Reinventing Culture with Netflix

There’s never before been a company like Netflix. Not just because of its unique position as a leader in both the worlds of entertainment and technology; or because of its growth as the world’s leading streaming entertainment service, with over 193 million members in 190 countries. Netflix is a revolutionary company because of a counter-intuitive and radical management culture which defies tradition and expectation.

When Reed Hastings founded Netflix, he developed a corporate philosophy and a set of management principles that would make Netflix one of the most inventive companies in the world. This meant rejecting the conventional wisdom under which other companies operate. At Netflix, adequate performance gets a generous severance, and hard work is irrelevant. At Netflix, you don’t try to please your boss. You practice radical candour instead. At Netflix, employees never need approval, and the company always pays top of the market. When Hastings first devised them, the implications of these principles were unknown, but over time they have inculcated flexibility, speed, and boldness throughout a successful and rapidly growing organization.

Hastings elaborates on these controversial principles at the heart of the Netflix psyche, based on hundreds of interviews with current employees and never-before-told stories from his career. Hastings has generated results that envy the business world. This is the fascinating, untold story of a unique company taking over the world.

Build Up Talent Density

The first step to building a successful and high-performance team is to build something Reed calls talent density. The idea is based on the observation that one highly talented person can contribute 5 to 10 times the output compared to a ‘normal’ employee.

Netflix presents adequate employees with a generous severance package. The idea is to let people who do just enough build a small group of highly talented people. Having adequate people pulls highly talented people down as they feel adequate is the way to go.

The overall idea is to remove controls eventually and allow people to do whatever they feel is suitable for the organization.

In most companies, policies and control processes are implemented to deal with employees who exhibit sloppy, unprofessional, or irresponsible behaviour. But if you avoid or move out of these people, you don’t need the rules. If you build an organization made up of high performers, you can eliminate most controls. The denser the talent, the greater the freedom you can offer.

In Netflix’s case, they were forced to let go of 40% of their workforce after the dot com crash, leading to them making a list of non-performers they had to let go. Once they had made the uncomfortable conversations of firing people, they realized the business's productivity increased contrary to expectation. The reason for this was simply the talent density that got created. High-performance individuals love to work together because it is inspiring and a whole lot of fun!

If you have a team of five stunning employees and two adequate ones, the adequate ones will sap managers’ energy, so they have less time for the top performers, reduce the quality of group discussions, lower the team’s overall IQ, force others to develop ways to work around them, reducing efficiency, drive staff who seek excellence to quit, and show the team you accept mediocrity, thus multiplying the problem.

So how does Netflix build talent density? Simple, fire people who are adequate or below! This is complicated. Netflix focuses on this intensely.

We would hire the best employees and pay at the top of the market. We would coach our managers to have the courage and discipline to eliminate any employees who were displaying undesirable behaviours or weren’t performing at exemplary levels.

Breaking this down into three steps;

• Fire adequate, and below performers, only high performers remain
• Pay top of the market and above the high performers. They, anyway, do at least 5x of the adequate ones.
• Coach managers to actively fire people who are either cultural misfits, adequate, or below performers.

Once a team has built talent density, increasing candour is next.

Increase Candour

Once the talent has been built up, the best of it can be utilized by increasing candour!

?? noun:?candour, the quality of being open and honest; frankness.

Let’s face it. Everyone hates feedback; somewhere, for some reason, feedback is always seen as something employees dread. Smart ones, however, know that feedback is a necessity. If you stray away from feedback (even if you feel you are doing well), you cannot grow.

Once Netflix built talent density, they started seeing increasing candour in the office. People were working hard, and candid feedback was helping people grow even more.

We hadn’t hired any new talent or raised anyone’s salaries, but day-by-day candour was increasing talent density in the office. The more people heard what they could do better, the better everyone got at their jobs, the better we performed as a company.

But doing this is not always straightforward because not everyone is tuned to receiving feedback. E.g. if a manager is moody, it is not straightforward to convey this to him. Folks at Netflix found a way to calculate how much money his moodiness was costing the business. Crazy right? But this is how candour backed with data helped Netflix create a culture of exchanging feedback openly and quickly. Netflix works hard to encourage people to give feedback. It is the fuel that runs one of the most efficient businesses in the world.

