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Zappos: An Experiment in Holacracy



Tony Hsieh, CEO of Zappos sent his employees an ultimatum in early 2015 – embrace the self-management philosophy Holacracy or leave the company. Eighteen percent of the staff chose to leave rather than remain under the new system characterized by no job title, no managers, and complex rules governing employee interactions. Is this an experiment in organizational design worth sustaining?
An Experiment in Holacracy
The Offer: Tonys Email to Employees
Imagine going to the office on a Monday morning having no idea what you will be doing at work
that day. What if this were to happen every day? You would have no clearly defined set of
responsibilities and must simply pitch in and make yourself useful according to the tasks left to
be accomplished by various teams. Welcome to Zappos! For better or worse, Tony Hsieh, CEO
of Zappos, has introduced a new self-management system to his organization known as
The concept of Holacracy was created in 2007 by Brian Robertson and Tom Thomison. It
is now owned and managed by HolacracyOne. According to Holacracy’s official website:
Holacracy is a complete, packaged system for self-management in organizations.
Holacracy replaces the traditional management hierarchy with a new peer-to-peer
“operating system” that increases transparency, accountability, and organizational
Under this system, there are no job descriptions for any employee. Employees will have
roles, which can be multiple, that are defined around the work. The traditional hierarchical
system is discouraged and, instead, transparent rules are set so that each employee in the
organization knows exactly what the others are doing. Teams are entrusted to make their own
decisions, as there is no delegated authority to influence them.
This case was prepared by research assistants Bryan Golden and Anusheel Pandey under the direction of James
O’Rourke, Teaching Professor of Management, as the basis for class discussion rather than to illustrate either
effective or ineffective handling of an administrative situation. Information was gathered from corporate as well as
public sources.
Copyright: © 2017. Eugene D. Fanning Center for Business Communication. All rights reserved. No part of this
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form by any
means electronic, mechanical, photocopying, recording, or otherwise without permission.
According to Tony Hsieh, he implemented Holacracy to prevent the formation of a
bureaucratic system arising from Zappos’s rapid expansion. He wanted to keep the start-up spirit
alive and empower employees. Critics of Holacracy, however, point out that it does not take
human emotions into account and, hence, is an inefficient system. Moreover, rigid meeting
formats govern when and how a participant can speak up during a meeting. Unsurprisingly, not
everyone was on board with the new self-management system.
On March 24, 2015, Tony Hsieh sent a 4700-word e-mail message to employees,
reaffirming the company’s commitment to Holacracy.1 In it, he gave employees until April 30 to
decide whether they wanted to remain with the company or leave. If they chose to leave, they
would receive a generous severance package worth nearly half their annual salary.2 By the
deadline, 18% of the staff took the offer. This was in addition to the 11% who left the company
for other reasons earlier in the year. Ultimately, 29% of the 1,500 Zappos employees left the
company in 2015.3 A year after its implementation, we look back at how the new management
style is functioning, the benefits it offers, and the challenges it faces going forward.
Zappos: History and Culture is an online shoe and clothing store founded in 1999 by a young soft-spoken
entrepreneur called Nick Swinmurn. The website was initially named Shoesite with the idea of
selling footwear online, but was later renamed to “Zappos,” derived from the Spanish word
Zapatos” meaning shoes. Swinmurn took pictures of shoes in local stores and published them
on his website. When an order was placed on the site, Swinmurn would buy the shoe from the
store and ship it to the customer. Before approaching Tony Hsieh of Venture Frog for seed
funding, Swinmurn had already been rejected by almost every other Venture Capital firm.4
One year earlier, Swinmurn sold LinkExchange for $295 million to Microsoft and began
investing in a number of other projects.5 Describing his first meeting with Hsieh, Swinmurn says
in his book Delivering Happiness, “We didn’t know if the shoe idea would work or not, but they
(Nick and Fred – two Nordstrom employees who had risked their jobs to join Zappos) were
clearly passionate and willing to place big bets.” Initially, the idea was to invest enough money
for Zappos to grow in the first year and seek further funding at the end of the year.5
With the burst of the internet bubble, Zappos was unable to generate another round of
funding after the first year. Short of cash and desperate to survive, Hsieh sent an e-mail to
Zappos employees with a 9-month plan and the decision to lay off some staff. Some employees
voluntarily left, while others offered to take a pay cut. In his book, Hsieh describes the time,
writing, “We realized that we had laid off the underperformers and the nonbelievers, but because
everyone remaining was so passionate about the company and believed in what we were doing,
we could still accomplish just as much work as we had before.” The drive to survive had brought
