine it openly, send learnings to everyone
  • “Once or twice a year, at our product meetings, I ask all our managers to write in bets that went will, bets that didn’t go well, and open bets”
  • Performance judged on collection of bets + learnings

The Keeper Test

  • You’re not a family (in which you all stay together regardless of “performance”) you’re a sports team
  • Keeper test: if a person on your team were to quit tomorrow, would you to try to change their mind? Or would you accept their resignation, perhaps with a little relief? If latter, you should give them a severance package now, and look for a star, someone you would fight to keep
    • To reduce fear, encourage employees to do the “Keeper Test Prompt” – ask their managers how hard they would fight to keep them!
  • This increases the talent density
  • They don’t use stack-ranking which “creates internal competition and discourages collaboration”
  • Voluntary turnover at Netflix: 3-4%. American cos average 12%
  • Involuntary turnover at Netflix: 8%. American average 6%
  • So people stay more of their own accord, but the Netflix fires more.

Lead with context not control

  • “If you want to build a ship, don’t drum up the people to gather wood, divide the work, and give orders. Instead, teach them to yearn for the vast and endless sea” – Antoine de Saint Exupery
  • This is something I’ve seen the best managers do
  • Tree trunk not pyramid

Going global

  • Awareness of the “Culture Map” (Erin’s previous book).
  • Particularly for feedback, adapt your delivery to different cultures
XL ... The Culture Map by Erin Meyer - Peter Fisk

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