This essay analyses Holacracy and leadership through the lens of Tony Hsieh and the “Zappos family” in the growth and success of online retailer Zappos. The first two sections focus on the Zappos timeline, the change process leading to Holacracy, and the development of organisational culture over this period. The final two sections focus on the role of leadership and management in Holacracy, and how teams form and function within a complex organisation.

Contents:

1.1. The Change Process at Zappos

1.2. The Red Tape Crisis and Switching to Holacracy

2.1. Organisational Culture at Zappos

3.1. How Zappos Organises the Roles of Leadership and Management

3.2. Comparisons Between Holacracy and the Self-Management Model

4.1. The Organisation of Teams at Zappos

4.2. Team Formation, Progression, and Development at Zappos

4.3. Key Takeaways

1.1. The Change Process at Zappos

Since its founding in 1999, Zappos has seen considerable change in its organisational culture, driven by an expanding workforce, annual turnover, and diversification of product offerings. One way of analysing how change has affected the company is through Greiner’s 1998 Growth Model, which assumes that growing organisations move through five distinguishable phases of growth, each ending with a management crisis requiring new techniques to resolve.

Co-founders Nick Swinmurn and Fred Mossler began drop-shipping shoes in 1999 under shoesite.com (Zappos, 2019). When early investors turned away, a 25-year-old internet entrepreneur named Tony Hsieh, made an angel investment to keep the company afloat. Hsieh, a strong business manager with experience scaling an internet company, took over leadership in 2003, resolving the leadership crisis and marking the end of Greiner’s proposed Phase 1. Hsieh introduced 365-day returns and customer service 24/7, giving the company, (now “Zappos”) a competitive advantage in the online shopping industry; sales grew from $8.6mm in 2002 to $184mm in 2004, marking a strong Phase 2 evolutionary period (SGB, 2006). Soon after, Zappos faced a Crisis of Autonomy, and in order to attract more serious and motivated employees, moved 78% of the workforce from San Francisco to Henderson, NV (Zappos, 2019).

Over the following “Delegation” evolutionary period, Greiner (1999) attributes growth to heightened motivation and responsibility for lower-level managers. In Nevada, Zappos formed a strong organisational culture by investing heavily in employees; introducing a month-long training “bootcamp” for new hires, crowd-sourcing the “Zappos 10 core values” (See Appendix), and engaging senior management in mentorship (ZapposInsights; 2022; Peake, 2019).

Contrary to Greiner’s model, motivation was driven not by profit centres and bonuses, but by building a more attractive, open and honest working environment that let employees directly drive change by being “part of something bigger”; their starting rate for many new hires was uncompetitive at $11 per hour and their famous “offer” discouraged money-motivation by paying unhappy employees $100 (and later $3,000) to quit (Zappos, 2019; R. Feloni, 2016; Askin & Petriglieri, 2016).

Greiner (1998) theorises that when lower-level managers begin coordinating plans, money, technology and personnel towards their own incentives, the resulting Crisis of Control will be solved by implementing new coordination techniques. This was not an obvious change for Zappos, instead Fortune (2009) listed Zappos as one of its “Best Places to Work” for its dynamic, interpersonal work environment.

They boasted ever-higher revenues, and accepted an acquisition offer from Amazon, which Hsieh saw more as a “joining of forces”; Amazon kept senior management while giving them access to their technology, metrics and warehouse operations, enabling horizontal expansion into clothing, houseware and cosmetics (Hsieh, 2009; Askin & Petriglieri, 2016). Rather than seeking to gain control, shareholders and directors were exchanging it for Amazon stock, and netting large personal fortunes in the process (S. Lacy, 2009).

1.2. The Red Tape Crisis and Switching to Holacracy

The Red Tape crisis arises out of a proliferation of systems and programs that begin to exceed their utility. Further to this, Greiner (1998) says that rigid and formal teams are not sophisticated enough for large and complex organisations, and that spontaneity and matrix-type organisation provide the path to further growth.

In a 2016 interview, Hsieh said that “for many years prior to 2012 I had a nagging sensation that Zappos kept building bureaucracy into the corporate structure”, and upon learning of it at the Conscious Capitalism CEO Summit, viewed Holacracy as the tool for achieving self-management and entrepreneurship at Zappos, done in a bid for longevity, and in order to “avoid losing the startup edge” (Feloni, 2016).

Askin and Petriglieri (2016) characterise the shift to Holacracy by its ability to “increase collaboration, give employees freedom to make full use of their skills, and eliminate bureaucracy and bottlenecks”. Zappos employee Maggie Hsu described Holacracy as “a hierarchy of work and not people” (Bowles, 2014).

