No Rules Rules: Netflix and the Culture of Reinvention

by Reed Hastings

The more people are given control over their own projects, the more ownership they feel, and the more motivated they are to do their best work. Telling employees what to do is so old-fashioned, it leads to screams of “micromanager!” “dictator!” and “autocrat!”

Netflix does not operate in a safety-critical market, like medicine or nuclear power. In some industries, preventing error is essential. We are in a creative market. Our big threat in the long run is not making a mistake, it’s lack of innovation. Our risk is failing to come up with creative ideas for how to entertain our customers, and therefore becoming irrelevant.

Jack made it clear that at Netflix you don’t lose your job because you make a bet that doesn’t work out. Instead you lose your job for not using your chips to make big things happen or for showing consistently poor judgment over time.

Jack explained to Kari, “We don’t expect employees to get approval from their boss before they make decisions. But we do know that good decisions require a solid grasp of the context, feedback from people with different perspectives, and awareness of all the options.” If someone uses the freedom Netflix gives them to make important decisions without soliciting others’ viewpoints, Netflix considers that a demonstration of poor judgment.

The Netflix Innovation Cycle If you have an idea you’re passionate about, do the following: “Farm for dissent,” or “socialize” the idea. For a big idea, test it out. As the informed captain, make your bet. If it succeeds, celebrate. If it fails, sunshine it.

I can’t make the best decisions unless I have input from a lot of people. That’s why I and everyone else at Netflix now actively seek out different perspectives before making any major decision. We call it farming for dissent.

Farm for dissent. Socialize the idea. Test it out. This sounds a lot like consensus building, but it’s not. With consensus building the group decides; at Netflix a person will reach out to relevant colleagues, but does not need to get anyone’s agreement before moving forward. Our four-step Innovation Cycle is individual decision-making with input.

When a bet fails, the manager must be careful to express interest in the takeaways but no condemnation. Everyone in that room left 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 you won’t lose your job.

When you sunshine your failed bets, everyone wins. You win because people learn they can trust you to tell the truth and to take responsibility for your actions. The team wins because it learns from the lessons that came out of the project. And the company wins because everyone sees clearly that failed bets are an inherent part of an innovative success wheel. We shouldn’t be afraid of our failures. We should embrace them. And sunshine mistakes even more!

A worker’s performance will be judged on the collective outcome of his bets, not on the results from one single instance.

A professional sports team is a good metaphor for high talent density because athletes on professional teams: Demand excellence, counting on the manager to make sure every position is filled by the best person at any given time. Train to win, expecting to receive candid and continuous feedback about how to up their game from the coach and from one another. Know effort isn’t enough, recognizing that, if they put in a B performance despite an A for effort, they will be thanked and respectfully swapped out for another player. On a high-performing team, collaboration and trust work well because all the members are exceptionally skilled both at what they do and at working well with others.

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.

One Microsoft engineer reportedly said: People will openly sabotage other people’s efforts. One of the most valuable things I learned was to give the appearance of being courteous while withholding just enough information from colleagues to ensure they didn’t get ahead of me in the rankings.

In 2015, The New York Times reported that GE had, like Microsoft in 2012, dropped the evaluation method. As one might expect, stack ranking sabotages collaboration and destroys the joy of high-performing teamwork. We encourage our managers to apply the Keeper Test regularly. But we are very careful to not have any firing quotas or ranking system. Rank-and-yank or “you must let go of X percent of your people” is just the type of rule-based process that we try to avoid. More important, these methods get managers to let go of mediocre employees, but they kill teamwork at the same time. I want our high-performing employees to compete against Netflix’s competitors, not one another. With rank-and-yank what you gain in talent density you lose in reduced collaboration.

