Making Sense Of Zappos And Holacracy

Steve Denning

“Zappos Says Goodbye To Bosses,” was the recent headline in the Washington Post. “Zappos is going holacratic: no job titles, no managers, no hierarchy,” wrote Aimee Groth in Quartz. “Gurus Gone Wild” wrote my fellow Forbes contributor, George Anders. And also Paul Hebert: “A new word crept into HR’s vernacular last week: holacracy. Better get used to seeing it.”

The cause of the media hysteria is the announcement reported by Ms. Groth that “During the 4-hour meeting, [Zappos CEO, Tony] Hsieh talked about how Zappos’ traditional organizational structure is being replaced with Holacracy, a radical “self-governing” operating system where there are no job titles and no managers.” Zappos has already started and expects to complete the transition by the end of 2014. The fact that it is Zappos that is doing this—a firm that has been hailed by some as a model organization of the future—means that the announcement must be news of some kind. But what?

The hysteria is based on some misunderstandings.

First misunderstanding: Holacracy is non-hierarchical?

The first nonsense in this discussion is the notion that holacracy is non-hierachical. Holacracy, a management practice developed by the entrepreneur, Brian Robertson, in his firm Ternary Software and introduced to the world in a 2007 article, puts a lot of emphasis on consensual, democratic decision-making and getting everyone’s opinion. At the same time, holacracy is explicitly and strongly hierarchical. If you read the introductory article or the Holacracy Constitution 4.0 (2013), you will see that holacracy is hierarchy on steroids: the hierarchy is spelled out in more detail than in any conventional organization you have ever seen.

Basically, in holacracy, there is a hierarchy of circles, which are to be run according to detailed democratic procedures. At the same time, each circle operates within the hierarchy. Each higher circle tells its lower circle (or circles), what its purpose is and what is expected of it. It can do anything to the lower circle—change it, re-staff it, abolish it—if it doesn’t perform according to the higher circle’s expectations. The word “customer” or a reference to any feedback mechanism from the customer doesn’t appear even once in the Holacracy Constitution. The arrangements are purely inward-looking and vertical.

In holacracy, each circle must meet the purpose as defined by its higher circle. That purpose could be to delight customers or it could be to make as much money as possible by taking advantage of customers with “bad profits”: the Holacracy Constitution is silent on what the purpose is. Brian Robertson has expressed the personal hope that the chosen purpose will be noble. But the Holacracy Constitution doesn’t make that hope explicit. Holacracy is neutral on the choice of purpose: neither the customer nor feedback from the customer figures in the Constitution at all.

Holacracy is essentially a set of inward-looking hierarchical mechanisms that connect the circles. Each circle is required to be run democratically and openly, with exhaustively detailed procedures on how things like meetings are to be managed and how decisions are to be made. For those interested, there are even more detailed sets of procedures for other kinds of issues. But each circle, however democratic it is, works within a vertical hierarchy and is required to look upwards for instructions as to its purpose and guidance on how it is doing in response to that purpose. The emphasis on vertical hierarchy should be no surprise because the concept of holacracy is based on the explicitly hierarchical thinking of the authors, Arthur Koestler and Ken Wilber.

Arthur Koestler: The Ghost In The Machine

The founding text is Arthur Koestler’s astonishing but now out-of-print book, The Ghost in the Machine (1967), which is in effect a hymn of praise to hierarchy. It argues that our entire world is made up of hierarchies of one kind or another. Beginning with language, then going on to music, Koestler argued that literally everything in our world, including chemistry and biology (atoms to molecules to cells to organisms), life forms and society are nested hierarchies of entities, which, for lack of any existing word, he called “holons.”

Holons are Janus-faced, in the sense that they both look upward for direction to the hierarchical level above them, and operate internally according to (a) rigid governing rules, (b) flexible strategies, and (c) feedback mechanisms. This perspective, Koestler argues, is correct whether the governing rules are too rigid and oppressive so as to prevent appropriate flexibility in action (pathological hierarchies), or too loose so as to encourage chaotic behaviour (anarchy). In either case, we are still dealing with a hierarchy of holons.

Koestler argued persuasively that this perspective enables us to understand how the mind makes sense of the chaotic signals it receives from the world through the senses and is able to take effective action. It explains how the body functions and how society operates or breaks down. He argues that it is necessary to establish any understanding of human psychology and the evolution of life.

Ken Wilber: A Theory Of Everything

Ken Wilber continued this thinking and developed it further, for instance in his books, A Theory of Everything (2001) and Sex, Ecology, Spirituality (2011). He identifies even more hierarchies: contextual hierarchies, spiritual hierarchies, phonetics hierarchies, stellar hierarchies, hierarchies of cultural worldviews, autopoietic hierarchies, technological hierarchies, economic hierarchies, phylogenetic hierarchies and so on.

“The Kosmos is a series of nests within nests within nests indefinitely, expressing greater and greater holistic embrace—holarchies of holons everywhere!—which is why everybody had their own value holarchy, and why, in the end, all of these holarchies intermesh and fit perfectly with all the others… The universe is composed of holons, all the way up, all the way down.”

Because the word “hierarchy” had come to be associated with oppressive, pathological hierarchies, Koestler hesitantly coined the term “holarchy” to describe value-neutral hierarchies. Wilber adopted the term, while making explicit that “holarchy” and “hierarchy” are synonyms, to be used interchangeably. Neither holon nor holarchy contain any implication that they are self-governing or democratic, except to the extent that each holon must work within its governing rules, whatever they happen to be. A holarchy might be a rigid autocracy or a consensual democracy: it is still a holon within a holarchy. A holacracy is an organization developed from the perspective of holarchic thinking and inspired by consensual democratic values.

