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Extreme Teams

Why Pixar, Netflix, Airbnb, and other Cutting-Edge Companies Succeed where Most Fail

AMACOM

RESULTS AND RELATIONSHIPS

Only Teams That Risk Going Too Far Will Go Far Enough

Netflix was born of a simple idea — provide movies on DVDs delivered via the U.S. Postal Service. This was a radical departure from the approach of the industry leader at the time, Blockbuster, which had more than 9,000 stores filled with rack after rack of videocassettes. The founders of Netflix claimed that they started the company out of frustration with being charged $40 by Blockbuster for a movie rental turned in six weeks late. That story, however, was nothing more than a clever marketing ploy. The truth was that the founders, already successful entrepreneurs, wanted to be the "Amazon of something." They saw that DVD players, then rare, would come down in price and become the preferred technology for viewing movies. Netflix even worked with DVD manufacturers and retailers to accelerate that process. Once it occurred, people embraced the Netflix model — one that offered a vast selection of movies online, rapid turnaround of orders, and a simple low-cost fee structure. The bright-red Netflix mailing envelopes were soon appearing in mailboxes across the country. Blockbuster, which in 2000 was 500 times as large as Netflix, was slow to respond to the Netflix threat — unable to believe that its greatest asset, a vast chain of retail stores, had become a liability. The decade-long battle between the two firms culminated in Blockbuster's bankruptcy — a casebook example of a nimble startup company outmaneuvering a much larger and well-established firm. Netflix continued to grow and is the world's leader in the online streaming of movies and TV shows, with more than 83 million subscribers. It is now moving aggressively into the production of original content with hit TV shows such as House of Cards and Orange Is the New Black. Netflix, with a track record of taking big risks in the pursuit of growth, will likely become the dominant media company in the world.

Netflix is equally bold in its approach to people management. More than 8 million people have downloaded a presentation of the firm's operating principles. Sheryl Sandberg, CFO of Facebook and author of Lean In, suggests that the Netflix "culture deck" may be the most important document ever produced in Silicon Valley. In it, the company describes how it operates and, in particular, its freedom and responsibility culture. Netflix believes in giving its employees a great deal of autonomy but also holding them to high standards of performance. Each year, it strives to do something that reinforces the freedom people have in how they work. For example, Netflix did away with the need for its employees to track their vacation time — they take as much as they need. The key ingredient in making this model work is having the right people. Freedom and responsibility are not worth a great deal if people lack the motivation and capabilities needed to deliver results. Netflix developed its culture deck after the firm's CEO, Reed Hastings, was dismayed after conducting new-hire orientation sessions where up to one out of three new people were shocked by what he told them about the firm's high-performance culture (emphasizing, in part, that they operated as a team and not a family and people need to continually earn their place in the company — otherwise, they would be fired). Hastings held some of his hiring managers accountable for not clearly communicating his firm's culture to those they hired. But he decided that putting the Netflix culture principles in writing would reduce the number of people who wondered, after joining the firm, if they made the right decision. He didn't want anyone thinking the company had engaged in a "bait and switch." The culture was not for everyone, and Hastings wanted new hires to be told what to expect. The culture deck, as a result, was distributed to all potential hires and, thus, by default, became a public statement. Hastings decided to post it for those interested in how his firm operates.

Netflix uses the term "talent density" to describe the level of skill within a firm. High density is a workforce comprised of people who can perform at a level that Netflix describes as extraordinary. It developed the idea of density after the painful experience of laying off one-third of its workforce early in its history due to insufficient cash flow. The firm retained its most talented people and let go of the others. After the layoffs, the firm's leadership was fearful that the company would not make progress on its improvement initiatives because the remaining 80 employees would need to focus on simply running the existing business. But, to their surprise, the work to be done was getting done faster and better with far fewer people. Hastings, the CEO, commented, "We tried to figure out why. And we realized now there was no more dummy proofing necessary ... everybody was going fast and everything was right."A second insight from that period was that those who remained after the layoffs enjoyed working in an environment where everyone could be trusted to do an exceptional job. They wanted to work in a company that consisted only of highly talented people. The joy they felt from this experience was even more than the success that typically resulted from their collective efforts. The company decided then that it would develop an approach to ensure that it retained only extraordinary people moving forward — and not settle for mediocrity in any way.