They feel it is disloyal to the organization if someone feels something is not best for the organization but stays without calling it out.

In most situations, both social and professional, people who consistently say what they really think are quickly isolated, even banished. But at Netflix, we embrace them. We work hard to get people to give each other constructive feedback—up, down, and across the organisation—on a continual basis.

Netflix promotes not just candid but also frequent feedback, which, in my experience, increases the chances that you will hear something hurtful. Even though most of Netflix’s employees intuitively understand by now that a simple feedback loop can help them get better at their jobs. But candour at the workplace is a risky business. People can misuse or probably not know how to use it and say things that could hurtful.

A simple pronged strategy is suggested here; every time you give feedback, every time you are giving feedback, irrespective of where one is in the hierarchy of the organization, have the following goals;

• Aim to Assist

One needs to clearly explain how a specific behaviour change will help the individual or the company, not how it will help you. The feedback must always aim to assist the company, and this should be communicated well.

• Actionable

One must ensure that the feedback is not vague and is 100% actionable for the recipient. The feedback that tells profit what is wrong leads to confusion, whereas actionable feedback leads to focus.

For someone receiving feedback, they must have the following constructs in their mind while (and after) feedback;

• Appreciate

Receiving feedback must be taken as a help. One must always appreciate feedback that follows the pointers above. Feedback must be called out if it does not aim to assist or is not actionable.

• Accept or Reject

The receiver and the provider must understand that the decision to react to the feedback is entirely up to the recipient. This adds ownership and does not create a culture where people tell others what to do.

Finally, candour doesn’t help if it is done when the moment is gone. Candour works when it is given as soon as possible, keeping in mind that A culture of candor does not mean that you can speak your mind without concern for how it will impact others.

Many have been deeply conditioned to wait for the right moment and the right conditions before telling the truth, so that the usefulness of the feedback often all but fades away.

Once candor has been sorted, it is time to release controls to truly skyrocket efficiency.

Release Controls

So far, we have set up talent density but only allowing the top performers to stay and have also set up a culture of candour where people have been able to candidly suggest to others what they feel about initiatives and feed off the common brilliance of the high talent density that is present at the workplace.

To sky-rocket efficiency, it is time to release controls. How Netflix started releasing controls by removing a vacation policy completely. The doubts they had were that this could lead to one of the following two outcomes;

1. Everyone is on leave during critical phases.
2. No one takes leaves because leaders set that culture.

The clearer the manager is when setting context, the better. That accounting director might say, “Please give at least three months’ advance warning for a month out of the office, but a month’s notice is usually fine for a five- day vacation.”

To solve a. they suggest having a few ground rules in place like no leaves during the financial year ending for accountants, no leaves during the release for developers involved, etc.

With the absence of a policy, most people look around their department to understand the “soft limits” of what’s acceptable.

To solve b., they encourage leaders to set examples by taking leaves regularly and showing their team that it is okay to unwind now and then without feeling guilty.

One of the goals was getting all leaders to take significant amounts of vacation and talk a lot about it.

Releasing controls is an ongoing process, and leaders must strive to remove as many controls as possible. An example could be removing approvals for PRDs in product management or removing tech reviews by team leads in engineering. Top talent must be trusted to deliver their best, and the faith must be absolute. You cannot tell a talent that I trust in your skill and then review every bit of work he does to make sure it is fine.

Release controls release blockers and enables talent to display their true mettle while being accountable for all their actions.

The ethos of Netflix is that one superstar is better than two average people. Freedom is not the opposite of accountability, as I’d previously considered. Instead, it is a path toward it.

Fortify Talent Density

So, we have now checked off building talent density, increasing candour, and releasing controls. The time is ripe to solidify the talent density that has been built.