the team together. Tough times had also forced Hsieh to sell 11 of his properties in San Francisco
to keep Zappos open.5
Over time, Zappos started keeping inventory. Although the sales were continuously
increasing: $70 million in 2003, $184 million in 2004 to $370 million in 2005, the company was
still not profitable.5 Struggling to keep up with the expenses and hoping to hire cheaper labor, the
company moved from San Francisco to Las Vegas in 2004. Even during the struggling times,
Hsieh made sure that customer service was not affected. His goal was to be the number one e-
commerce company, larger even than Amazon.5 In 2004, the idea of the Zappos culture book
was also born. The book meant new hires were to read what the Zappos culture means to its
employees. According to Hsieh, the final print on the book was unedited. And, while most of the
employee reactions were positive, some were unhappy with the additional processes and
procedures at Zappos. For Hsieh and the senior management, these criticisms were also
important. In fact, they led to the launch of a monthly newsletter, Ask Anything, where
employees could ask any question and have it answered in a companywide e-mail. Later, Zappos
began offering company tours to the general public.6
Hsieh always emphasized building the company culture. He believed the culture and the
brand are closely tied. Being technically competent, in his view, is necessary but not sufficient to
land a job at Zappos; cultural fit is a very important factor, as well. Every new employee,
irrespective of the role, is asked to take customer calls for the first few weeks after the training to
imbibe the belief in customer service. At the end of the training, everyone is given an option to
leave the company along with a severance package of $2,000 if they do not believe in the culture
of the company.2 All employees of the company were involved in forming the ten core Zappos
Amazon Acquires Zappos
Until 2007, Zappos grew at a very fast pace, exceeding the revenue expectations the company set
for itself each year. The 2008 recession, however, slowed growth and Hsieh was forced to lay off
more than 8% of the workforce.5 Notably, he offered generous severance packages to those
employees affected by the layoffs.
Strategic planners at Amazon had been watching Zappos for some time. CEO Jeff Bezos
was convinced that Amazon was not the right platform to sell shoes because of the complexity
involved. Bezos had first approached Zappos in 2005, but Hsieh wanted to remain independent.
After an early Zappos-Amazon offer failed, Bezos launched an online marketplace for shoes
called The new website offered discount pricing but failed to dent the growth of
Meanwhile, Amazon kept monitoring Zappos’s progress, looking for evidence of a
slowdown. That occurred during the Great Recession of 2009, and Zappos began looking for
outside investors. Amazon approached Zappos again and, on July 22, 2009, Zappos announced
that Amazon had acquired it in an all-stock deal. Amazon would purchase the online shoe retailer
for 10 million shares of Amazon common.8 By the time the deal was closed in 2009, it was worth
$1.2 billion. As a result of the acquisition, the shares paid for Zappos represented 2.31% of the
433 million shares of the combined company.9 The deal was clearly beneficial for both the
parties, as Zappos received much-needed cash, retained all its employees, and was allowed to
protect its culture by working independently.
For Amazon, founder and CEO Jeff Bezos said, “Zappos is a customer-focused company.
We see great opportunities for both companies to learn from each other and create even better
experiences for our customers.10 He went on, “Zappos has a customer obsession which is so
easy for me to admire. It is the starting point for Zappos. It is the place where Zappos begins and
ends. And that is a very key factor for me. I get all weak-kneed when I see a customer-obsessed
company, and Zappos certainly is that. Zappos also has a totally unique culture. I’ve seen a lot of
companies, and I have never seen a company with a culture like Zappos’s. And I think that kind
of unique culture is a very significant asset.11
Zappos continued to grow steadily under the Amazon umbrella, earning an operating
profit of $54.5 million in 2014, which was expected to reach $97 million in 2015.12 In 2008,
Zappos had reported net income of $10.8 million.13 According to Hsieh, the relationship between
Zappos and Amazon was “governed by a document that formally recognizes the uniqueness of
Zappos’s culture and Amazon’s duty to protect it.”14 Zappos continues to operate today as an
independent unit within Amazon and is free to set its own organizational structure. Amazon,
however, has influenced some key aspects of Zappos operations. In September 2012, Zappos
handed over its two Kentucky distribution and fulfilment warehouses to Amazon to improve
operational efficiency.15 This change meant 2000 Zappos employees became Amazon employees
and Hsieh described the change as “bittersweet.”16
Brian Robertson and Tom Thomison devised the concept of Holacracy, a self-governing
management system, in 2007. Under their consultancy, HolacracyOne, a team advises companies
on how to implement the new management style. Holacracy also features a constitution that
governs how meetings must be run. According their website, Holacracy increases transparency,
accountability, and organizational agility.