Netflix believes that most firms suffer from the opposite — which becomes more pronounced as they grow. This occurs because mediocre talent can be tolerated when a firm is successful and has the financial buffer to carry those who are underperforming. In essence, large companies can afford those who are far from extraordinary (versus smaller startup firms that generally don't have that luxury). Netflix further believes that firms, as they grow, create processes in an effort to compensate for a decrease in talent density. Most large firms, for instance, require annual operating plans and conduct regular operating reviews to ensure that their various groups are focused on the right priorities (versus trusting them to do so more spontaneously). Each functional group (such as finance and human resources) develops its own set of processes with the best intentions, but the cumulative effect can create stifling bureaucracy. The problem is that processes are almost always less effective than talent in surfacing and adapting to emerging business challenges and competitive threats. Processes are based on a set of assumptions about what is needed in a given situation and a particular point in time — which becomes a problem when the assumptions on which those processes are based become outdated as things change in a firm's marketplace. This is not to suggest that processes are unnecessary — only that processes are no substitute for talent.

Netflix works hard to avoid the trap of putting processes before people. It gives its employees big jobs and ample latitude on how to perform those jobs. It strives to simplify or eliminate the administrative requirements it places on its people. It also works hard to surround its people with talented peers, which the firm believes is the best perk a company can offer employees. All of which is good news if you work at Netflix. The bad news, at least for some, is that Netflix will not only fire underperformers — it will fire those who are only average. Netflix believes that talent ultimately determines who wins in a competitive battle. The company is tenacious in upgrading talent because it believes the output of an extraordinary employee is 10 times that of an average employee. It also believes that the best thing it can offer its employees is the experience of working with other highly talented, highly dedicated peers.

The primacy of talent within its culture impacts almost all of Netflix's actions when it comes to people management. The company, for instance, recently introduced a generous one-year unlimited sabbatical for employees who are new parents. The program pays the salaries of those who want to spend time at home with their newborns. Their jobs are waiting for them when they return. In announcing the program, Netflix described the program as a means to attract and retain superior talent. It noted that:

Netflix's continued success hinges on us competing for and keeping the most talented individuals in their field. Experience shows people perform better at work when they're not worrying about home. This new policy, combined with our unlimited time off, allows employees to be supported during the changes in their lives and return to work more focused and dedicated.

Netflix is now clear about its expectations — extraordinary performance from every employee. Effort doesn't matter. Intent doesn't matter. Results matter. This can mean, at one extreme, that those who produce outstanding results with relatively little effort are rewarded based on the outcome they achieve. On the other extreme, those who work hard but fail to produce results will leave the firm. This doesn't mean that they are fired after one misstep, but it most likely means they are fired if there is a second misstep. This firm's approach is all the more striking in that Netflix is competing for talent in a tight labor market. Silicon Valley has a low unemployment rate, with the competition for topflight engineers being particularly intense. With talent in short supply, we might assume that Netflix would be more accommodating of average performers. Not so. The firm's emphasis on superior results begins in its orientation sessions with new hires. One employee, responding to a question about the firm's culture, observed:

I currently work for Netflix — and yes, there is a culture of fear BUT it is pretty much outlined to you on DAY ONE that if you do not perform, they will find you and get rid of you as quickly as possible. So you know what you're in for as soon as you step in the door.

Another employee, echoing the same sentiment but with a touch of dark humor, described a mythological "sniper in the building" whose job it is to locate and kill any Netflix employee who fails to deliver extraordinary results.