Zappos trialed Holacracy in early 2013 with the HR department, before announcing a company-wide transition over 2014. After missing this deadline, Hsieh removed the divisions between the remaining departments, eliminating many manager titles and offering employees 3–15 months of pay if they quit, with a new five-week deadline (Askin & Petriglieri, 2016). To stagger a disrupted workflow, the “Supercloud” project team was given nine extra months to make the transition (Feloni, 2016). By January 2016, 260 employees had taken the severance package, and around 360 employees had been hired.

In a 2013 interview, Hsieh said that “every time a city doubles in size, productivity per resident goes up 15%. Companies, in contrast, see productivity per capita fall as they grow.” When in 2015 the company became fully Holacractic, the turnover growth rate increased by 50%, giving credence to Hsieh’s concerns (Feloni, 2016). Upon reflection, Hsieh said it would have been better to transition earlier.

2.1. Organisational Culture at Zappos

Organisational culture refers to the system of shared meanings and norms, expressed through forms such as symbols and rituals in organisations (Ritti, 2009). Schein (2010) identifies three components as the makeup of organisational culture: artefacts, espoused values and basic underlying assumptions, where “artefacts” are visible structures and processes that in reality, may be hard to decipher (Schein, 2010. p.26).

At Zappos, these include the design and layout of the campus, open offices, and facilities, the free lunches, concierge services, medical insurance and “the offer” of a month’s pay to quit (Fortune, 2009). Their sixteen public tours a week convey transparency, and visitors are greeted with horns and cowbells by employees with unconventional “uniform” such as pyjamas and bunny ears (Gurchiek, 2011).

Zappos’s mission statement to “provide the best customer service possible: deliver WOW through service”, is evident in customer service calls, where “Zapponians” don’t use scripts or upsell, and are trained to visit competitors’ websites to ensure they get the products they want; indicative of Hsieh’s ethos that “a company’s culture and brand are really just two sides of the same coin” (Hsieh, 2010). Employees at Zappos are also encouraged to talk freely to anyone, representative of the confidence and respect Zapponians are given by the company, though unsurprising when the CEO regularly tweeted and blogged on his personal website up until his November 2020 passing (Askin & Petriglieri, 2016).

While these “integrating symbols” offer insight for customers and observers, Schein (2010, 2010) makes it clear that all artefacts, while visible, can be misinterpreted, for only those who live within the group understand how they form the daily operating principles for behaviour. An example of this is Zappos’s loose dress-code, lack of capitalised emails, and freedom to self manage; despite being symptoms of, these traits don’t guarantee listlessness — nor workforce innovation and creativity. They are however, products of an informal work environment that fosters work-life integration. Zappos’s “espoused value” of work-life integration is one way they promote engagement, creativity, and innovation.

Creating a college-like atmosphere was something Hsieh went to great lengths to achieve, and pursued long before Zappos existed. He let employees live rent-free in his loft (and later, guesthouse) and hosted large gatherings of close friends and employees. He asserted his conviction in a “tribe”, where “the combination of physical synchrony with other human beings and being part of something bigger than oneself leads to a greater sense of happiness” (Hsieh, 2010. p.80).

Accordingly, the “Zappos Handbook”, compiled of descriptions of Zappos’s culture and brand by customers, employees, partners and vendors, is designed to look like a college yearbook, and is handed out to all new recruits (ZapposInsights, 2022). The book was designed to shortcut the learning process, making “espoused values” more obvious. Other measures were taken to speed this process up: the 4 year pipeline was introduced to offer undergraduates internships and roles while still in college, reducing pre-existing loyalties and helping them identify with the culture while still studying (Caldini, 2001).

The same year Zappos announced they were transitioning to Holacracy, they received 25,000 applications for 250 job openings, a rate five times greater than Harvard (Askin & Petriglieri, 2016). The vetting process involved a high degree of monitoring, with a candidate’s treatment of shuttle drivers and tour guides the principal factor for terminating an application (Nisen, 2013). Across the board, interviewers choose candidates first-and foremost by how much they embodied the “10 core values” (See Appendix) (Wharton, 2016).

From 2013 onwards, the Holacratic work environment defined much of Zappos’s culture. These beliefs and values are typically unconscious, and thus acted upon without as much reflection (Schein, 2010). In Holacracy, managers are no longer present, creating a looser environment with less supervision. Freedom of thought and creativity enables innovation, but comes with stress and ownership for the average employee, who must now deal with harsh decisions and difficult calls instead of throwing these problems to their bosses (Laloux, 2014).

The Holacratic constitution (2022) provides a mechanism to deal with team conflict, making group dynamics less sensitive and more constructive. This infrastructure also gives group members obvious routes when looking for mentorship and coaching. Having a formal system for managing interpersonal conflict is an important feature of Greiner’s (1998) Phase 5 organisation.

