Context Beats Control

The Core Insight

The head of product at Netflix did the arithmetic for the executive team. At the current growth rate, the company takes a third of United States Internet bandwidth within a year. Growth had run about 30 percent a quarter for three quarters in a row. Patty McCord spent fourteen years on that executive team. Asked whether anyone knew how to manage growth like that, she said she did not know.

Powerful, published in 2017, is her account of what replaced the management system. The job of a business leader is to build great teams that do outstanding work on time. McCord holds that nothing else belongs in the job description of management.

Most managers believe good behavior comes from incentives, process, and perks. McCord argues that adults bring the behavior with them, and that management exists to clear what blocks them. Companies take power out of the work with process, then run programs to hand a fraction of it back. She ran that machine herself at Sun Microsystems, with 370 people in HR.

The 2001 layoff is the hinge of the book. The bubble burst, Netflix came close to bankruptcy, and the company cut a third of its staff. Then DVD players became that Christmas's gift and the business took off. Two thirds of the people did twice the work, and everyone was happier. The ones who stayed were the highest performers, and McCord took the lesson the book runs on. The best perk you can give an employee is high performing colleagues, and her name for it is talent density.

The Framework

The system has a name, freedom and responsibility, and the freedom comes with discipline. McCord cut the words policy and procedure out of her vocabulary and kept the discipline. Culture change means naming the behaviors you want to become consistent practices, then instilling the discipline of doing them. She ran the change the way a product team runs a product: experiments, A/B tests, and a fast kill on whatever fails.

Five practices carry the system, and the Introduction lists them.

• Talk openly and constantly about the work and the challenges, across the whole company.
• Practice radical honesty, face to face wherever possible.
• Hold strong fact-based opinions, argue them hard, and test them.
• Act on what serves the customer and the company rather than on being proved right.
• Make every hiring manager build the team for the work coming next.

One bet sits underneath all five. Adults can hear the truth, spend the company's money sensibly, take their own vacation, and read a P&L. Each policy McCord deleted is a statement that the staff are adults.

Key Ideas

Every Employee Reads the P&L

Context replaces rules and approvals. McCord defines it as clear continuous communication about the work to be done, and she took the idea from open-book management. Teach the customer service reps the P&L and the cost of acquiring a customer, because every referral one of them earns saves that amount. When people do stupid things, assume they are uninformed or misinformed.

Context made the deletions safe, and the list is long.

• The no vacation policy let people take the time they thought appropriate, and behavior barely changed.
• Expense and travel policies went, replaced by good judgment about the company's money.
• Annual planning went, because the road map was wrong within three to six months, so budgets rolled three quarters at a time.
• The bonus system went, on the reasoning that an annual bonus makes an adult work neither harder nor smarter.
• Employees chose what share of their pay arrived as options, and the options vested monthly with no vesting period.

Honesty Gets Practiced in Public

Part of being an adult is being able to hear the truth, and you owe the adults you hire that truth. Raise the problem with the person, face to face where possible. Her standard reply to a manager complaining about a colleague is to ask whether he has told her yet. The one exception to no criticism behind backs is an ethical violation such as harassment, handled confidentially.

The format is Start, Stop, Continue. Each person tells a colleague one thing to start, one thing to stop, and one thing they do well. The executive team ran it aloud in front of the group, modeled and never mandated, and it became an annual feedback day. About 90 percent of employees welcomed it. The system began anonymous, and the engineers rebelled and signed their names inside the message text.

Feedback has to name a behavior and stay actionable, so calling someone unfocused fails on both counts. A Deloitte study found 70 percent of employees admit to staying silent about issues that compromise performance. Qwikster was a train wreck, and the company reversed it within about a month. Everyone had a chance to object beforehand, so the team owned the failure together.

Facts Beat Data

Two questions became house habits: how someone knows a claim is true, and what leads them to believe it. Sales and marketing were barred from venting at the engineers about buffering, and had to ask and mean it. Data is the basis of good questions rather than the answer to them. Ted Sarandos calls his version data informed. Data turns into an accountability shield when a failed show gets defended on the grounds that it tested well.

Surveys showed a small segment adamantly opposed to removing the DVD queue, and the A/B tests showed no difference in retention. They removed it and spent the capacity on streaming quality. Removing the credit card requirement at sign-up was expected to lift subscriptions, and subscriptions plummeted by half, because people were pushed through sign-up twice.

Reed Hastings sat the head of marketing and the head of content in chairs facing each other, and each argued the other's side. After losing an A/B test he argued against, Hastings told the room that Tom was right. A fact-based claim is not automatically a true one.

Hire the Team Six Months Out

Donald Rumsfeld said you go to war with the army you have. McCord inverts it: hire now the team you want to have in the future.

