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At Zappos, an engaging work culture comes first; the company lavishly invests in morale. But what's the business rationale for spending generously to make employees happy? Economics correspondent Paul Solman visits the eccentric Las Vegas headquarters of Zappos, a company that's known for its devoted customer service and philosophy of self-management rather than hierarchy.
But first: You might know retailer Zappos for the shoes it sells and its emphasis on customer service. What you may not know about is its quirky corporate culture, and why the company is banking on that for its long-term success.
Our economics correspondent, Paul Solman, reports, as part of his weekly series, Making Sense, which airs every Thursday.
Definitely the best port-a-potty experience I have ever had.
From its Porta Party P.R. to its campus in downtown Vegas, Zappos, the online shoe monger, is devoted to different.
JASON BROWN, Zappos:
Let me give you these three rules about wearing wallflowers, as we like to call them.
Wallflowers, because you see we have got the wall? And we call them wallflowers.
Front desk dress code enforcer Jason Brown gives visitors three options.
First one is to take it off if it holds sentimental value to you. The next one is to wear it around your head in a bandana, John Rambo-style. And then the last one is to cut, and it becomes part of the collection.
Thankfully, my tie was deemed passably peculiar and thus spared a spot on the wall. Amidst decor both seasonal, lanterns for Chinese new year, and longstanding, like the ShoeZaphone.
Tony Hsieh took over Zappos 17 years ago, after selling his online ad network, LinkExchange, to Microsoft for a cool $265 million.
TONY HSIEH, CEO, Zappos:
What a lot of people actually don't know is the real reason why we ended up selling the company.
And that is?
And it's because the company culture just ended up going completely downhill. I myself dreaded getting out of bed in the morning to go to my own company.
History wouldn't repeat itself, Hsieh vowed. So, at Zappos, culture comes first. And that starts with hiring people who will fit.
I remember coming in, and one of the things was, we're not trying to hire based off of your education. We want to hire based off of someone I would want to go have a beer with after lunch.
Well, I would want to have a beer with you, and I barely know you.
Yes. I wouldn't have a beer. We could have a shot.
Zappos' core values are an obsession: embrace change, be humble, create fun and a little weirdness.
Musician Tyler Williams heard it was harder to get into Zappos than Harvard. So to be more than a face in the crowd, he sent a video valentine. And when it earned him an interview:
TYLER WILLIAMS, Zappos:
I think one of the craziest questions is they asked, on a scale of one to 10, how weird are you? So, I'm a definitely a 10 on that scale, so I was worried I was a little too weird for Zappos.
Nope, Williams is now a fungineer, the brains behind company galas and other so-called experiences, like Tutu Tuesdays.
We — probably at the pinnacle of its popularity, we had 50, 60 people that would wear tutus on Tuesday.
Another core value, build a positive team and family spirit.
So, we put these games on the elevator to hopefully …
That was good — to hopefully stop and play the game, have collisions, have conversations, and get off on the wrong floor, so people would visit different areas that they normally wouldn't.
Zappos invests lavishly in morale.
Impress a colleague and H.R. will pay you Zollars to redeem for Zappos swag. Each month, employees can reward a co-worker with a $50 company bonus for going above and beyond. And company largess begets acts of random kindness.
LETHA MYLES, Zappos:
I took a picture of a particular bouquet that I liked, and I posted on Facebook, like, oh, I love flowers.
Letha Myles started in customer service nine years ago.
The next day, there was a bouquet of flowers sitting on my desk, along with a note saying: "You make us smile, so we thought we would make you smile."
Birthday balloons abound. Cubicle self-expression is de rigueur.
But, look, what can the business rationale be for all this? Why would Amazon pay more than a billion dollars for Zappos in 2009 and then let it spend so generously for so long just to make its employees happy?
I think it's pretty hard to give great, amazing service if you're an unhappy employee.
Turns out Zappos' business is service. It started with shoes, as Amazon did with books, aims to branch out.
