Meyer

Reed is another Netflix leader who frequently displays these two behaviors. And in return he receives more negative feedback than any other leader in the company. The proof is his 360-degree written assessment, which is open for everyone to contribute to, and where he consistently gets more feedback than any other employee does. Reed solicits feedback continually and religiously responds with belonging cues, sometimes even speaking publicly about how pleased he’s been to receive a piece of criticism. Here is a paragraph from a memo he shared with all Netflix employees in spring 2019:

360 is always a very stimulating time of year. I find the best comments for my growth are unfortunately the most painful. So, in the spirit of 360, thank you for bravely and honestly pointing out to me: “In meetings you can skip over topics or rush through them when you feel impatient or determine a particular topic on the agenda is no longer worth the time... On a similar note, watch out for letting your point-of-view overwhelm. You can short-change the debate by signaling alignment when it doesn’t exist.” So true, so sad, and so frustrating that I still do this. I will keep working on it. Hopefully, all of you got and gave very direct constructive feedback as well.

By Reed’s count, he takes six weeks of vacation a year, and from my limited experience, I would add “at least.”

Reed’s own modeling is fundamental to the success of the unlimited vacation policy throughout Netflix. If the CEO doesn’t model this, the method can’t work. Even then, Reed’s substantial vacation-taking has trickled down as intended in some areas of Netflix and not so well in others. When those leaders under Reed don’t follow his example, their employees often sound a bit like the zombies from Reed’s nightmares.

As Netflix grows there are an increasing number of pockets where Reed’s modeling and Patty’s initial instructions don’t seem to have trickled down. On these Netflix teams, the “no vacation policy” does feel a bit like a “no vacation” policy. But many leaders at Netflix are consciously following Reed’s modeling, taking big vacations and making sure everyone is watching. And when they do, employees use the freedom Netflix provides in many surprising and beneficial ways.

When you offer freedom, even if you set context and clarify the ramifications of abuse, a small percentage of people will cheat the system. When this happens, don’t overreact and create more rules. Just deal with the individual situation and move forward.

This finding makes perfect sense. Creative work requires that your mind feel a level of freedom. If part of what you focus on is whether or not your performance will get you that big check, you are not in that open cognitive space where the best ideas and most innovative possibilities reside. You do worse.

This tendency has a name: the pratfall effect. The pratfall effect is the tendency for someone’s appeal to increase or decrease after making a mistake, depending on his or her perceived ability to perform well in general. In one study conducted by Professor Lisa Rosh from Lehman College, a woman introduced herself, not by mentioning her credentials and education, but by talking about how she’d been awake the previous night caring for her sick baby. It took her months to reestablish her credibility. If this same woman was first presented as a Nobel Prize winner, the exact same words about being up all night with the baby would provoke reactions of warmth and connection from the audience.

When you combine the data with Reed’s advice, this is the takeaway: a leader who has demonstrated competence and is liked by her team will build trust and prompt risk-taking when she widely sunshines her own mistakes. Her company benefits. The one exception is for a leader considered unproven or untrusted. In these cases you’ll want to build trust in your competency before shouting your mistakes.

Dispersed decision-making can only work with high talent density and unusual amounts of organizational transparency. Without these elements, the entire premise backfires. Once those elements are in place, you are ready to remove controls that are not just symbolic (such as vacation tracking) but also have the power to dramatically increase the speed of innovation across your business.

People desire and thrive on jobs that give them control over their own decisions. Since the 1980s, management literature has been filled with instructions for how to delegate more and “empower employees to empower themselves.” The thinking is exactly what we’ve heard from Paolo. 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!

Smith, however, was an entrepreneur, and that Yale paper became the basis for FedEx, which he founded in 1971. He was also a betting man: once, in the early days of FedEx, after a bank had refused to extend a crucial loan, he took the company’s last $5,000 to Las Vegas and won $27,000 playing blackjack to cover the company’s $24,000 fuel bill. Of course, Netflix doesn’t encourage its staff to go to casinos, but it does seek to instill some of Fredrick Smith’s spirit into the workforce. As Kari remembers:

When I started at Netflix, Jack explained to me that I should consider I’d been handed a stack of chips. I could place them on whatever bets I believed in. I’d need to work hard and think carefully to ensure I made the best bets I could, and he’d show me how. Some bets would fail, and some would succeed. My performance would ultimately be judged, not on whether any individual bet failed, but on my overall ability to use those chips to move the business forward. 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.

