(Teal) - Zappos's Evolution: From Holacracy To Market-Based Dynamics

Posted by ProjectC 
'Holacracy provided Zappos with a tool to break free of traditional organization and introduced a shared vocabulary to help people understand what it means to be self-organized and self-managed.

However, employees at the company said pure Holacracy started to create some challenges on its own. "Our circles were still arranged hierarchically, where budgeting or headcount was allocated from the top down," Hsieh explained. He also argued that instead of circles being arranged hierarchically, each should really be its own small business or start-up.

These challenges resulted in Zappos's employees being more focused on solving internal problems within their own organization rather than focusing externally to satisfy their customers’ needs.

To solve these challenges, the company needed additional methodologies and mechanisms to refocus on their customers and reach better self-organization and self-management levels. So, after practicing Holacracy for several years, the company decided to evolve beyond its pure form, leading to the introduction of three new concepts over time:

- Market-Based Dynamics
- Customer-Generated Budgeting
- Triangle of Accountability

Market-Based Dynamics

In March 2017, Zappos introduced a Haier-style internal marketplace where circles (or teams) run like small, independent businesses (like Haier's microenterprises) with a strong customer focus.


Customer-Generated Budgeting


Instead of budgets being passed top-down from the leadership through each microenterprise, Zappos developed the concept of Customer-Generated Budgeting (CGB) around September 2018.

CGB can be seen as a kind of network approach to budgeting where budget conversations and transactions happen between microenterprises across the organization.

In addition, CGB allowed microenterprises to keep most of the revenue they generated for themselves. This ensured that microenterprises no longer had to fight for their annual slice of the budget pie but rather earn their budget directly from their customers instead.

Triangle of Accountability

In early 2019, Zappos implemented the slightly ominous-sounding Triangle of Accountability (ToA) concept, a framework set by the leadership in which all market dynamics between the microenterprises occur.

The ToA aims to provide each microenterprise in their internal market with a minimal number of constraints that enable maximum levels of autonomy and accountability.

As long as microenterprises stay within these constraints, they can engage in any type of business they desire. In fact, they can pretty much do whatever they want and spend their money however they want.

The framework is based on three guidelines:

- Respect the company’s culture and core values
- Deliver the highest customer satisfaction possible
- Ensure healthy team-level financials

From Budgets to Bank Accounts


“In a traditional organization, there is a top-down budget. You’re also incentivized to spend as much money as you can so that you can get more money the next year, or at least the same amount. And that’s not really how we live our day-to-day lives. In my personal bank account, I’m not trying to spend all the money I have there by the end of the year so that I can start afresh the next. That’s just not something we do.”

“Why not apply that thinking, and make budgets basically bank accounts? Every team had a bank account, and every team had an opportunity to be a customer, a service provider, and an investor. We had service agreements between teams.”

“If I’m in the development team, I’m providing services to the merchandising team to let them put their goods on the website. There’s a service agreement between those teams. So that’s where you’re getting your money.”

“And all of that was tracked using a homegrown system. It gave teams the opportunity to reinvest in themselves to grow their team. If they wanted to charge more internally or externally, they could sell their services externally. They could reinvest the way they wanted to.”

"We also started experimenting with things like team-based compensation and being able to pay your team what you feel is necessary. Obviously, you still had to pay the bills…”

Internal Contracting Mechanism

Zappos also implemented what’s known as an internal contracting mechanism between microenterprises and external partners.


According to the principle of CGB, each microenterprise puts together a list of services, including costs. Anybody can find what’s needed and set up a service agreement to become a customer.

The digital CFO tool manages all the transactions transparently—including invoicing. Expenses and costs can be seen by others and include the percentage of time spent, along with overheads, benefits, taxes, and profit.

Entrepreneurial Mindset

The CGB mechanism levels the playing field, compelling all microenterprises to provide services or products and generate revenues from at least one customer.

Microenterprises had to pay the company 50 percent of additional revenue. They could keep the other half to invest however they chose. This led to some teams going truly entrepreneurial in various directions.

“A lot of teams were able to experiment with different things,” says Murch. “Look at the last few years, when Zappos took over a theatre on the strip in Las Vegas. There’s Zappos Theatre. There are some interesting businesses: the audio-visual team, for example, provided services to external clients and grew.

“There are many great examples,” she continues. “And one of my favorites is actually Zappos's Adaptive Team that started in the early days of the MBD initiative. That came from a phone call from a customer expressing a need. One phone call turned into this amazing business to help people who have adaptive needs, things that they’re challenged with, and the Zappos adaptive platform provides functional clothing for them.”

Interestingly enough, Zappos didn’t force everyone into an entrepreneurial role.

“There’s a place for everyone,” says Murch. “Especially if you’re on a team, you don’t have to be the entrepreneur. We did introduce a program to help people experience an entrepreneurial mindset.”

Next steps

Later on in the process, the company began experimenting with team-based compensation mechanisms to boost entrepreneurship.

“We hadn’t quite reached a point where they were able to give bonuses to team members and truly give compensation, you know, whatever made sense for them,” Murch explains. “We did have some small teams experimenting with that, but it hadn’t got through to the organization yet. I think that’s really where we wanted to go.” '

- Zappos's Evolution: From Holacracy To Market-Based Dynamics, October 2, 2021


Holacracy – ‘..to fully harness the power of every human sensor..’

Sociocracy 3.0

(Praxeology) - '..Menger’s experience stressed subjective factors..'

(Praxeology) - '..his or her subjective values .. to explain all economic phenomena as the results of what people do..'

'..have organizations that are more and more adaptable and far more humane..'

(Bazaarmodel)(Teal - To Heal) - '..to let the individuals and organizations search or really think about the meaning of life.'

(Holacracy Lite) - Blinkracy: lighter version of the Holacracy One’s system

(Haptopraxeology)(Bazaarmodel - To Heal - Teal) - Holacracy '..to fully harness the power of every human sensor..' - 'A good constitution is infinitely better than the best despot.'

(Bazaarmodel - To Heal - Teal) - Empathy and perspective - 'How do I help people be at their natural best.'

'How to transform into a truly engaging workplace?' - 'Spark'

Haptopraxeology)(Teal, Ethics) - '..your message to the many established organisations .. create an enabling environment..' - 'To change the world of finance..'

(Haptopraxeology)(To Heal, Teal)(Reinventing Organizations) - '..the realms of body, emotions, relationships, nature, and spirit..'

It Doesn't Have to Be Crazy at Work - 'It’s time to stop celebrating Crazy, and start celebrating Calm, Fried and Hansson assert.'