Fig 1: Holacracy vs Traditional Organizations
The following is an extract from the Holacracy Constitution, providing instructions on how to
convene a meeting.17
3.3.3 Meeting Process
The Facilitator must use the following process for Governance Meetings:
· (a) Check-in Round: The Facilitator allows each participant in turn to share their
current state or thoughts, or offer another type of opening comment for the meeting.
Responses are not allowed.
· (b) Administrative Concerns: The Facilitator allows space to discuss and resolve any
administrative or logistical matters the Facilitator deems worthy of attention.
· (c) Agenda Building & Processing: The Facilitator builds an agenda of Tensions to
process, then processes each agenda item in turn.
· (d) Closing Round: The Facilitator allows each participant in turn to share a closing
reflection or other thought triggered by the meeting. Responses are not allowed.
A Policy of the Circle may add to this process, but may not conflict with any of the steps or other
rules defined in this Article of the Constitution.
Principal Features of Holacracy 17
1. No Job titles or managers. Every employee has a clearly defined role of his or her choice
which aligns with the companys goals and the employee’s skills. A person having multiple
skills can choose to be part of multiple issue-based circles (or teams). Every circle has a Lead
Link, who is primarily responsible for driving that team’s task to closure, but is additionally
responsible for other administrative work.
2. No hierarchy of managers. Compared to traditional management structures, Holacracy is
relatively flat.” Since an employee may concievably have multiple roles in different circles, he
or she may have authority over a colleague in one circle, while that same colleague might have
authority over him or her in another circle.
3. Every role is clearly accountable according to the Holacracy constitution. The constitution
has in-built mechanisms to overcome situations when two roles may conflict.
Other Organizations Using Holacracy 18
• Accord Immobilier, Reunion Island (real estate).
• Adscale Laboratories, New Zealand (online advertising).
• ARCA, Mebane, NC (cash automation).
• arTerre, Reunion Island (agroecology).
• David Allen & Co, Ojai, CA (GTD method).
• Conscious Capitalism (NGO).
• Dev Bootcamp, San Francisco, CA (information technology and services).
• Kahler Financial Group, Rapid City, SD (financial services).
• MaestroConference, Oakland, CA (social conferencing).
• Pantheon Enterprises, Phoenix, AZ (specialty chemicals).
• Precision Nutrition, Toronto, ON (fitness and nutrition industry).
• SOPRODI, Clermont-Ferrand, France (metallurgical industry).
• Springest, Amsterdam, Netherlands (training programs and courses).
• Waking Up the Workplace (NGO).
• Office of the Chief Information Officer of Washington State, Washington State, USA.
Holacracy Failures at Other Organizations
Online publishing platform, Medium, implemented the Holacratic management style for a few
years until abandoning the idea in 2016. After Medium stopped using Holacracy, Andy Doyle,
Head of Operations, complemented Holacracy for its decentralized management approach and
the HolacracyOne team for their innovative work. In his blog, however, he acknowledged a few
of the challenges the system presented. Doyle admitted that implementing Holacracy for large
initiatives can become “time consuming and divisive to gain alignment.” Record-keeping and
focus on governance are also complications associated the Holacratic management structure. He
further adds that the process to recruit experienced candidates had become difficult in a “bossless
company.” The following excerpt from his blog sums up his views on the subject:
We are moving beyond it because we as a company have changed and want to make
fundamental changes to reflect this. Many of the principles we value most about
Holacracy are already embedded in the organization through how we approach our work,
collaborate, and instigate change. Beyond that, the system had begun to exert a small but
persistent tax on both our effectiveness, and our sense of connection to each other. 19
Another technology start-up that tested Holacracy for a few years before abandoning it was
GitHub.20 Even Tony Hsieh’s pet, the downtown Vegas project, an initiative to revitalize the
district, had to exit Holacracy after a few months.