INNOVATION CYCLE STEP 2: FOR A BIG IDEA, TEST IT OUT

Most successful companies run all sorts of tests in order to find out how and why customers behave the way they do—and the results of those tests usually influence the corporate strategy. The big difference at Netflix is that the tests take place even when those in charge are dead set against the initiative.

The big guys, Neil and Reed, were set against the idea publicly and privately. At most places this would be end of discussion. But Todd Yellin, VP of product, (who worked for Neil) had doubts. He discussed with Zach Schendel (senior user experience researcher) about running some tests to find out if Neil and Reed’s claims were accurate. Zach remembers it like this:

I thought, “Neil and Reed are against this idea. Is it okay to test it out?” At any of my past employers, that would not have been a good move. But the lore at Netflix is all about lower-level employees accomplishing amazing things in the face of hierarchical opposition. With that in mind I went ahead.

When you read about Freedom and Responsibility at Netflix, it’s easy to get lost in the lovely idea of Freedom without properly considering the accompanying weight of Responsibility. Being the informed captain and signing off on your own contracts is a case in point. Although Reed certainly doesn’t intend to induce fear and trembling in his workforce, part of the reason that F&R works so well is because people do feel the burden of the responsibility that comes with the freedom and make extra efforts accordingly.

Most important were the lessons that not just Yasemin, but the entire Netflix Marketing team learned from her mistake. “When we hire new marketing people, we have a series of historic cases we cover with them to teach what not to do. The Turkey Black Mirror campaign is one of our favorite teaching cases and everyone talks about it.” Yasemin explains. “It demonstrates so clearly the importance of socializing and what happens when you don’t do it. But it also helped all of us in marketing to remember our goal at Netflix is to create moments of joy. So don’t run a campaign that’s a little creepy. Don’t try to spook the public into watching our shows. Instead, a good campaign should be exciting, joyful, and just plain fun.

It’s clear that the Keeper Test increases talent density, but it also creates worry. Employees report feelings ranging from “mildly concerned” to “occasionally terrified” that they will be cut from the team.

According to the Society for Human Resource Management’s “Human Capital Benchmarking Report,” the average annual turnover rate for American companies the past few years has been around 12 percent voluntary turnover (people choosing to leave the company of their own accord) and 6 percent involuntary (people who were fired), which adds up to a total average annual turnover of 18 percent. For technology companies, the total average annual turnover is more like 13 percent, and in the media/entertainment business it’s 11 percent.

Over the same period, voluntary turnover at Netflix has remained steady at 3–4 percent (considerably below the 12 percent average—meaning not many choose to leave) and 8 percent involuntary (meaning 2 percent more people get fired at Netflix than the 6 percent average), equaling a grand total of 11–12 percent annual turnover . . . or just around the average for the sector. It seems there aren’t actually that many people Netflix managers wouldn’t fight to keep.

Getting publicly ripped apart sounds like torture. Each time I go to a live 360 I’m nervous. But after you get started, you see it will be fine. Because everyone is watching, people are careful to be generous and supportive in the way they give the feedback—with the intention of helping you succeed. No one wants to embarrass or attack you. - Larry Tanz, VP of content.

Ten years before, in 2007, Leslie Kilgore had coined a phrase, which is now used across Netflix to describe exactly what Ted was doing as he walked out through the lobby of the hotel: “Lead with context, not control.” At just about any other company, with this much money on the table, the senior guy would get involved and control the negotiations. But that’s not what leadership looks like at Netflix. As Adam explained: “Ted wasn’t about to make that decision for me, but he set broad context to help align my thinking with the company’s strategy. That context he set laid the foundation for my decision.

Leading with context, on the other hand, is more difficult, but gives considerably more freedom to employees. You provide all of the information you can so that your team members make great decisions and accomplish their work without oversight or process controlling their actions. The benefit is that the person builds the decision-making muscle to make better independent decisions in the future.

Therefore, the first question you need to answer when choosing whether to lead with context or control is, “What is the level of talent density of my staff?” If your employees are struggling, you’ll need to monitor and check their work to ensure they are making the right decisions. If you’ve got a group of high performers, they’ll most likely crave freedom and thrive if you lead with context. But deciding whether to lead with context or control isn’t just about talent density. You also have to consider your industry, and what you are trying to achieve.

When considering whether to lead with context or control, the second key question to ask is whether your goal is error prevention or innovation… 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. Although many brick-and-mortar retailers have gone out of business as increasing numbers of people shop online, Target has made a priority of imagining fresh ways to get customers into the stores.

