 "Robert I Sutton")
Netflix CEO Reed Hastings strives for high "talent density" at his company. Hastings believes that the company's devotion to putting highly skilled people in every position who take personal ownership for doing great work that helps the company, not just themselves, is the key reason that Netflix persists as a dominant provider of films and TV shows. Netflix makes clear to employees from day one that merely "adequate performance" results in a "generous severance package." Netflix's unwavering commitment to hiring people who deliver star performances day after day - and quickly firing those who don't meet these exacting standards - has propelled fast, smart, and reliable scaling: the company grew from a small founding team in 1997 to roughly 2,500 employees in 2013.
Hastings sees Netflix as akin to a professional sports team. He wants stars in every position and spends the money to get and keep them. Netflix pays top-of-the-market salaries, even for Silicon Valley, and adjusts compensation so that the company stays at the top. Annual compensation reviews are treated as rehiring decisions. Managers ask: What would the person get elsewhere? Is this person so good that he or she would be difficult or impossible to replace? What would we pay for his or her replacement? What would we pay to keep the person? As a result, when the war for talent rages in Silicon Valley, Netflix employees get big raises without having to interview for jobs outside the company or drum up offers. A Netflix executive explained to us how this works: he offered a new engineer from the East Coast about $150,000 per year, which he accepted. Before the engineer arrived in California for the job, however, a market survey indicated that he was paid below the top of the market. So Netflix raised his pay to about $250,000.
The company abhors micromanagement: Hastings's philosophy is that talent density - having a roster of stars who are also team players - means that fewer rules and bosses are needed than at places that don't focus on hiring the best of the best. This commitment persists even as the company continues to grow. Here is Netflix's entire policy on expensing, entertainment, travel, and gifts: "Act in Netflix's best interests." This minimalist approach to management fuels a virtuous cycle. Employees with impressive skill and motivation are attracted by the pay. Then they stay - and work like dogs - because of the autonomy, pride in their work, and lack of friction.
The downside for employees is that there is rarely a drawn-out evaluation and rehabilitation process when someone isn't cutting it - he or she is promptly sent packing. The same Netflix executive who gave the new hire a $100,000 raise described how this Darwinian approach played out in his group. In the prior twenty-four months, twenty-five of his seventy-five-person team had been shown the door. People were rarely let go for weak technical skills. They were fired for "lack of personal characteristics," which included "not proactive enough, they simply take orders but don't contribute their own ideas, or they don't show enough curiosity to question the status quo."
High School Dropouts at Tamago-Ya
Tamago-Ya ("Egg-House"), for example, takes a drastically different approach to hiring and developing people than Netflix. This Japanese company produces organic box lunches and sells them to Tokyo office workers for about $4. Tamago-Ya assembles their lunches near the Haneda Airport, a sixty-to ninety-minute drive from their customers in the Shinjuku business area in downtown Tokyo. The typical order comes from a workgroup that buys twenty to forty lunches every weekday. Each lunch box contains six or more items, and customers have a fairly long list of options. Each lunch is made fresh that morning and delivered warm. Examples of food items include stir-fried beef with oyster sauce, boiled spinach with sesame dressing, coleslaw, and steamed rice. The company takes orders between 9 a.m. and 10:30 a.m. each day. The lunches are delivered by noon that same day - so there is little margin for error in assembly or delivery. Of the sixty thousand to seventy-five thousand lunches that Tamago-Ya delivers each day, late orders are rare and fewer than fifty are wasted (they have a .006 per cent failure rate).
Stanford's Jin Whang, an expert in supply chain management, asked founder Isatsugu Sugahara if his company had a sophisticated computer system for forecasting demand and scheduling. Sugahara explained that Tamago-Ya was decidedly low-tech. The company relies on market intelligence from van drivers - mostly high school dropouts, many of whom were arrested in their youth. These drivers interview and choose the customers in their territories. They reject customers when it will be too difficult to deliver lunches on time . Each driver owns his or her route, and drivers' compensation depends on how many lunches their customers buy and whether they can keep waste low - they earn as much as $80,000 a year.
Tamago-Ya's founder was a high school dropout himself. He is convinced that the methods his company uses to motivate and instill accountability in workers, especially among those crucial drivers, explain why his company has grown and performs so well. By getting to know customers' needs and personal quirks, drivers have the knowledge required to give them superb service. Drivers also feel beholden to the company: they are paid well and strive to reciprocate Sugahara's faith in them by turning in superior performance.
Re-printed with permission from Scaling Up Excellence: Getting to More Without Settling for Less by Robert I Sutton and Huggy Rao. Copyright Random House. All rights reserved
SCALING UP EXCELLENCE: GETTING TO MORE WITHOUT SETTLING FOR LESS
AUTHOR: Robert I Sutton, Huggy Rao
PUBLISHER: Random House
Price: Rs 699
| Large teams can put excessive cognitive load on each member: Robert I Sutton |
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What is the Buddhism-Catholicism approach mentioned in the book?
Our research revealed that the question of whether to insist that an organisation does the same thing everywhere in the same way (Catholicism) versus encouraging people to make adjustments to local conditions (Buddhism) captures the most important strategic decisions. Yes, adaptation to local markets is important. For instance, when Illy Coffee opened stores in India, it required large places with chairs and tables. This wasn't necessary in Italy, where a coffee bar is a stand-up only operation.
Too much flexiblity can undermine the brand. Standardisation leads to efficiency but it undermines employee motivation. There is no easy answer. A skilled leader has to keep his or her eyes open and to keep making adjustments.
What are the benefits of keeping small teams?
Large teams can put cognitive load on each member. Most of us are able to maintain good personal relationships with, say, three or four teammates. But as a group expands, each member devotes more time to coordination chores (and less time to actually doing the work), more hand-offs between the growing cast of members are required (creating opportunities for mis communication). For example, a basic work unit at McKinsey is one engagement manager and three other members. Says Intuit's CEO Brad Smith, "Our development teams can be no larger than the number of people who can be fed by two pizzas. It helps them stay nimble and make quick decisions."
What should start-ups do to promote mutual accountability?
Create an organisation where people feel that they own the place and the place owns them. It all starts with pride. Look at organisation s like Pixar, innovation consulting firm IDEO and BMW. In these companies, people are hired, promoted, and rewarded not just for doing work, but for feeling obligated to make sure that everyone around them does so as well. It is easier for start-ups to inculcate accountability among their employees because they are small. Founders such as Steve Jobs of Apple and Marc Zuckerburg of Facebook created the culture of accountability right from the early days.
Robert I Sutton
Professor of Management Science and Engineering, School of Engineering, Stanford Graduate school of business
Professor of Management Science and Engineering, School of Engineering, Stanford Graduate school of business
