How Netflix Works

A truly revolutionary way of building a company

Good evening,

I hope you managed to through some of my book recommendations for the year last week.

If you did, you’d be glad to know that today’s piece is on a theme that one of them covers quite beautifully: building a winning organizational culture.

Every company boasts of being the greatest place to work ever and winning dozens of awards for the amazing things they do. But even a toddler doesn’t fall for that shtick.

Having run a company for the last 7 years, I know first-hand how challenging it is, so I was naturally intrigued to hear about all the hype and attention Netflix keeps getting for its radical policies.

We’ve all heard about their cool-as-hell culture doc that went viral years ago. But I’ve always been a bit skeptical- has Netflix really managed to do something out of the ordinary?

That’s when I came across a new book co-authored by Reed Hastings (Founder of Netflix) and Erin Meyer (Business professor, INSEAD) called No Rules Rules. A few rave reviews were enough to convince me to pick it up. It’s safe to say that I was totally blown away by what I read.

The book is an inside view of the culture and policies that Netflix has built since its inception, and Meyer’s expertise is helpful in conducting a third-person analysis of what it is that really makes those ideas so special and effective.

I was so mesmerized by the stuff that I couldn’t believe that a company can really implement such policies and still grow at a breakneck pace. Forget growth, how on mother Earth does a company even survive when it does things that sound so whacked up?

Well, the truth is, not only have they grown, but they’ve grown in a way that left most market watchers gasping for breath. On top of that, they have survived multiple disruptions/existential threats and have successfully changed gear in order to emerge as a stronger and more relevant business.

So what’s their secret sauce- the ideas that sound so unbelievable on paper and yet get practiced in Netflix offices all over the world?

Let’s understand them with some short points that are crispier than the tub of nuggets you devoured last night:

Increase Talent Density

Netflix’s entire culture can be summed up in 3 words: Freedom and Responsibility. It’s essential to understand that total freedom can only be provided when the talent that gets access to it is really the best out there. Research indicates that even one average performer is enough to bring down the performance and morale of the entire team. So when Netflix faced its first major setback during the dot com crash, they laid off everyone except the very best. The thesis here is that average performers are a big drain on managers. By bringing down the overall level of productivity, they cause even the high performers to jump ship, who would rather join a company where they get challenged and learn from equally (or more) competent people.

Radical candor

Building on that, they hired only the best folks and then created a culture of radical candor: where anyone can speak openly and give candid feedback to any other person, regardless of the hierarchies. “Only say to someone what you’d say to their face”. It’s typical for much younger folks to even tell Reed that he’s probably wrong about his ideas- a practice that is impossible in most companies and ends up shocking even the new folks who join Netflix. The idea here is that being open and candid with the intention of helping the other person improve works magically when everyone’s talented and leads to a culture of high performance which is supremely contagious. But such candor can also be a recipe for disaster, which is why they’ve developed a framework on how to give feedback (actionable, not to be given when angry, with the agenda to foster improvement, etc) and train new people to ensure it’s done properly.

No Vacation and Travel policy

In line with the strategy of reducing as many controls as possible, Netflix removed its leave policy: you can take as many as you want at any time! Now, this really does sound like the stuff of dreams but it actually works out pretty well. The interesting thing is that they understood the challenges that come up when such ideas are launched. Since it’s so unprecedented, people usually don’t know how to react. “Should I take a 10-day trip? Or will it make me look like a freeloading prick?”. To resolve such dilemmas, people usually look to others for guidance, which is why they ensured that the managers would have to lead by example: themselves taking vacations to completely normalize the idea. Similarly, there are no controls and approvals for business travel. Instead, the entire travel policy is: “Act in Netflix’s best interest”. No fights with the admin team, no cajoling your boss, no waiting for 20 levels of hierarchy to approve your flight option. Inspiring stuff!

Pay Top of Market

Another idea that sounds totally nuts is that Netflix actually encourages its employees to talk to recruiters, give interviews and constantly assess their market value! Here’s the philosophy: annual appraisal cycles are broken. They slot people into neat little categories (like 5% or 10%) and end up demoralizing highly competent folks who easily get poached. Instead, Netflix spends a lot of time trying to assess the market value for its talent to decide how compensation should be computed. Since they hire only the best, they decide to pay top of personal market- which means, they’d give probably 20% more than what a person would get in other companies. But with great pay comes great responsibility, and they also have a ‘Good performance will get a generous severance’ policy. Taking the ‘Good is the enemy of great’ idea to heart, the company lets go of talent that doesn’t perform exceptionally well! Additionally, if during the appraisal, the company assesses that the market hasn’t moved much for a particular role, they don’t give a hike. This is a radically different compensation policy and it’s amusing that it works out so well at their scale.

No Decision-Making Approvals

Yet another utopian-sounding philosophy that the company follows is this: “You’ve hired an employee because they’re competent and know how to do a good job. So why do they have to take approvals for it?”. People are encouraged to take bets and own their decisions. This is borne out of Reed’s own bad experiences when he launched a really bad product feature with terrible consequences…only to realize that a lot of team members were against it but didn’t speak up out of fear/lack of a platform to do so. Building on that experience, Netflix has built an innovation cycle where employees are encouraged to socialize their ideas, circulate memos asking people to rate them, and farm for opposing views so they can be stress tested. Bigger ideas are expected to be piloted with small tests but employees are never stopped by their bosses from doing something big or daring. In fact, they’re made to sign contracts themselves so they feel a sense of ownership and responsibility for the bets they’re taking. Once again, this is almost unheard of, especially for a Fortune 500 firm, and it still amazes me to think how this level of decentralized decision-making consistently produces delightful outcomes.

Transparency

Just like radical candor, the level of transparency practiced is unusual- to the point that even company secrets are shared with employees. Employees are shown the P&L so they feel they’re part of the business instead of just another spoke in the wheel who only has to do his/her own job and nothing more. The belief is that showcasing this level of trust and openness fosters greater commitment and ownership. Moreover, even the bad news is told to the team pretty transparently. If there’s a possibility of a layoff in a year, a manager opts to be open about it rather than saving the bad news for the very last moment. The clarity can be unsettling initially but works out well as it never leaves people with gnawing uncertainty about anything to do with their jobs. Another excellent practice is to shine your mistakes openly. The resulting vulnerability is great in building bonds and getting others to open up too. The only caveat is that such things can only be practiced in a high-talent-density environment- if incompetent people publicize their mistakes, they stand the risk of being judged even more (instead of being empathized with)- which links this back to the very first point.

There are many more (unbelievable) ideas that are routinely practiced at Netflix but I couldn’t dive into all of them for the sake of brevity.

If you're intrigued, I’d really recommend you read the book- it’s not just a theoretical account but dives into stories of employees talking about their experiences and Reed himself candidly sharing the mistakes that eventually shaped this culture. It’s inspiring.

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You can also read some of the other popular articles from the archives: like this one on travel or this short piece on the dark story of our capitalist system.