Most organizations you know follow a traditional hierarchical system. There’s someone at the top and the positions trickle down, creating this pyramid-like structure. If this image popped up in your head, it isn’t any wonder, as organizational structures have not changed much over the years.

Complete Guide to Holacracy: Example of Zappos

© Shutterstock.com | Honza Hruby

However, there are alternative ideas and concepts out there looking to challenge this traditional approach. One of these concepts is called “holacracy.” In this guide, we’ll look at what holacracy is and explain the way it works and by the example of the company Zappos. We’ll examine the benefits of holacracy and the criticism it has faced. Finally, we’ll look at how holacracy could work together with the idea of the lean startup.

WHAT IS HOLACRACY?

The official holacracy website has a quote from Malcolm Gladwell’s ‘What the Dog Saw’, which states:

“If everyone had to think outside the box, maybe it was the box that needed fixing.”

Essentially, holacracy is about “fixing the box”, i.e. providing a new governance structure. The premise of the system is to answer the question “how do we organize an organization more efficiently?”

Hence, holacracy is a system of organizational governance, which seeks to help organizations to distribute authority more efficiently and to improve decision-making procedures. The goal is to improve management processes and support innovation within the organization.

The term comes from the word “holarcy” (Arthur Koestler, “The Ghost in the Machine”). It has its origins in the Greek word ‘holons’, which means “whole” or “units that are autonomous.” The name ‘holacracy’ is actually a registered trademark of HolacracyOne LLC. Therefore, the use of the brand name for commercial purposes is strictly limited, although organizations are free to implement the holacracy model as they wish.

The system has gained in popularity in countries such as Australia, Switzerland and the United States, but it’s not yet widely used. So far, mostly non-profit organizations have adopted holacracy as their governance system. However, some private companies such as Zappos, David Allen Company and Conscious Capitalism, have adopted holocracy as well.

For an in-depth overview, you should watch the following Ted Talk by Brian Robertson:

How did holacracy develop?

The holacracy model started as an experiment of new organizational governance structures in the company Ternary Software in USA. The founder of the organization, Brian Robertson, put his best practices together and the holacracy model was born in 2007.

In 2010, Robertson developed and published the Holacracy Constitution, which explains the underlying principles and practices of the structure. This is nowadays used as a guide by organizations trying to implement the system.

Online shoe retailer Zappos implemented holacracy in 2013

Zappos is an online shoe and clothing retailer in the US. The company was founded in 1999 and in 2009, Amazon announced it would acquire the company in an all-stock deal for around $1.2 billion. Nowadays, Zappos has around 1,500 employees.

The online retailer adopted the holacracy governance model in 2013. The company began experimenting with the structure slowly. In mid-2014, around 10% of its employees were under the model. By the end of 2015, the company had implemented the system throughout its entire organization.

John Bunch, who works at Zappos, told Mashable in 2014,

Kind of the broad overarching theme about why we’re adopting this is to try to scale agility.” Bunch continued, “The point we’re at as a company is we’ve gotten past where we can be like a small family and really adapt our business to real-time environments.

The experience of Zappos hasn’t been simply smooth sailing. The company’s CEO, Tony Hsieh, announced in 2015 that employees would either have to adjust to holacracy or leave the company, together with a hefty severance package. After the announcement, nearly 18% of employees had decided to quit.

However, Hsieh argues the employee exodus shouldn’t be explained through a failure of the system. He told the TechInsider,

Anecdotally I would guess that about half of them, the reason they took the offer was because it actually had nothing to do with Holacracy or self-management. It was just because they really had wanted to go out and start their own business.

WHAT ARE THE ESSENTIAL ELEMENTS OF A HOLACRATIC SYSTEM?

Holacracy includes a variety of elements to reorganize the governance structure of an organization. This section will look at the principles of a holacratic system through two lenses. First, we’ll use the company Zappos as an example to explain the elements. Secondly, we’ll also explain how these structures differ from a traditional hierarchy.

1. Roles instead of job descriptions

Perhaps the striking difference between traditional governance structures and the holacracy model is evident in job descriptions. Whilst we are typically used to job titles such as vice president, manager and so forth, holacratic systems remove these altogether.