Online Shoe Business: Industry Overview
In 2015, total global footwear sales grew 6% and reached $340 billion.21 Of that figure, online
sales from all sources represented 12% or $41 billion and a growth rate of 22% over the previous
year. Several factors have contributed to the growth of the online shoe and apparel industry,
including changing demographics, increased customizability, operational efficiencies, and larger
selection. Millennial shoppers are more likely to shop online and are a key driver for the growth
in global online shoe and apparel sales. Millennials are also driving the trend toward
customization and personalization in an effort to obtain a distinctive product that makes them
stand out from the crowd. Nike, for example, offers online bespoke models that allow customers
to customize the print, color, and stitching for up to $1,000. Customers can also add their names
or other text to a design to further personalize the shoe. This sort of customization is more
practical for online retailers and is another source of growth for the e-commerce shoe market.
The athleisure trend has driven growth in the shoes and apparel industry as a whole, as
the athletic shoe market grew more than 14% globally in 2015. This growth is also reflected in
increased sales for online shoe retailers, but is not a point of differentiation between brick-and-
mortar retailers. Larger selections and operational efficiencies, on the other hand, do represent a
point of differentiation for online footwear merchants compared to traditional retailers. Online
retailers are able to continuously update their inventory to match consumer trends, whereas
traditional retailers may only update inventory once per season. This helps online retailers attract
fashion-conscious shoppers.22 A larger selection and greater sizing options of online retailers
have also contributed to sales growth. Online retailers are better equipped to stock rare or unique
products that may command a premium than are traditional retailers.
Summary of Key Competitors and Their Organizational Structure
The online shoe retail industry has low barriers to entry and a number of well-established
competitors. They are customarily grouped by channels of distribution into categories of pure-
play or mixed-channel competitors. Pure-play competitor such as Zappos have only an online
distribution channel while mixed-channel competitors such as DSW and Nike have physical
stores as well as an online presence. The largest domestic competitor for Zappos is Foot Locker.
However, the low concentration for the industry has led to a large number of small players.23
International competitors include (Canada), Zalando (Germany), Sarenza (France),
and Spartoo (France). Additionally, Amazon itself continues to compete in the online footwear
By 2015, all of Zappos’ competitors in the online shoe industry still had traditional
management structures. Additionally, none of the competitors changed their corporate structure
in response to Zappos. The impetus for the organizational change at Zappos was not driven by
unique market pressure and has not spread throughout the online shoe retail industry. Instead, the
idea for Holacracy at Zappos sprang from Tony Hsieh’s vision for moving the company forward.
Holacracy at Zappos
Tony Hsieh is an avid book reader who says he was inspired by Triumph of the City by Harvard
Professor Edward Glaeser. According to the book, as the size of the city doubles, innovation and
productivity per citizen increases by about 50%. Unsurprisingly, Hsieh wanted Zappos to grow
more like a city than a typical bureaucratic organization that resisted growth as the number of
employees increased. Motivated by this vision, Hsieh began the transition to holacracy from
2013-2014 in the form of a small pilot program in the Human Resources department. By early
2015, Hsieh decided to expand the program to the entire organization.24 The ensuing frustration
and confusion on the part of employees provided the impetus for him to write “The Offer” e-
mail. As a result, Zappos became the largest organization ever to implement Holacracy.
Each Zappos employee is given 100 total people points to use within the circles they join.
Both their badges and their people points constrain which roles they take within the company.
John Bunch was the implementation lead for the Holacracy transition at Zappos.25 He oversaw a
new system of badges to signify the capabilities and expertise each employee possesses over a
wide range of work-related functions.26 Performance reviews are handled by each circle
individually. Some circles may choose to perform performance reviews, while others do not.26
Holacracy doesn’t clearly define any process governing the compensation of the
employees. At Zappos, though, every employee is assigned a badge according to the roles and
skills the employee possesses. Salaries, according to inside sources, may be linked to the badges
in the future. Hence, an employee holding multiple badges may receive a higher salary. For now,
though, employees are required to submit their application to the Zappos Compensation Circle.