Second misunderstanding: No managers in holacracy?

The second misunderstanding in the media is the notion that in holacracy there are no managers. In a holacracy, there may be no one with the title of “manager”, but there are “roles” that are, in every respect except the title, “managers”. Thus Brian Robertson wrote in his basic 2007 article:

“At Ternary, we have a ‘Project Manager’ role, accountable for:

·  Creating and maintaining a project release plan.

·  Facilitating creation of contracts.

·  Invoicing clients at the end of each month.

·  Sending a daily status e-mail to the project team.

·  Holding a retrospective after each phase of a project.

·  Publishing project metrics at operational meetings.…”

The fact that this “project manager role” isn’t called a Project Manager doesn’t mean that there are no managers. Nor does the fact that the accountabilities of the role can be changed in accordance of the governing rules of the circle make him or her any less of a manager in the normal sense of that word.

In fact the responsibilities of the “core roles” in holacracy, such as Lead Link, Rep Link, Facilitator and Secretary, are spelled out in exhaustive detail in the Holacracy Constitution. Any responsibility that isn’t explicitly covered is assigned to one of these roles. To suggest that there are no managers here is absurd.

Third misunderstanding: In holacracy, anything goes?

Most of the media hysteria about the announcement at Zappos stems from these two misunderstandings: no hierarchy and no managers, hence chaos. These misunderstandings would dissolve upon reading Koestler, Wilber, the Holacracy Constitution or any of the related documents. If anything, the degree of hierarchical prescriptiveness in holacracy is mind-boggling.

In fact, to an outsider, it is a wonder that anyone in a holacracy ever masters these detailed procedures without the help of a resident lawyer, or that people ever have time to get anything done and deliver value to customers, given the time and effort needed to master and comply with these immensely complicated internal procedures. It may be that once people get the hang of the arrangements, they’re not as complicated as they look. But holacracy is about as far from an “anything goes” world as you could possibly get.

The real issue: Where is the customer in holacracy?

While the hue and cry in the media about holacracy is now “whatever happened to the managers?” the more pertinent question is: “whatever happened to the customer?”

Koestler was careful to delineate the feedback mechanisms that enable holons to develop flexible strategies to cope with a changing environment, always within the rules given to them from the holon above them in the hierarchy. These mechanisms might be simple thermostatic mechanisms that enable a body to keep its temperature constant or more complex kinds of feedback from the environment. The feedback might come from above or below or from outside.

In holacracy, the only explicit feedback mechanisms alluded to in the Holacracy Constitution are vertical. There are no explicit feedback mechanisms from the customer i.e. the people for whom the work is being done. This is not to say that members of any circle are formally excluded from sensing a “Tension” from failure to meet customer needs  of which they happen to become aware and then take action to resolve that “Tension”. But it is also true that the explicit focus of the Holacracy Constitution is entirely internal. The customer is simply not in the picture.

In a world in which the balance of power in the marketplace has shifted from seller to the customer, this issue is critical.

When so much time and effort is spent on the micro-details of the internal decision-making mechanisms and absolutely no attention given to any external feedback mechanisms, one could easily get the idea that the internal mechanisms are supremely important while the customer is irrelevant. Unless and until this “gap” is rectified, holacracy risks being a distraction from the central organizational challenge of our times, namely, how to make organizations more able to add value to customers through continuous transformational innovation.

Holacracy may make sense for Zappos

Nevertheless, in the case of a firm like Zappos, which is already well advanced in implementing Agile management practices and has an intense, even obsessive, focus on adding value to customers, something along the lines of Holacracy has possibilities.

Thus, holacracy addresses an area on which Agile practices have offered relatively little guidance, namely, how does the administrative work of an organization get done? Agile practices focus effort on work that adds fresh value to customers. They tend to assume that tiresome administrative tasks like sorting out sick leave will somehow get done “elsewhere” without describing how that “elsewhere” functions. Holacracy offers one suggestion as to how these things might get done. It’s democratic but it’s heavy. It’s not the only way, but it is one way.

For a firm like Zappos that is already very strong on its external focus and agility, holacracy offers one possible solution for dealing with administrivia. Time will tell whether the weighty democratic procedures within each circle of holacracy will justify the gains to be made, or whether they will constitute more of a bureaucratic distraction from the real work of adding value to customers. Intuitively one is tempted to think that there must be better, lighter-weight solutions.

In any event, dealing with administration seems to be the driving force behind the Zappos decision to give holacracy a try.

Thus Zappos’s John Bunch, who is helping lead the transition to the new structure, says in the Washington Post that “while people have latched on to the idea that Zappos is getting rid of managers, what the company is actually doing is ‘decoupling the professional development side of the business from the technical getting-the-work-done side.’”

Holacracy as now formulated is not the solution

For most organizations today, particularly big organizations, the problem is the very opposite. The organization has in place all the procedures it needs to deal with administrivia. Its central problem is the weakness of its external focus. Instead of delighting customers through continuous transformational innovation, it is focused on improving internal efficiency and meeting its quarterly targets and maximizing shareholder value. To resolve this problem, holacracy in its current form will be of no help.

This is not to say that holacracy cannot evolve to become more useful. The motives of its sponsors are noble. In its next evolution, it could offer lighter-weight procedures.

Even more important, the next version of holacracy could spell out the role—currently missing—of customer feedback in a world in which the customer, not the internal hierarchy, will decide whether the organization will survive or not. The customer is the entity to which the organization and its procedures should be giving primary attention. Internal democracy might be nice, but not if organization’s survival is the price.