Traditionally, specific titles and job descriptions provide each person working in the organization a specific set of tasks they need to accomplish. For instance, a job title ‘The Head of IT” might require the person to manage the IT department, respond to employee queries and report to the senior management.

On the contrary, under the holacracy model, the organization focuses on roles. These roles come from the work within the organization; as they are not restricted to a single individual. Hence, instead of having a single job description, the employees can fill several roles within the holacratic organization. There’s also fluidity, as the roles of each person change depending on the required work.

2. Circle structure instead of departments

Traditional organizations are generally structured around a hierarchic model. You have someone above you in the organization who you report to and who assigns you tasks. However, holacracy removes this hierarchical structure in favor of a circle structure.

This means that roles form a circle structure within the organization. For example, certain roles regarding the organization’s finances might form a larger circle. However, there is hierarchical organization in the way the circles are laid out. Certain circles are ‘above’ others. Nonetheless, each circle has the ability to self-organize.

The authority to decide about roles and to assign tasks lies within the circle, not a single person or a different part of the organization. Decisions within each circle are made in a democratic way, not dictated by one department head. That’s the most significant difference between a traditional department and a holacratic circle.

Hsieh explained this structure is “about moving faster, being more responsive and adaptable, and enabling employees’ talents and passions to shine”. Each circle can gather around and adjust the roles and tasks without having to run everything through a hierarchical system.

What does that look like in practice? If an employee at Zappos wants to change something, he doesn’t have to approach his manager anymore and convince him to solve the problem. Instead, he can ask the circle to assign him the authority to solve the problem himself. As a result, leadership is distributed throughout the whole organization, fostering innovation and improving efficiency.

3. Rapid iterations replace big re-organizations

Another element of holacracy is the way how it deals with re-organizations. Unlike in traditional organizations, where structural updates happen every few years, holacratic structures are updated in rapid iterations.

The aim is to keep the organization up-to-date. Important changes occur frequently, and not always within the company. Modern day organizations are constantly changing because of changes in the technological and economic environment, and holacracy wants to ensure the structures are updated monthly to adjust to the latest changes.

Part of this are the so-called “governance meetings” where people inside a circle can discuss how to organize roles and other processes. This sort of organizational rapid iteration is a key part of operations at Zappos.

4. Regular meetings to distribute roles and authority

Holacratic systems also implement a different type of governance process. In a traditional organization, authority belongs to certain people who then delegate authority further. While the authority is somewhat shared under these models, the ultimate decision-making power is centralized at the manager in-charge. In order to implement a new idea or to make a change, employees must always seek the approval of the manager higher in the hierarchy.

Holacracy changes this and instead focuses on ‘integrative decision making’. People are able to self-organize and make adjustments without having to consult a superior. This allows the system to change fluidly and shifts responsibility and accountability to the individual.

To accomplish this, there will be strategic, operational and governance meetings within each circle. During these meetings, employees come together and discuss strategic issues, current project and distribute and redistribute authorities within the circle.

5. Transparency instead of office politics and constant relationship building

Traditional organizations tend to have a clear set of procedures that are followed strictly and changes are often slow to come by. Employees are subject to “office politics,” which means that people with insider information and close relations get ahead, while other, potentially more qualified employees do not advance within the organization.

Holacracy focuses on transparency and the operational needs of the organization. At Zappos, employees are free to make the decisions and have more authority to solve problems. The rules are laid out in the holacracy constitution and everyone has to follow these rules. There is no space for individual office deals, bypassing certain rules. The priority is that things get done.

THE ADVANTAGES AND DISADVANTAGES OF HOLACRACY

While Zappos has enjoyed some of the benefits of this organizational set-up, it hasn’t been without a few drawbacks. Holacracy has also received its fair share of criticism and the system has its limitations.

The advantages – an learning organization that adjusts quickly to changing environments

The advocates of holacracy believe the system is essentially a better form of governance, which enables and motivates employees to participate in decision-making and to be more innovative. When Zappos introduced holacracy, they also found the system to benefit the organization’s work culture.

Whilst it’s easy to think holacracy doesn’t have a hierarchical structure and is therefore chaotic, Zappos found the opposite to be true. Hsieh said in an Inc. interview,

There actually is more structure in some cases and more explicit documentation on what people’s different roles are, what their accountabilities are.