We have talked about one day there could be a Zappos airlines or a Zappos hotel that's just about the very best customer service and customer experience.
Well-known service, like the 365-day free shipping return policy, managed by customer service reps who start at $14 an hour and comprise a third of all employees and above-and-beyond service. Two flight attendants told me Zappos, when asked, sent pizza to an auditorium full of new JetBlue hires.
In fact, we just had our longest phone call ever, which was well over 10 hours' long.
But what were they talking about?
I wasn't there, but I think they — they bonded.
So, for you, to hear that somebody spent 10 hours on the phone with a customer bonding, that's a good thing, not a waste of time?
That's an amazing thing.
But what's the payoff?
2008 was the first year we hit a billion dollars in gross merchandise sales. We're doing several times that now. And the number one driver through all that history has been through repeat customers and word of mouth.
So, Amazon has kept hands-off, while Zappos proselytizes its happy, weird ways, offering daily tours and advising companies that want to emulate it.
Now CEO Hsieh can be impish.
Rachel, do you want me to leave? Get it? Leave?
But he can also be seriously controversial. He's introduced a system called holacracy that, among other things, does away with bosses entirely.
All Zappos' 1,500 employees now belong to some 500 self-governing teams called circles.
CHRIS PEAKE, Zappos:
We're going to start like we do every holacracy meeting with a check-in round. Just call out your distractions. Get here, get ready to process some tensions today and share what you know with others.
I'm only distracted because I have a super long day of meetings.
I'm super, super distracted because the application window is open for intern candidates again for the summer, which means we have thousands and thousands of applicants, in the span of a week, up to like 5,000.
So-called tactical meetings are run by a facilitator, according to a rigid format, using holacratic lingo.
Let's move on to triage, you guys. You can just go ahead and yell those tensions out. And, Rachel, as our secretary, will go ahead and capture those for you.
In the closing round, kudos for efficiency.
A ton of actions. We covered seven items in less than a half-an-hour, and we have like a zillion outputs, which is really great, but, with that, everyone have a great day.
Chris Peake helped with the holacracy rollout.
I would say the best thing about this process is the commitment to action and projects and the transparency to those. I would say probably the most challenging, with Zappos' culture, you introduced a really rigid process within meeting spaces.
Hsieh believes self-management is key to Zappos' longevity, allowing it to grow not like a top-down corporation, but a city.
Most companies, as they get bigger, they become less nimble, less innovative, less productive. Every time the size of a city doubles, innovation or productivity per resident increases by 15 percent.
When you get more people in a relatively smaller area in a city, then you get this crossover of ideas from different creative types and entrepreneurs and businesses.
But self-organization wasn't for everyone. So, two years ago, Hsieh offered a liberal severance package to those not sold on the new structure, in fact, to everyone. Eighteen percent took buyouts, hiking the firm's yearly turnover rate for 2015 to almost 30 percent, though there's plenty of turnover at customer service firms and plenty in Las Vegas, period.
But Letha Myles is sticking with it.
The people who stayed are pretty much saying that they're willing to commit to learning it and practicing it. You know, let's still remember, we're friends, we're family, and I think that helps us stay true to the process.
It felt like it took the humanity out of it. But we have worked that back into the process, I feel. And everybody's voice gets heard, which, usually, in the past, it was just the loudest person in the room, right?
Williams points out that Zappos is now canine-friendly, because it was deemed safe enough to try, a key idea in holacracy.
In the past, that had been shut down multiple times. And through holacracy, we were able to push that through. I know that's not a huge deal, but it's a big deal to our employees.
But Hsieh thinks self-management will accomplish something much bigger: saving Zappos from the fate of most large companies.
If you look at the Fortune 500 list, which I think came out in 1955 originally, something like 85 percent, maybe more, are no longer on that list. The default fate for most companies is actually death. I want this company to still be around 500 years from now.
This is economics correspondent Paul Solman, still wearing my tie, reporting from Las Vegas.
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