We realise here that there are some great employees and some just okay ones. The okay ones are managed, while the stars are relied upon to give everything they can. If the managed ones continue to grow, the stars are dragged down. It could be perception, but there is research that we come to see that the best programmer doesn’t add ten times the value. She adds more than a hundred times.

So how do you get the best programmer?

Pay top of the market

You think of your budget as hiring five people when you hire a top professional in creative roles. This allows any organization to draw the best talent without compromising productivity.

A great lathe operator commands several times the wages of an average lathe operator, but a great writer of software code is worth ten thousand times the price of an average software writer.

So for operational roles, you can pay an average market salary, and your company will do very well, but for roles that require creation, getting the best talent and paying top of the market for it is okay. So the company would be relying on one tremendous person to do the work of many. But they would pay tremendously.

Managing people well is hard and takes a lot of effort. Managing mediocre-performing employees is harder and more time consuming.

When those lean teams are exclusively made up of exceptional-performing employees, the managers do better, the employees do better, and the entire team works better—and faster.

No bonuses

We learned that bonuses are bad for business at the same time that I came across the rock-star principle.

High performers naturally want to succeed and will devote all resources toward doing so, whether they have a bonus hanging in front of their noses. Contingent pay works for routine tasks but decreases performance for creative work. People are most creative when they have a big enough salary to remove some of the stress from home. By avoiding pay-per-performance bonuses, you can offer higher base salaries and retain your highly motivated employees.

At Netflix, employees are encouraged to find out what the top of the market is, even to the extent of appearing for interviews. Managers and employees must know clearly what the top of the market is, and managers must strive to keep top-performing employees in and at the top of the market. If this needs a lesser-performing employee goes, so be it.

But nothing increases talent density more than paying people high salaries and increasing them over time to ensure they remain top of the market.

Pump Up Candour

Candour is built by consistent effort; one of the ways to do this is by opening crucial information across the company.

Secret-keeping at work is even more prevalent and harmful than in a student dormitory. Keeping much confidential content in your closet takes a psychological toll: stress, anxiety, depression, loneliness, and low self-esteem. One of the practices to pump up candour is to have leaders hold walking meetings, where one can often come across other employees meeting out in the open. As an end goal, employees must not feel that they’re working for a company; they should feel that they are part of it.

A sure-shot way of doing this is to openly share critical business information with every employee on the team.

We also created a strategy document that was filled with information we wouldn’t want our competitors to know, and posted it on the bulletin board next to the coffee machine. Most notable is the four-page “Strategy Bets” document on the home page of the company’s intranet.

When you give low-level employees access to information generally reserved for high-level executives, they get more done on their own. The more employees at all levels understand the strategy, financial situation, and the day-to-day context of what’s going on, the better they become at making educated decisions without involving those above them in the hierarchy.

But how do you handle leaks? Sensitive information carries much value and can be misused. A conclusion drawn here is that leaks should not hinder transparency. Netflix says that when information does one day leak (they imagine it will), they won’t overreact. They’ll deal with that one case and continue with transparency.

Your people are not stupid. When you try to spin them, they see it, and it makes you look like a fraud. Speak plainly, without trying to make bad situations seem good, and your employees will learn you tell the truth. If you trust your people to handle appropriately sensitive information, the trust you demonstrate will instigate feelings of responsibility and your employees will show you just how trustworthy they are.

Even for a team, candour becomes important. Candour can be extended to the team; e.g. Reed has a document accessible to his direct reports where anyone can mention anything, including “concerns over Ira’s performance”—and it’s not open to the rest of the company. Similarly, this can be extended to when people have been let go.

Now Release More Controls

The next step is to release more controls. An important way to do this is to disperse decision-making. A dispersed decision-making model has become the foundation of culture and is one of the main reasons for growth and innovation. Bosses need to step out of the “decision approver” role and see the entire business speed up and innovation increase.

We want all employees taking bets they believe in and trying new things, even when the boss or others think the ideas are dumb.