Picture the team six months out at its best, and write down what it accomplishes then that it does not accomplish now. Then work the harder half, which is how the work gets done differently. More meetings or fewer, louder debate, faster decisions, different people making them. Then ask what people need to know how to do for any of that to happen. Only after that do you look at the team you have. Six months is the horizon because that is about as far ahead as anyone pictures a business now.

The company is a sports team rather than a family. Netflix told candidates outright that it was not a career-management company, and told staff to interview elsewhere regularly. The compounding hire is the capacity builder, a person who knows how to build a great team. A CEO at 150 people planned to hire 300, and her question back was whether he wanted seventy-five paid twice as much. More people do not produce more work or better work. One quarter produced twenty hires, and five of them were wrong for the job.

Pay Top of Market for the Work Ahead

Compensation surveys report the past, so the prevailing system runs in arrears. McCord ties pay to performance and cuts the link to the review cycle. Netflix stopped pegging pay to a percentile and decided to pay top of market.

Marking to the 65th percentile does not mean paying 65 percent of the top rate. It means 65 percent of people in that role are paid less and 35 percent are paid more. Marking to market means estimating the market value of the work a person does for you, in the time frame you need it done. If you cannot pay top of market everywhere, pay it for the positions with the greatest potential to raise performance.

Google offered one of her employees almost twice his pay, and she read it as the market value his own work created. She did not want a system where people leave to get paid what they are worth. Two comparable candidates arrive, the woman earning 130,000 dollars and the man 150,000 dollars, and the answer is to offer both 160,000 dollars. Pegging offers to history perpetuated the bias that leaves women underpaid. If you cannot state the reason for a pay gap out loud, look hard at why.

The Good Good-bye Beats the Improvement Plan

Scotty Bowman holds the most wins in NHL history and took three teams to a record nine Stanley Cup victories. The season runs eighty games, and every ten games he sat down with each player individually. He brought their stats, feedback from other coaches and team members, and the player's own self-evaluation. Accenture, Deloitte, and General Electric all dropped the annual review, and GE piloted the change on thirty thousand employees first. McCord asked a Fortune 100 HR executive twice what business metric completing the annual review affects, and got no answer.

The improvement plan gets carried out as a way of proving someone is incompetent, and she calls that cruel. Often the person is fine and the job has moved underneath them. When a hire cannot do the job, the failure sits in the hiring process. She does not ban improvement plans, and she requires that improvement be the real goal rather than a case built to remove someone.

The replacement is a conversation with no verdict in it. She names what success looks like six months out, then says that recruiting the team from scratch, she is not sure she hires you. People sue because they think they were treated unfairly, and that usually means nobody told them the truth in time. She calls the decision rule My Algorithm. Is what this person loves to do, and does exceptionally well, something the company needs someone to be great at?

Practical Applications

Run the six month exercise on your own team this quarter. Write what the team accomplishes half a year out, then how the work gets done differently. Compare that against the people you have, and hire against the gap.

Teach the business before you delete a rule. Walk every person through the P&L and the cost of acquiring a customer. Then delete one policy at a time, and put it back if the experiment proves it was needed.

Move feedback onto a schedule the work can use. Ten games at a time is the interval, and Start, Stop, Continue is the format. Run it out loud at the top first, before asking anyone below to do it.

Price your key roles at top of market before the next raise cycle, starting where a better person changes the output most. Then replace the next improvement plan with a conversation. Say what success looks like in six months, and say it while there is time to act.

Who This Is For

Managers and founders running teams of knowledge workers get the most from this. The book is thin on process and heavy on judgment, written for someone with the authority to decide who sits in a seat. Skip it if you want mechanics, because the operating detail for installing any of this is left to you.

Read the policy set against the company that produced it. Netflix paid top of market in cash and hired from a deep pool of senior talent. Those two conditions made the firing practices survivable. The human cost falls on the people, and not on the company. The person told they are not right for the next six months carries the mortgage, the visa, and the search. Netflix carries a hiring cycle.

The outside world knows the practice by its keeper test, which asks whether a manager fights to keep someone who is leaving. That test is not stated in this book under that name, and the practice behind it is the same one. Copy the firing practices without the pay and the talent density, and the result is cruelty rather than performance. The evidence here is one company, told by an insider, during the years it worked.

The Decision

Stop any employee in your company, at any level. Ask for the five most important things the company is working on for the next six months. McCord's bar is that the person answers rapid fire, one through five, in about the words you use.

A miss means the context is not there, and every rule you delete on top of missing context becomes a real risk. Pay, honesty, and the good good-bye all assume the person across the table knows what the business is trying to do. Run the test on three people this week, and count how many get to five.