There are other circles tasked with hiring and firing decisions. The badges are necessary to
qualify for different project roles listed on the Role Marketplace. For example, an employee can
get a writerbadge to answer customer e-mails or a GlassFrog” badge to work on the
Holacracy software.27
Employee response to the implementation of this new system at Zappos has been
generally, but not entirely, positive. Jordan Sams from the Holacracy implementation team said
that ideas that were previously rejected have now been implemented and people no longer have
to wait for promotions to demonstrate their ability to handle more complex and challenging
roles.27 Holacracy empowers employees to collectively influence effective decisions, as
evidenced by the reversal of a decision made by the CEO. Tony Hsieh closed the bridge
connecting the parking garage to the Zappos office before the transition to Holacracy because he
felt employees would be more collaborative if they all entered the building through the same
entrance. Some employees felt this was unsafe when they worked late at night because it forced
them to walk through the streets of downtown Las Vegas. After implementing Holacracy, the
organization made the decision to reopen the bridge.28
Dogs were not allowed in the Zappos office prior to Holacracy. After the transition,
employees organized to implement a viable plan to allow dogs into the office that addressed the
most common objections. Now, dogs are allowed in the office provided they pass a behavioral
test and do not enter the ‘allergy zones’ designated for people sensitive to dander. Zappos chief
of staff Jamie Naughton said this change would not have been possible without Holacracy.29
Not everyone has embraced the change from a traditional management structure to
Holacracy. Nox Voortella worked for Zappos as a sales planner before deciding to leave due to
the new self-management system. She initially thought Holacracy was great but eventually felt
the insecurities of some former managers led them to attempt to reconstruct their power within
the new system.3 She went on to say that the managers who stayed with the firm had less to offer
than those who left. Tyler WIlliams, who is lead link of a marketing circle, echos that sentiment
but thinks the problem is getting better. “Now we are getting back to that place where we are
being kind and forgiving to people, and people that used holacracy as a weapon are finding
themselves getting smaller and smaller islands to work from. We’re more policed now as a
company based on peer pressure rather than on micromanagement.”30
Charles Kim is another Zapponian who left the organization in 2015 after ten years of
service. When asked if he left because of Holacracy, he said Personally, no. I had other reasons
for leaving Zappos. Others I know, yes.When asked whether Holacracy had affected company
culture he said, “Yes, the culture became obsolete. Although they encouraged an emphasis on
upholding the culture, Holocracy was the root cause for it to diminish.”
In addition to the loss of staff, the implementation of Holacracy was associated with
some notable changes in performance metrics for the company. Because Amazon prepares
consolidated financial statements, they do not publicly disclose profit forecasts specifically for
Zappos. However, according to a 2016 Fortune article, “the company achieved its 2015 profit
goals, but several employees say that it has lowered its 2016 targets.” Additionally, Zappos was
present on the the Fortune 100 Best Companies to Work For list from 2008 to 2015, however,
they were dropped from the list for 2016 largely due to the implementation of Holacracy.
Finally, Glassdoor employee reviews exist for the company as early as 2009. Employee review
ratings increased slightly from 3.6 out of 5 in March to 3.8 out of 5 in December 2015.31
Responding to the additional turnover in 2015, the company’s official statement says it
“was mostly due to us giving long-time employees the opportunity to pursue their dreams
(average severance paid out was about 5.5 months pay when we last analyzed the data).” The
statement went on to say, “We have always felt like however many people took the offer was the
right number of people to take the offer, because what we really want is a group of Zapponians
who are aligned, committed, and excited to push forward the purpose and vision of Zappos.”
Industry experts give Holacracy mixed reviews. Ethan Bernstein, a Harvard Business
School professor, says Holacracy isn’t the answer to self-management but is a useful framework
for conflict resolution. “Holacracy replaces that [traditional] structure with a structuring process,
at least for particularly frequent kinds of conflicts, to resolve conflicts in a potentially less-
hierarchical, more self-organized, and more adaptive fashion.” Similarly, David Ulrich from the
University of Michigan Ross School of Business says the principles of Holacracy aren't
necessarily new. “The basic insight is that employees should be more engaged in decision
making – through teams or individual involvement – when they are able to make good decisions
and are willing to work hard on the right things.Stanford Professor of Organizational Behavior
Jeffrey Pfeffer, in a 2013 article “You’re Still the Same: Why Theories of Power Hold Over
Time and Across Contexts” believes hierarchy to be the fundamental principle of all
organizational systems. According to the tweet from his official account on July 18, 2015, “The
idea that employee empowerment is imposed from the top is a logical contradiction. Plus, people
prefer hierarchy.”32
How Should Zappos Proceed?
