The secret sauce of Netflix: No Rules Rules

Traditionally, as a startup grows, so does its culture. A successful tight knit group eventually grows to dozen people, then a larger team. With more people to manage, the organisation begins enforcing more rules, processes, and policies. Dress policy, leave policy, and a policy on travel and expenses. 

This is the traditional progression for almost every company. It’s what we understand as the sensible way of running a business. Global streaming service Netflix, on the other hand, completely goes against the grain. The Netflix leadership team believes enforcing rules stifles innovation and creativity. They view policies and process controls as what makes a company unable to adapt to disruptions in the industry.

As described by co-founder Reed Hastings, it’s a culture that “values people over process, emphasises innovation over efficiency, and has very few controls.” 

It’s this weird and wacky, yet somehow immensely successful culture cultivated at Netflix that is explored in No Rules Rules by Reed Hastings and Erin Meyer.

To truly understand the growth of Netflix as a company, you first have to consider the context and environment which the company launched into. Founded in 1997 by Reed Hastings and Marc Randolph, Netflix started off as a rent-by-mail service for DVDs.

Customers would browse their website, select a DVD title, and it would be posted to their door a few days later. This later evolved into CD rental as the technology advanced at the turn of the century. But remember, the internet was only just becoming a mainstream activity in the 90s. 

It was tough enough to run this type of business, let alone compete for market share with a multi-national goliath, better known as Blockbuster. At the time, Blockbuster was the leading video rental company with more than 9,000 stores and a valuation of nearly $6 billion.

As discussed in No Rules Rules, in its desperate early days Netflix made a pitch to Blockbuster to develop and run Blockbuster.com, a digital arm to its brick-and-mortar business. According to Hastings, they were laughed out of the office.

But less than a decade later, Blockbuster filed for bankruptcy in 2010. Today Netflix employs over 12,135 employees worldwide, is available in over 190 countries around the world and is valued at over $246 billion. Not only did it pass Blockbuster, it revolutionised the entertainment industry and how we consume content.

No Rules Rules is a book that analyses Netflix’s secret sauce, particularly its company culture that disrupted, adapted, innovated, and made unimaginable creative leaps.  

To explore how the company reinvented itself time and time again, Hastings approached Erin Meyer to co-write the book. Meyer is the author of The Culture Map: Breaking Through the Invisible Boundaries of Global Business, which studies how different national cultures impact business. As Hastings provides his business insight to decisions made by the company, Meyer unpacks these and evaluates why they worked. Or in some cases, why they didn’t. 

The book defines the foundation that makes up Netflix’s successful culture. This is broken down into three areas, written in a way that can be applied and replicated by most organisations.

1. Build-up, strengthen and max-out talent density

Talent density is achieved by creating a workplace filled with high performers. For Netflix, this was accelerated by the burst of the .com bubble, meaning the company had to downsize and retained only the high achievers, culling the mediocre employees.

Hastings explains that most businesses enforce rules and policies as a way to control careless or sloppy employee behaviour. Take the expense policy for example — most businesses enforce an expense budget as a way to avoid the risk of an irresponsible employee over-spending when travelling. Hastings argues that if you avoid these types of employees, your organisation essentially doesn’t need these types of rules, meaning you can eliminate most of these controls.

Once the workplace is filled with high performers, it’s important to compensate them at the top of the market. According to data, the main reason employees leave their current job is for more money (44%), therefore paying at the top of the market is the best way to retain and strengthen talent density.

The book also advises managers to put employees through The Keeper Test — “Which of my people, if they told me they were leaving for a similar job at a competitor or peer company would I fight hard to keep.” By doing this, the organisation is being proactive about its talent and tough on performance.

2. Introduce and increase candour

Netflix prides itself on honesty and constant feedback. Hastings explains that the normal, polite way of giving feedback to employees usually restricts people from providing valuable feedback necessary to truly lead to progress. Think how many times you’ve wanted to give honest feedback, but were afraid to hurt your co-workers feelings. 

Netflix squashes this restriction by encouraging its employees to provide honest feedback, often. Hasting explains that doing this allows high achievers to become better at what they do, be more resilient and more accountable.

Candour can then be increased by creating more transparency at an organisation level, then creating a way to increase a circle of feedback throughout the organisation.

3. Reduce and release controls

Netflix famously has no leave policy, no travel policy, and no dress policy. Hastings advises that organisations scrap travel, expense, and leave policies to truly reduce controls. Rather, it’s up to the employee themselves to decide how and when they want to take time off from work. 

Leaders within the company must be the model for good behaviour — such as taking an appropriate amount of leave. As Hastings puts it, “a boss who never vacations will result in an office that never vacations.”

As for the expense policy, removing this will overall help the organisation through employees having the freedom of making quick decisions. It will also help with administrative costs associated, such as procurement processes. However, Hastings advises that employees need context. For example, managers must set the context of what’s an appropriate amount to spend. If people are caught abusing the system, Hastings suggests they are fired and the situation is spoken about openly to deter others.

Organisations can look at removing further controls that help the organisation remain quick and agile, such as decision making approvals.

The main takeaway from No Rules Rules is that you can retain an innovative, agile company culture while scaling rapidly. The guidebook style of the book is perfect for anyone who is looking for inspiration, insights and advice on how to create an agile work environment. It explores trial-and-error, and why big ideas need to be constantly tried and tested.

All in all, it’s a must read for any startup or small business that is experiencing growth and is looking to maintain an innovative and agile company culture.