But what if everyone starts taking bets they believe in and don't align with the organization's goal? To cater to this problem, the book defines a step-by-step guide for innovation;

1. Employees are encouraged to farm for dissent. The more you actively farm for dissent and encourage a culture of expressing disagreement openly, the better the decisions that will be made in your company. This is true for any company of any size in any industry.
2. Or socialize the idea. For smaller initiatives, you don’t need to farm for dissent, but you’d still be wise to let everyone know what you’re doing and to take the temperature of your initiative.
3. For a big idea, test it out. If you are taking a big bet, test it out with users. Users provide the most unbiased and accurate reflection of how your idea will likely pan out.
4. As an informed captain, place your bet. At Netflix, you don’t need management to sign off on anything. If you’re the informed captain, take ownership: sign the document yourself.
5. Finally, if your bet wins, celebrate it. If it fails, sunshine it. As a leader, you can sunshine bets by your team by;
6. Asking what learnings came out of the project
7. This exercise reminds everyone that they are expected to implement bold ideas and that, as part of the process, some risks won’t pay off. They see that making bets is not a question of individuals’ successes and failures but rather a learning process that, in total, catapults the business forward.
8. Not making a big deal about it.

Everyone in the room should leave with two major messages in mind. First, if you take a bet and it fails, Reed will ask

you what you learned. Second, if you try out something big and it doesn’t work out, nobody will scream—and

1. you won’t lose your job.
2. Sunshining your own failed bets
3. When you sunshine your failed bets, everyone wins.
4. When the embarrassing mistake is big, the temptation to distance yourself from it is great.

A faster, more innovative decision-making process is possible if you have high talent density and organizational transparency firmly in place. Your employees can dream big, test their ideas, and implement bets they believe in, even in opposition to those hierarchically above them.

Max Up Talent Density

With a dispersed decision-making model, if you pick the very best people and they pick the very best people (and so on down the line), great things will happen. Ted calls this the “hierarchy of picking”, and it’s what a workforce built on high talent density is all about. If you’re serious about talent density, you have to get into the habit of doing something much harder; firing a good employee when you think you can get a great one.

This is so difficult in many companies because business leaders are continually telling their employees, “We are a family.” But a high-talent-density work environment is not a family. A family is all about sticking together. When people behave badly, don’t pull their weight, or cannot fulfil their responsibilities, we find a way to make do. We don’t have a choice.

Each manager must run their department like the best professional team, working to create strong commitment, cohesion, and camaraderie while continually making tough decisions to ensure the best player is manning each post. A manager should ensure that they;

• Demand excellence
• Make sure the best person fills every position in the team for the job.
• Train to win
• Set up continuous feedback loops about how to improve performance
• Knowing effort is not enough
• Swap employees who deliver a B performance despite an A effort

An important method of maximizing talent density is to have managers take the Keeper Test.

If a person on your team were to quit tomorrow, would you try to change their mind? Or would you accept their resignation, perhaps with a little relief? If the latter, you should give them a severance package now, and look for a star, someone you would fight to keep.
        

But the test can also breed anxiety among employees. The biggest worry people have when they learn a colleague has been let go is whether that person had feedback or whether the termination came out of the blue. But when people choose to sunshine exactly what happened, the clarity and openness will wash away the group's fears.

Max Up Candour

Saying that the company values candour is one thing. Maintaining it while the organization grows, new people join, and relationships become more numerous is more challenging. Teams must ensure that they have regular mechanisms in place so that the most critical feedback gets out.

A way to do this is to have each employee select a handful of people they want to receive feedback from and have those people fill out the report anonymously, rating the employee on a scale of 1 to 5 across a series of categories and leaving comments.

A “Start, Stop, Continue” format could be used for the comments to ensure that people didn’t just pat each other on the back but gave concrete, actionable feedback.

Another way to do this is to have 360 written feedback every year, asking each person to sign their comments. It is important that leaders share their 360s with the entire team. Any nonactionable fluff (“I think you’re a great colleague” or “I love working with you”) should be discouraged and stamped out.

Sometimes it’s embarrassing. Often it’s uncomfortable. But ultimately it boosts your performance.