Therefore, the holacratic model can provide organizations with more transparency and accountability. Because the rules in the Holacracy Constitution 4.0 are laid out in detail, and everyone in the organization is supposed to read these, there is no room for murky office deals and politics. Everyone knows how the organization operates and the rules are the same for everyone.

Furthermore, as the layers of bureaucracy and traditional top-down structures are removed, the organization’s employees have the chance to work more efficiently. Since you aren’t required to run all of the decision through someone else, the chances are higher that things get done.

In the traditional system, if you found a problem in a specific area, you’d have to first identify the responsible manager. Then they’d probably need to run the issue with other managers at higher hierarchical levels, which needs time. On the contrary, under holacracy, if the circle is in charge of the issue, it doesn’t necessarily matter who solves the problem and it’s easier to distribute the authority needed to solve problems.

Naturally, this sort of agility breeds and encourages innovation. Hsieh writes in Zappos Insights,

When companies get bigger, innovation or productivity per employee generally goes down”.

In order to solve this issue, the company uses holacracy.

Holacracy…enables employees to act more like entrepreneurs and self-direct their work instead of reporting to a manager who tells them what to do,” he concludes.

The disadvantages / criticism – the big picture gets lost and not enough focus on customers

Holacracy has also faced criticism and there are certain drawbacks to the system. The most obvious flaw critics point out to is the ‘loss of the big picture’. Since there’s no deep-seated hierarchical structure, the individual circles can become too focused on their own tasks. Therefore, the ‘big picture’ is lost, as the focus is on getting smaller processes to perform smoother.

The Economist pointed out in an article how past experiments with democratic structures have not always provided suitable results. While the article acknowledged the system could work in smaller companies such as Zappos, larger firms probably would not benefit from these fluid structures.

The system has also faced criticism in terms of its approach on the customer. The Holacracy Constitution has explicit feedback mechanisms, but these are only vertical within the institution, i.e. employees are able to provide better feedback. However, the Constitution doesn’t provide much information on customer feedback.

SYNERGY EFFECTS OF HOLACRACY AND LEAN STARTUP: A “LEAN LEARNING ORGANIZATION”

The holacracy model is often discussed in connection with the lean startup idea, as the two models have many synergies and could offer a viable organizational structure for companies.

The lean startup model was developed by entrepreneur Eric Reis. It’s focused on ensuring that a new startup learns about its market as quickly as possible without using many resources in the process. The ideal process would look something like this:

Have an idea for a new product -> identify the riskiest assumptions about the market -> build a ‘minimum viable product’ to test these assumptions -> release the ‘minimum viable product’ -> measure user interaction to learn whether assumptions were valid -> use the data to improve or change the product -> run the process again and again

Zappos story follows the lean startup model rather well. It started out with the hypothesis that people would buy shoes online. Hence, Zappos opened a rudimentary website to provide shoes online, which customers slowly started using. As the user base grew further, the company began measuring the traffic and monitoring their preferences in order to improve the website.

The lean startup theory focuses on operational procedures, while holacracy focuses on a governance structure. However, both systems fit together and could form a “lean learning organization,” providing answers to the above criticism that holacracy doesn’t include the customer. As lean startup models are quite focused on using customer experience at the centre of product development, this would make up for the lack of customer focus in holacracy.

Overall, holacracy and lean startups provide a suitable match because:

  • Lean startups focus on operations, whilst holacracy emphasizes governance. A business which uses both approaches would answer the questions: “What product to sell?” and “How do we organize?”
  • Both systems aim at an efficient, flexible and fast learning organization. Lean startup models focus on gathering data to improve learning, whilst holacracy ensures decision-making is swift and based on operations.
  • Both systems use fast iteration cycles. You don’t spend too much time to make decisions or to test products and governance structures, but you adapt to situations as fast as possible.
  • Both systems are created for high uncertainty.
  • Both systems use data immediately when it’s available.

Holacracy is definitely a new way of thinking about organizational structure and management. While it might not benefit certain companies, it could be an innovative and efficient way to model a new startup. In combination with the lean startup theory, this could completely change the way how many startups operate.

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