Adam wanted desperately for Netflix to get that movie. News on the street was that Amazon, Hulu, and HBO all wanted it too. He’d bid $2.5 million for it that morning—a huge amount for a documentary—but had just learned the bid was too low. Should he bid $3.5 million? $4 million? No documentary had ever gone for that much. He and Rob were discussing the bid when Ted Sarandos entered the lobby from the adjoining breakfast room. They told him about the Icarus situation, and he asked what they were going to do. Adam remembers the conversation like this: “Maybe we’ll go up to $3.75 or $4 million, but that’s a huge amount to offer for a doc. It would completely reset the market,” I said, watching for Ted’s reaction. Ted looked me square in the eye and said, “Well, is it ‘THE ONE?’” He made quote marks with his fingers, like it meant something important. That made me nervous. It was my ONE. But was it his ONE? I asked him, “What do you think, Ted?” Ted started moving toward the door. Clearly, he was not going to answer that question. “Listen,” he said. “It doesn’t matter what I think. You’re the doc guy, not me. We pay YOU to make these decisions. But ask yourself if it’s THE ONE. Is this going to be a massive hit? Is it going to be an Oscar nominee like Super Size Me or An Inconvenient Truth? If it’s not, that’s too much to pay. But if it’s THE ONE you should pay whatever it’s going to take: $4.5 million, $5 million. If it’s THE ONE, get the movie.”

But if, like Target, your goal is innovation, making a mistake is not the primary risk. The big risk is becoming irrelevant because your employees aren’t coming up with great ideas to reinvent the business.

Antoine de Saint-Exupéry, the author of The Little Prince, put it rather more poetically: If you want to build a ship, don’t drum up the people to gather wood, divide the work, and give orders. Instead, teach them to yearn for the vast and endless sea.

HIGHLY ALIGNED, LOOSELY COUPLED

Of course in a company, it’s not about one chef cooking for one family. Instead there are layers of leadership, which makes creating alignment more complex.

The number one goal for these meetings is to make sure that all leaders across the company are highly aligned on what I call our North Star: the general direction we are running in. We

WHEN ONE OF YOUR PEOPLE DOES SOMETHING DUMB DON’T BLAME THEM. INSTEAD ASK YOURSELF WHAT CONTEXT YOU FAILED TO SET. ARE YOU ARTICULATE AND INSPIRING ENOUGH IN EXPRESSING YOUR GOALS AND STRATEGY? HAVE YOU CLEARLY EXPLAINED ALL THE ASSUMPTIONS AND RISKS THAT WILL HELP YOUR TEAM TO MAKE GOOD DECISIONS? ARE YOU AND YOUR EMPLOYEES HIGHLY ALIGNED ON VISION AND OBJECTIVES?

We had a lot of debates on my team about whether this strategy would work. Would children want to watch characters that were so dramatically different than they were? We didn’t know. That’s where the context Ted set came in. As he had stressed, these were the questions we would seek to answer and we should be prepared for our bets to fail, provided they resulted in clear learning. We all came to an agreement. We would give it a try and learn along the way.

In order to lead with context, you need to have high talent density, your goal needs to be innovation (not error prevention), and you need to be operating in a loosely coupled system. Once these elements are in place, instead of telling people what to do, get in lockstep alignment by providing and debating all the context that will allow them to make good decisions. When one of your people does something dumb, don’t blame that person. Instead, ask yourself what context you failed to set. Are you articulate and inspiring enough in expressing your goals and strategy? Have you clearly explained all the assumptions and risks that will help your team to make good decisions? Are you and your employees highly aligned on vision and objectives? A loosely coupled organization should resemble a tree rather than a pyramid. The boss is at the roots, holding up the trunk of senior managers who support the outer branches where decisions are made. You know you’re successfully leading with context when your people are moving the team in the desired direction by using the information they’ve received from you and those around you to make great decisions themselves.

finessing

When collaborating with less direct cultures, we’ve learned at headquarters to be more vigilant and to try to calibrate our communication so that it feels helpful to the receiver and is not rejected simply because of form. Chris’s advice was simple and anyone who needs to give feedback to a colleague in a less direct culture should take heed. Be friendlier. Work harder to remove the blame. Be careful to frame the feedback as a suggestion, not an order. Add a relationship-based touch like a smiling emoji.

When giving feedback with those from your own culture, use the 4A approach outlined in chapter 2. But when giving feedback around the world, add a 5th A: The 4As are as follows: Aim to assist Actionable Appreciate Accept or decline Plus one makes 5: Adapt—your delivery and your reaction to the culture you’re working with to get the results that you need.

Reed sometimes refers to Freedom and Responsibility as operating on the edge of chaos.