People must choose a feedback receiver who will receive tough feedback with openness and appreciation. Choose a feedback provider who will give tough feedback while following the 4A guidelines. And even if you’re in a state of perfect readiness, you’ll need a strong moderator who ensures all feedback falls within the 4A framework and steps in if someone says anything out of line.

Eliminate Most Controls

And finally, once you have achieved the points mentioned above, it is time to eliminate most organisational controls. To eliminate most controls, leaders must lead with context, not control. In a control-based system, the boss approves and directs the team's initiatives, actions and decisions. Leaders frequently use control processes to give employees freedom towards their approach while reserving control over what gets done and when.

In a context-based system, leaders allow their team members to thrive on the freedom to select and try their work. But you cannot lead with context without ensuring talent density. If your employees struggle, you’ll need to monitor and check their work to ensure they make the right decisions.

But leading with context might not always be valid. Control mechanisms are necessary to run a dangerous operation profitably with as few accidents as possible. If you’ve high-performing employees and your goal is innovation, leading with context is best. Don’t tell your employees what to do to encourage original thinking; make them checkboxes.

In addition to high talent density (that’s the first condition) and a goal of innovation rather than error prevention (that’s the second), you also need to work (here comes the third) in a system that is “loosely coupled.”

A tightly coupled system is one in which the various components are intricately intertwined. A loosely coupled design system has few interdependencies between the parts. They are designed so that each can be adapted without going back and changing the foundation. In a loosely coupled company, an individual manager or employee is free to make decisions or solve problems, safely knowing that the consequences will not ricochet through other departments. Even with high talent density and innovation as your goal, leading with context may be impossible if you don’t sort this out.

Loose coupling works only if there is a clear, shared context between the boss and the team. That brings us to the fourth condition of leading with context, i.e. having a highly aligned organization. To lead with context, the system must be highly aligned & loosely coupled.

Let's look at how alignment can be achieved across an organization.

North Star

• The leadership must do a great job setting a north star that everyone in the organization follows. The first goal is to ensure that all leaders across the company are highly aligned on a North Star: the general direction everyone is running in.

Tree, not a Pyramid

• Decision-making must not be a pyramid. It must work like a tree. The highest level of the hierarchy sits at the root of this tree. His direct reports sit at the trunk, their reports on branches and so on until the last decision maker in the team.

A traditional, control-oriented approach is not the most effective choice in a loosely coupled organization, where talent density is high and innovation is the primary goal. Instead of minimising error through oversight or process, focus on setting clear context, building alignment of the North Star between boss and team, and giving the informed captain the freedom to decide.

Going Global

If you are looking at going global, map out your corporate culture and compare it to the cultures of the countries you are expanding into. For a culture of freedom & responsibility, candour will need extra attention. In less direct countries, implement more formal feedback mechanisms and put feedback on the agenda more frequently because informal exchanges will happen less often.

Talk about the cultural differences openly with more direct cultures, so the feedback is understood as intended. Make adaptability the fifth 'A' of your candour model. Discuss openly what candour means in different parts of the world. Work together to discover how both sides can adapt to bring this value to life.

Conclusion

The rules-and-process approach has been the primary way of coordinating group behaviour for centuries.

You can set up systems to control the movements of your employees with rules and processes. Or you can implement a culture of freedom and responsibility, choosing speed and flexibility, and offering more freedom to your employees. Each approach has its advantages. It is a sign of excellence when a company produces a million doses of penicillin or ten thousand identical automobiles with no errors because of the rules and processes set up.

When error prevention is more important than innovation, you must have loads of checks, processes, and

procedures to ensure you don’t screw anything up. However, in today’s information age, in many companies and on many teams, the objective is no more extended error prevention and replicability. On the contrary, it’s creativity, speed, and agility. In the industrial era, the goal was to minimize variation. But now, the most significant risk isn’t making a mistake or losing consistency; it’s failing to attract top talent, invent new products, or change direction quickly when the environment shifts.

So, in conclusion, the idea is not to play a symphony but to build a jazz band instead. Work on creating those jazz conditions and hire the type of employees who long to be part of an improvisational band.

When it all comes together, the music is beautiful.