3.1. How Zappos Organises the Roles of Leadership and Management

In Holacracy, an organisation structures its leadership by establishing an “Anchor Circle” to govern all domains and express the overall purpose of the organisation (Holacracy.org, 2022). The “Lead Link” and/or governance of this Anchor Circle has the authority of a traditional CEO and shareholder roles, with the power to name the organisation and define their own accountabilities. In Zappos’s case, the Alignment Group members facilitate most of this high level governance, with meetings focused on breaking down sub-circle tensions, increasing productivity, and developing new strategies, tasks and performance measures for the organisation (Peake, 2019).

Leadership is streamlined in this Holacratic system when compared to traditional organisations; according to Laloux (2014), “problems, harsh decisions and difficult calls cannot be thrown up the hierarchy to bosses. Instead they must be dealt with within the circles when possible”. The time that was spent dealing with these issues can now be focused on the purposes of the Anchor Circle and organisation as a whole, increasing the function of its leaders.

Solinger et al. (2020) outline the leader as a role model, wherein “they take a moral stance on an issue, convince others to do the same, and together spur change in a moral system”. This description matches Hsieh, who by adopting Holacratic protocol himself, affirmed his moral and ethical convictions to his employees and shareholders.

By corroborating with the day-today Holacratic rules, Hsieh was able to better “Deliver happiness” by showing honesty and humility, commitment to the ten values, and commitment in seeing Zappos succeed; further growing his long list of sacrifices to Zappos, which thus-so-far included cutting his yearly pay to $24, opting to work among his employees in an open office, and selling all his real estate to put the proceeds into the company (Staley, 2013. p.35, p.42).

Critically, inter-circle communication occurs through the role of Rep Link, who 1) reports the tasks assigned to the sub-circle by the Anchor Circle, and 2) notifies Anchor Circle governance of any issues concerning the sub-circle’s capacity to complete a task, which Anchor Circle governance then resolves (Holacracy.org, 2021). Simultaneously, “Circles of one” with high-level authority, such as Chris Peake at Zappos, help teams with a custom assortment of issues. Peake (2019) describes the role as “helping circles evolve and grow”, done by resolving queries and interpersonal issues, and increasing productivity, engagement, innovation and adaptability with coaching sessions. He also acts as “Facilitator” for the Anchor Circle, monitoring Alignment Group meetings.

Mintzberg (2005) and Grint (2005) agree that distinguishing between leadership and management is difficult, with the latter proposing that a manager’s work involves processes and a leader’s role may be more complex (Buchanan and Huczynski, 2017; Smircich and Morgan, 1982). Zappos expresses its Holacratic approach as:

There are no traditional managers in Holacracy. Instead, every employee is a leader of her/his roles and the Lead Link carries just some of those traditional management functions into our world of self-organisation (yet looks nothing like a traditional “boss”) (Zappos, 2019).

The structure of Holacracy means that the degree to which the Lead Link “manages” may vary based on the task and team; ultimately they act more as a degree of control for complex organisations with ever-changing tasks. While they are given the domain to assign roles, priorities, and strategies to circle members, they are encouraged to “let them evolve in the hands of the circle members” (Zappos, 2019). Circle members are also given the power to change constraints and governance procedures for this reason.

#### 3.2. Comparisons between Zappos and the Self-Management Model

An alternative approach to management is taken by Morning Star, a California-based company producing, delivering and processing tomato products. Employees establish their own priorities and strategies to reach Colleague Letters of Understanding (CLOUs), which are similar to quotas, and are based on negotiations in a meeting at the start of the year (de Morree, 2016). Morning Star’s self-management approach is described as:

[All employees] are self-managing professionals, communicating and coordinating their activities with fellow colleagues, customers, suppliers, and fellow industry participants, [without being given direction] (Hamal, 2011).

Self-management works when the needs of the organisation are simple, stable, and easy to specify, like the Morning Star supply chain. When interactions are complex and between areas of merchandising, finance and marketing, like at Zappos, the existence of long-term CLOU contracts aren’t possible as tasks are ever-changing and non-routine. But even at Morning Star, all is not self-managed. Hamal (2011) describes Morning Star as a collection of “naturally dynamic hierarchies” based on influence, which in-turn, is based on work and expertise. This is similar to Zappos’s “hierarchy of work, not people” (Bowles, 2014). Temporary hierarchies also form to govern disputes, compensation levels, and to assess performance. Overall, the nature of Morning Star’s supply chain renders the role of Lead Link unnecessary. Employees can operate like a marketplace, with recurring negotiations based on routine, measurable output. Employees are rated and compensated by their individual performance and do not share mission statements with colleagues, discouraging the collaborative culture that is integral to Zappos’s Holacracy. Project-based organisations like Zappos capitalise on shared mission statements, with peers contributing to each other’s performance and reducing the risks of bottlenecks.