By 2016, Zappos employees working in their downtown Las Vegas office have been given
nearly a year to contemplate the Holacracy experiment. Eighteen percent of their colleagues have
left the company due to Holacracy and it was an open question whether this restructuring would
succeed with those who remained. They have recently learned the company has been dropped
from the Forbes 100 Best Companies to Work For list and they have had to reduce profit
estimates for the upcoming year.
Great companies have tried and failed with non-traditional management systems. Tech giant
Google, in 2002, attempted to implement a flat organization structure by eliminating the need for
managers. However, founders Larry Page and Sergey Brin, soon realized the importance of
properly trained management employees. As of 2013, Google had over 37,000 employees, with
5000 managers, 1000 directors and 100 vice-presidents.33 Where others have failed, will
Holacracy work for Zappos?
Discussion Questions
1. What should the organization do moving forward?
2. Was moving to Holacracy the right decision? How long should they wait to find out?
3. Who are the key stakeholders affected by the departing employees? How should Zappos
4. To which audience(s) should Zappos communicate regarding the reduction in workforce?
5. What actions, if any, should Zappos take to minimize the effect of the departing
6. What lessons can Zappos learn from previous organizations implementing Holacracy?
5. Hsieh, Tony, "Delivering Happiness: A Path to Profits, Passion, and Purpose"
7. Stone, Brad, "The Everything Store: Jeff Bezos and the Age of Amazon"
28. Personal correspondence 2/26/2017
Wie stellt sich das Verhältnis zwischen Formalstruktur und Informalstruktur in der holakratischen Organisation dar? Um diese Frage zu beantworten, analysiert Phanmika Sua-Ngam-Iam systemtheoretisch die Umsetzbarkeit der holakratischen Kernidee der Vereinigung der drei Seiten der Organisation. Es konnte aufgezeigt werden, dass eine Vereinigung der drei Seiten der Organisation faktisch nicht realisierbar ist, da bestimmte Erwartungen, deren Erfüllung für Organisationen bestandsnotwendig ist, nicht formalisiert beziehungsweise nicht formalisierbar sind. Es wurde dargelegt, wie sich die Mechanismen zur Sicherstellung der Erwartungserfüllung verändern, wenn Organisationen nicht klassisch, sondern holakratisch formalisiert sind. Insbesondere der Tausch von Gefälligkeiten stellt sich dabei als ein zentraler Mechanismus dar, um die Erwartungssicherheit zu erhöhen. Tauschgeschäfte werden jedoch im informalen Bereich getätigt und sind daher im Konzept der Holacracy nicht vorgesehen.
Full-text available
This paper discusses the importance of installing holacracy practices in the organizations’ core values instead of hierarchy. Since the organizational structures of holacracy and hierarchy are different, the current study aims to compare the functions of both concepts in terms of the management system. Holacracy suggests a more decentralized structure, while hierarchy stands on a centralized one. In holacracy concept, power moves from leaders to processes in an organization as a whole. Further, holacracy also provides a concrete framework for encoding autonomy, agility, and purpose-alignment into the organization’s DNA. Somehow holacracy replaces the conventional management hierarchy with a new structure. In holacracy, instead of operating top-down, power is distributed throughout the organization – giving individuals and teams freedom while staying aligned to the organization’s purpose. This concept has recently been accepted & implemented in some organizations worldly. In this case, the current study aims to concentrate on the main values of holacracy and finds out that what it can really bring for the organizations.
Delivering Happiness: A Path to Profits, Passion, and Purpose" 6
  • Tony Hsieh
Hsieh, Tony, "Delivering Happiness: A Path to Profits, Passion, and Purpose" 6.
The Everything Store: Jeff Bezos and the Age of Amazon
  • Brad Stone
Stone, Brad, "The Everything Store: Jeff Bezos and the Age of Amazon" 8.