If you’ve got high-performing employees, leading with context is best. To encourage original thinking, don’t tell your employees what to do and make them check boxes. Give them the context to dream big, the inspiration to think differently, and the space to make mistakes along the way. In other words, lead with context.

But when Ted and Melissa sat down in late October 2017, Ted spoke not about what people at Netflix knew but about all the things they didn’t know yet:

Look, Melissa, we are at a turning point for Netflix. We have forty-four million members in the US. The big growth will be international and we have a lot to learn. We don’t know if Saudi Arabians watch more or less TV during Ramadan. We don’t know if Italians prefer documentaries or comedies. We don’t know if Indonesians are more likely to watch movies alone in their bedrooms or around their family televisions. If we are going to succeed, we need to become an international learning machine.

Melissa was already familiar with the language of bet-taking used at Netflix and the implication that some bets will succeed and others will fail. What the gambling analogy didn’t capture was the critical aspect of learning from all that failing. This brings us to the context set by Ted:

As your team purchases and creates content around the world, we need to be laser-focused on learning. We should be ready to take bigger risks in high-growth-potential countries like India or Brazil so that we learn more about those markets. Let’s have some wins. But let’s also have some big messy losses where we learn how to succeed better the next time. We should always be asking, “If we purchase this show and it bombs, what will we learn from that?” If there is something big to learn, let’s go ahead and take the bet.

ARAM YACOUBIAN ON A SMALL BRANCH—MIGHTY LEARNINGS FROM LITTLE BHEEM

When Aram saw the original version of the adorable Indian animation series Mighty Little Bheem, he thought it would be a big hit in India:

The main character is this little child in a small Indian village, whose boundless curiosity and extraordinary strength leads to all sorts of adventures. He’s like a baby Indian Popeye. His character is based on Bheem, a mythical character in the Sanskrit epic Mahabharata, known across India. It seemed obvious to me, Indians would love this show.

But Aram had serious doubts about whether it was a good bet for Netflix. The first concern he had was with the animation quality.

Indian shows tend to be low budget. The quality of the animation was good enough to be popular on Indian TV. But I thought about what Dominique and I had agreed on. We wanted to make sure the quality was high enough to be successful not just in the country of origin but around the world. I knew that if we were going to purchase this show, we would have to invest two or three times what is normally spent on an Indian animation to get the quality we were looking for.

This led to Aram’s second concern:

That was a lot of money to invest in an Indian show. To recoup the investment we’d have to get a lot of children all around the world to watch it. But very few Indian programs had ever been hugely popular outside of India—in all the history of television and streaming. This was due to low budgets but also to a belief that the storytelling was too locally specific for global audiences. There was a widely held belief that Indian series didn’t travel well.

Aram’s third concern was the lack of historical data on preschool shows—even within India:

Mighty Little Bheem is for young children and until now there had been practically no preschool shows made in India either for streaming or television. That’s because Indian rating agencies don’t measure preschool shows, so they can’t be monetized. Was there even an audience in India for programming aimed at such young kids? History couldn’t provide an answer.

On the face of it, all this made things look pretty bad for Mighty Little Bheem. “All of history and all these business reasons were telling me not to make this show,” says Aram. But he also reflected on the context the Netflix leaders had set for him:

Reed made it clear that international expansion is our future and India is a key growth market. Mighty Little Bheem is a great show from a key Netflix growth market. Ted made it clear that when it comes to countries like India, we have so much to learn that we should take big risks, as long as the learning potential is evident. With Mighty Little Bheem what we would learn from the bet was very clear. The context Ted had set was enough for me to say, “Okay, even if this show crashes and burns, I’m trying three different things, all of which are going to provide Netflix with really good information.”

Melissa made it clear that we wanted children’s shows from around the world that were deeply local in topic and texture to make up our programming slate. Mighty Little Bheem was deeply Indian and had the elements to appeal to children anywhere.

Dominique and I had agreed that we should prioritize animation for our big international bets and that this animation should be of high quality. Mighty Little Bheem was an animated show that could achieve the high quality we needed with a financial investment.

With this context in mind Aram made his decision. He purchased Mighty Little Bheem and gave money to the local creators to upgrade the animation. The show launched mid-April 2019 and within three weeks became one of Netflix’s most watched animated series from anywhere in the world. It has now been watched by more than twenty-seven million viewers.

The rules-and-process approach has been the primary way of coordinating group behavior for centuries. But it isn’t the only way, and it isn’t only Netflix using a different method.