4.1. The Organisation of Teams at Zappos

Within circles, roles are defined by their purpose, their domains (that which they may control and regulate as their property), and accountabilities (ongoing activities) (Holacracy.org, 2022). At Zappos, Lead Links use domains such as the Glassfrog and Huzzah platforms to store the roles, responsibilities and policies of their circle. There is a degree to which Zappos’s circles fall under multiple definitions of organisational teams; there is no “Process Breakdown” (break in constitution) caused by a team operating across space, time, culture and organisational boundaries by electronic means, and therefore they may fit the “virtual teams model” criteria outlined by Shin (2005). The framework is sufficiently diverse to fit the “project team model”, as circles can be formed for roles with limited duration and involve a project manager (or Lead Link) (Brown, 2021).

Of conventional teams, circles have the most in common with “Cross-Functional teams”; being made up of a variety of skillsets and specialities, and partially voting for decisions while working under a project manager (Gleeson, 2019). They are considered dynamic beyond traditional divisions and departments, and members have increased familiarity, meaning they are more comfortable with conflict and conflict resolution. Notable differences include how these teams are formed to complete projects, then disbanded upon completion, rather than staying operational with an ongoing purpose. Circles may be disbanded after a task is complete, but at Zappos, this is unusual. Other core roles and accountabilities, such as meeting facilitation and inter-team communication, do not exist by default in Cross-Functional teams; Leinwand and Mainardi (2016) say that this “lack of accountability”, along with “conflicting priorities” hold these teams back.

Holacratic circles are thus a more collaborative and profiled version of the Cross-Functional team, with permanence, core roles and accountability, and protocol for conflict resolution. Leiwand and Mainardi (2016) call this the “capabilities team model” and liken it to a symphony orchestra; “the conductor is responsible for the whole work, but if a soloist needs help, he or she will turn to masters of the particular instrument for guidance”. This is done in Holacracy through Cross-Links and mentorship by the Anchor Circle Facilitator (Holacracy.org, 2022). This team model aims to make it easy for people with different backgrounds, skills, technologies and perspectives to build processes together and drive innovation organically within the organisation.

Complex organisations such Natura and IKEA have implemented cross-functionality into their business model; core departments, such as IKEA’s sustainability team, encourage members to invest in themselves and follow a cross-functional career, reporting to project managers who may not share their specialisms, but who share the same purpose (Dahlvig, 2011). Through this system, they are able to source, manufacture, merchandise and manage relationships with vendors and consultants.

4.2. Team Formation, Progression and Development at Zappos.

The Holacratic constitution is designed for groups working at their most productive rate, or in the fourth stage of Tuckman and Jensen’s (1977) model of group progression. This stage is

characterised by increased data flow, high task performance, openness, and helpfulness. In order to get to this point, Zappos accelerates circles through the earlier stages with a variety of methods. According to Homans (1951), the success of team formation is dependant on three factors; the environment (arrangement-of and access-to facilities, the culture and family values), the external system (given roles and accountabilities) and the internal system (emergent group dynamics): Zappos effects powerfully the environment with their acclaimed culture, online platforms and campus design. They also provide strong external systems guidance by assigning default accountabilities and core roles that connect the organisation. However, The Internal System must be developed organically by Zapponians, and not provided.

Conflict characterises the Storming stage (Tuckman and Jensen, 1977). Zappos (2019) gives freedom to Lead Links, disclaiming that “the initial structure is not etched in stone and enables the team to evolve it based off current reality and real [group tensions]”. This reduces friction, giving teams freedom to explore new strategies while developing more functional Internal Systems. Surpassing the third stage requires that teams increase productivity by evolving strategies and tasks, and by eliminating constraints (Tuckman and Jensen, 1977). These goals are achieved primarily through tactical meetings, where proposals are made by members and resolved by the Rep Link in Alignment Group meetings. Equally, the Facilitator to the Anchor Circle’s role provides mentorship and coaching, often by providing teams with ‘a higher awareness and understanding of their work’ (Peake, 2019). By stage four, groups are cohesive and independent with chemistry and task functions develop to problem solving (Tuckman and Jensen, 1977).

4.3. Key Takeaways

Transitioning to Holacracy provided Zappos with better corporate longevity. Increased self management, collaboration and accountability are critical traits for any Stage 5 organisation, and any firm confident in their culture’s commitment to the “bigger picture” could see large productivity gains from transitioning too. Cultures with money-centric motivation cannot expect loyalty over such transition and these firms could benefit considerably from “delivering more happiness” to their workforce.

Appendix

The 10 values of the Zappos “Family”:

1. Deliver WOW Through Service
2. Embrace and Drive Change
3. Create Fun and A Little Weirdness
4. Be Adventurous, Creative, and Open-Minded
5. Pursue Growth and Learning
6. Build Open and Honest Relationships With Communication
7. Build a Positive Team and Family Spirit
8. Do More With Less
9. Be Passionate and Determined
10. Be Humble

Source: ZapposInsights.com

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