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No Rules Rules

No Rules Rules: Netflix and the Culture of Reinvention, by Reed Hastings & Erin Meyer

I thought a lot about how this book applied to my current employment situation. For context, I manage a Consortium at Southwest Research Institute (SwRI) that is responsible for software development in the aerospace industry. Much of my work focuses on the design of jet engines and rocket engines, with a heavy focus on research applications. At my workplace we try to be innovative, but also in many ways we are highly restricted with what we can do. We try to foster a creative and innovative environment, but simultaneously we adhere to strict government regulations. This philosophy permits engineers and scientists to find creative solutions to challenging problems, but sometimes it also adds unnecessary frustrations. However, it is important that we adhere to the strict government regulations in order to win the large government contracts, which encompass approximately 50% of the business.

I’ve had my share of frustrations at work, just like all employees. For example, the expense reimbursement process is slow, and it is sometimes a hassle to get purchases approved. Other examples of red tape that prevent work from being completed in a timely manner include: when it takes the contracts department several weeks to approve a contractual edit, or when the legal department imposes burdensome restrictions on license approvals, or when a final report must be passed through a lengthy approval process. These examples sap time and energy, and they make it difficult to complete technical work. However, I understand the rationale for these conventional “red tape” barriers; they ensure honesty and integrity in the workplace. I also thought about the differences in compensation. In Reed’s company, high performance is paid a high salary. At SwRI, there is little reward for high performance. Raises are granted uniformly across the company, there are no stock options, and there are no bonuses. These policies do not encourage high performers, and moreover they give a sense of security and incentive to low performers. Poor performers are ensured that they will receive a lengthy warning before getting fired, and there is a sense of security in this. The firing process is slow and laborious. It saps management time, energy, and money. That’s why Netflix is willing to, and does, fire employees with little forewarning. At Netflix, the risk is high, but the reward is also high. At SwRI, the risk is low, but the rewards are also low.

The Netflix workplace does not have the same limitations and restrictions as a conventional workplace. To create a culture of freedom and responsibility at Netflix, Reed removed vacation policies, removed travel and expense policies, removed the approval process, and increased financial transparency. However, Reed concedes that these are radical changes, and for these changes to be successful, certain conditions must be met. The most important condition is that the workplace needs to have “high talent density,” which means that every single person is a top-of-the-market performer. Every single person is excellent. Mediocre employees are not tolerated. Doesn’t every business want the absolute best performers? Yes, but few businesses are willing to do what is necessary to get top-of-the-market employees. To get the best talent, you must pay the best salary. For many businesses, they think it is better to have 10 mediocre employees than one stellar employee, regardless of abilities. For Netflix, they would rather have one all-star employee than 10 mediocre employees. To ensure that Reed gets and maintains top talent, he pays top dollar. Top performers are internally motivated to constantly perform well and to continually improve. Therefore, these types of people can be trusted to make wise financial decisions on behalf of the company. I think this is a great idea; purchase the best of the best and be willing to pay for it. You pay a high price, but the high price ensures that a certain quality of work will be completed.

I like that Reed recognizes that some people will take advantage of the system, particularly, the expense policy, and to prevent abuse, certain procedures are in place. The authors provide one example where an employee used Netflix expenses for family vacations and family meals. For three years, nobody noticed. However, during one of the random Netflix audits, which are used to keep employees accountable, the employee’s misconduct was revealed. The employee was immediately fired and used as an example. In general, employees will seek to maximize personal gain, which means that people are going to overspend when the expense authorizations are removed. However, Reed believes that this is a small price to pay for flexibility and organizational speed. It also helps employees feel empowered and establishes a sense of ownership for the company.

One of the considerations for maintaining high talent density is that mediocre performance must get removed. This is where the popularized “adequate performance gets a generous severance package” phrase comes from. If the boss is not willing to fight hard for an employee, then that employee is not worth keeping and will be fired. To alleviate financial concerns related to losing a job, employees that are fired from Netflix receive generous compensation. Despite the fact that there is no employment guarantee in the future, employees are generally content because they are paid above top-of-the-market salaries, and they know that they can expect a “generous severance package.” Netflix operates like a team, not a family. Athletic teams, such as football teams and basketball teams, are continually trading, hiring, and firing athletes in order to maximize the team performance. It is the same philosophy at Netflix. Netflix is a team, and they are all working together to perform at the highest level. It is understood that sometimes a new player is the best choice for a certain position.