Understanding the Netflix approach to talent is summarized in a story that Reed Hastings tells often. Early in his career, Hastings worked for a startup technology firm as an engineer. He would work long hours and neglect some of the more basic office tasks, such as washing out his coffee cups each day. Instead, he let them pile up, and then, at the end of the week, someone took the cups, cleaned them, and returned them to his office. Reed assumed the janitor was washing the cups and putting them back in his office. This went on for over a year until he came in one morning at 5 a.m. and found his firm's CEO in the bathroom washing Reed's coffee cups. Hastings was surprised and asked if he was the person washing his cups each week. The CEO said yes and that he did it because Reed was working so hard, including all-night sessions, and the CEO felt this was something he could do to help him. In telling the story, Reed said this small act of kindness made him want to follow the CEO to the ends of the Earth. And here is the story's punchline — that is exactly where he led the company. The CEO, great with people, was terrible at building products that customers would buy. Hastings's lesson — people skills are important, but the key is having the judgment needed for a company to be successful. The question that Hastings asks of himself and his managers, particularly in regard to talent, is, what does the company need to promote its growth and what decision is needed to move it forward?

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A second defining trait of the Netflix culture is an ability to look beyond its current business model to the future. The company was planning on being the industry leader in streaming movies online while it was still working hard to win the DVD war with Blockbuster. DVDs were just a stop along the path to streaming. It was planning to produce its own TV shows and movies while it was still a distributor of content being produced by well-established studios. It was planning to expand internationally while it was still working to build a U.S. presence. This firm's focus on the future is only in terms of its business model — it impacts how it manages its people. Managers are told that their most important job is to build teams that deliver results. Toward this end, Netflix managers are told to periodically question the skills they need on their teams moving forward. The company, in particular, goes to great lengths to ensure that people are well equipped to address not only the challenges of today but also the challenges of the future. The central questions are as follows:

* What is it your team will be accomplishing six months from now?

* What specific results do you want/need to see?

* How is that different from what your team is doing today?

* What is needed to make these results happen?

After answering these questions, each leader is responsible for addressing any talent gaps in his or her team. In many situations, this means bringing new members into the team with the necessary skills. This stands in contrast to other firms where the emphasis is on developing the existing members of the team through feedback, coaching, and mentoring. Netflix believes that team leaders often fool themselves into thinking that they can develop people who fundamentally lack the skills or temperament needed to be successful. Instead, it asks its managers to recognize when a person does not have the skills needed to be successful. The firm uses what it calls the "keeper test" to set a high standard in determining who stays and who goes. Managers are asked, at least once a year, to "testify" regarding which of their team members they would fight to keep if those people were considering leaving the company to go to other firms. Those whom the manager would not fight to keep should be asked to leave the company.

The focus in Netflix is not on what you contributed in the past but on what you can contribute moving forward. The firm's loyalty is to the future, not the past. Those, for instance, who managed the growth of the Netflix DVD business may lack the skills needed to manage the growth of the firm's streaming business. Those who lead the streaming business may lack the skills needed to drive the production of original TV shows and movies. Those who built the U.S. business may lack the skills to manage the firm's expansion into international business. Netflix does not believe people should inherit future roles based on past achievements if they lack what is needed to drive future growth. To pay and retain people based on their past performance is bad for the performance of the business. It is also bad for the culture because it indicates, particularly to the new or younger people, that the company is not as performance driven as it claims. This management philosophy goes against the practices of many firms where past achievements are recognized by ensuring future roles within the company. Netflix is different. If you can't contribute to the firm's future growth, you are likely out of a job.

Managers, in general, can find reasons to avoid doing the painful work of removing those who are a poor fit to a company's future needs. This occurs for any number of reasons. First, assessing the capabilities of people is not always an easy endeavor. Truly poor performance is evident, but average performance is more difficult to assess given the range of factors that can influence how a person performs (such as the difficulty of the task, the availability of resources, or the cooperation of other groups within a firm). Second, most managers care about their team members as well as their families. Removing people from their jobs should not be an easy task, and for many leaders, it is the most painful part of their jobs. Third, most supervisors seek to avoid the legal entanglements that can occur when employees are fired or demoted. This is particularly true when there is no paper trail documenting the reasons for removing someone from his or her job (or in striving to justify why they would be a fit for future demands). Finally, many managers believe that they can coach their people to higher levels of performance — even though past supervisors have failed in doing so. They assume that they, unlike others, have what it takes to improve the performance of underperforming individuals.

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Excerpted from Extreme Teams by Robert Bruce Shaw. Copyright © 2017 Robert Bruce Shaw. Excerpted by permission of AMACOM.
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