When employees have freedom and responsibility, like they do at Netflix, it is important that they all understand the company vision so that they can make informed decisions. Reed calls this leading “with context, not control.” This means that the boss is responsible for setting the high-level direction, such as going global for Netflix, and leaves low-level decision making responsibilities to his team. Entering the global arena was a context goal for Netflix. The exact films to purchase and the exact content to stream were decided by employees underneath Reed. Since the employees understood the high-level direction, which was to go global, they were responsible for making informed decisions. And since they were high-performers, they made wise and informed decisions.

Perhaps the biggest theme in this book was increasing candor in the workplace. Much of the book focused on providing feedback. Some of the examples for providing feedback, such as live 360s, I did not find applicable. However, other examples, such as placing feedback on the weekly agenda, I think are immediately applicable for me. One of the things that I’m actually going to try at work is adding feedback to the agenda of my weekly 1:1 meetings. In past situations when I provided negative feedback with specific recommendations for improvement, I saw tremendous results. Therefore, I think it is worth being more proactive in the area of feedback. And my expectation is that other people will also provide feedback for me, so that I can improve. I thought it was really interesting that the authors provided examples of how feedback is provided differently in various parts of the world. For example, the Dutch provide very direct negative feedback, but the Japanese provide extremely indirect feedback. When working in a global marketplace, it is important to understand how feedback is perceived in different cultures. In the US, we are a relatively direct negative feedback country. Nonetheless, we still consider it proper to provide some positive feedback alongside the negative.

Overall, I thought this was an excellent book. It was enjoyable and easy to read. Plus it gave me some actionable ideas for my current job. I think that the authors did a great job of explaining the Netflix culture, and justifying why that type of culture works for their business area. But they also did a great job of clarifying that the radical Netflix culture is not applicable for all businesses. For example, there are tight restrictions and regulations in place in the aerospace industry, because the negative consequences of a plane are crash are severe. On the other hand, nobody is going to die if Netflix makes a poor streaming choice. Within Netflix, it is ok to make mistakes, as long as you can explain the lessons learned to your boss. I would love to work in a place with high talent density, minimal controls, and high candor. Unfortunately, that’s not realistic at my current job. There are some immediate actions that I can and will take; The first is to try increasing candor by adding feedback to my 1:1 meetings; The second is to ensure that all members of my team are aligned on vision and context.

Personal Thoughts About My Own Job

Recently, I’ve been frustrated with the amount of red tape that makes it difficult to get work done in a timely manner. For example, getting approval for a $300 pair of headphones. When it was clear that we would be working from home for the foreseeable future, I wanted to purchase a quality pair of headphones so that I could reliably receive phone calls and participate in meetings. However, $300 was deemed too expensive for a pair of headphones, and my request got denied. Since then, the company has purchased several sets of unused $150 headphones; they are unused because they do not work reliably. Who made the decision that $300 is unacceptable? Who set the limit, and why is it unacceptable to purchase something that is strictly going to be used to make me more efficient at my job? We spend thousands of dollars on computers and software and training to increase efficiency, and $300 is just 1-2 hours of labor cost.

Other examples of frustrations include my supervisor questioning me about purchasing a new computer monitor, Contracts taking weeks to supply contractual edits, legal imposing massive restrictions on license approvals, and lengthy approval process for final reports. All of these aforementioned complaints sap time and energy, and they it more difficult to do my job. It makes me long for more freedom and responsibility.

I’m also frustrated with how performance is rewarded. We do not receive any stock options, no bonuses, and raises are given uniformly across the Institute. This is not effective at encouraging high performers, but it gives a sense of security to low performers. For example, Mark was a low performer, and before he got fired, he was given plenty of opportunity for improvement. Our management made it clear to him that his performance was poor, and it took several months of strict bookkeeping before they could proceed with firing him. In fact, the firing process took so long, and sapped so much energy, that he found a new job before he was fired. The process of firing somebody is long and laborious. It wastes time, money, and energy. There is a sense of security in this. But that sense of security comes with little reward. Little risk and little reward. Speaking of risk, I applied for funding to explore some machine learning technologies, and the proposals were denied because they were too risky. We are a research institute, and we make money by solving problems that other people cannot solve. There’s inherently going to be risk. And internal research efforts are opportunities to embrace additional risk. And in all honesty, our proposal was not terribly risky, because it utilized proven technologies; these technologies were simply applied to an alternative application.

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