Organizational Scar Tissue: Stop Creating Rules for Every Problem

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When things go wrong, companies implement rules to solve them.

• Employees booking overly expensive hotels? – Devise multi-level pricing matrices (with different versions based on location and/or employee seniority) that must be followed

• Someone overpay for computer hardware? – Require multiple approvals for mousepads, keyboards, and webcams

• Booking expensive flights? Mandate the cheapest economy flights, require receipts, and a copy of your boarding pass to ensure the flight was taken

• And of course, make sure you submit a copy of your conference badge or agenda, because we need to make sure you attended what you said you were going to attend

These policies are common reactions to employee abuses and honest mistakes.

And it seems reasonable – identify the abuse and create a rule.

This works in the short term but creates a drag on a company’s long-term success. It drives a culture of compliance and rule following, prioritizing adherence vs. doing what’s best for the company. Rules take away freedom and autonomy. On the field judgment is replaced with behind the desk directives. Rules can’t adapt quickly to the real world. Creating endless exceptions just expands already monstrous rulebooks, adding confusion and frustration to employees who are looking to get things done.

All of this because a select few people took advantage of the system.

Jason Fried, CEO of Basecamp, calls this organizational debt. In the book Brave New Work, authored by Aaron Dignan, Jason explains:

I define organizational debt as any structure or policy that no longer serves an organization… One of the most common sources of org debt is the knee-jerk reaction. Every time something goes wrong, we immediately jump to create a constraint that will prevent future mistakes. So we institute a new role, rule, or process. As a result, over the course of a decade or two, a one-step process becomes twenty steps. Or five different processes become entangled. Or ten different roles become approvers for a simple decision.

Under the guise of creating order, we drift toward the disorder of a thousand stupid rules, leaving no ability to respond to the world as it unfolds.

There’s a better way to do this. When something goes wrong, deal directly with the people who took advantage of the system.

Don’t automatically create rules for the other 99% of employees who are doing what’s best for the company.

Reed Hastings, CEO of Netflix, explains how they’ve evolved to deal with this same problem. Hastings explains in his book, No Rules Rules: Netflix and the Culture of Reinvention, how they responded like most companies, implementing more rules to solve each new problem:

As we brought in new people, some of them acted irresponsibly, costing us money. We responded as most companies do: we put policies in place to control people’s behavior. Every time we acquired a company, Patty would take our handbook and their handbook and merge the two together. All these rules meant that going to work was less fun—and our most maverick employees, who were also the most innovative, left the company for more entrepreneurial environments. Those who chose to stay preferred familiarity and consistency. They learned policy adherence as the ultimate value.

Netflix began codifying more rules into employee handbooks to deal with the inevitable problems that occur when growing. But Hastings realized that more rules and compliance drive out the innovators and mavericks (those who actually create value) and reward those who prioritize rule following and obedience.

So Hastings shifted away from rules and towards a principles-based system. Hastings explains:

Today the entirety of the travel and expense policy still consists of these five simple words: ACT IN NETFLIX’S BEST INTEREST.

Through a gradual evolution, over many years of trial and error, we found an approach for making this work. If you give employees more freedom instead of developing processes to prevent them from exercising their own judgment, they will make better decisions and it’s easier to hold them accountable. This also makes for a happier, more motivated workforce as well as a more nimble company.

So Netflix encourages freedom over rule adherence, which drives better motivation and engagement.

But what does that look like in practice? Hastings explains:

During the ten years that David Wells was CFO he set the first round of context for incoming recruits at our “New Employee College.” He explained it like this: Before you spend any money imagine that you will be asked to stand up in front of me and your own boss and explain why you chose to purchase that specific flight, hotel, or telephone. If you can explain comfortably why that purchase is in the company’s best interest, then no need to ask, go ahead and buy it. But if you’d feel a little uncomfortable explaining your choice, skip the purchase, check in with your boss, or buy something cheaper.

That’s a powerful principle. Instead of extensive rules, there’s just one overarching principle to guide decisions. If you can justify the expense to your boss or peers, go ahead. If there’s any doubt, then ask for guidance. No more getting approval for every expense or action.

Leslie Kilgore, former CMO at Netflix, explains how this guidance works:

My marketing team was on the road nonstop. They selected their own flights and their own hotels. I went through a number of scenarios with them to help them make spending choices. If you’re flying overnight and have to be operational the next morning, flying business makes sense. If you can fly overnight in economy to save money and arrive a day earlier, that’s better and Netflix will pay for the extra hotel night. It’s almost never in Netflix’s best interest to fly business for short flights.

Senior leaders need to explain and teach what is valued at the company. Booking a flight a day before, but incurring another night’s hotel expense, made sense to Netflix. But many companies would lose their mind if an employee did this. So the point is, you need to set the standard for what is valued and acceptable for the company. That helps people make the right choice.

So what about those who cheat the system? How are they caught and what are the consequences? Leslie Kilgore explains how this worked at Netflix:

I told them I would never look at their expense reports, but that finance audits ten percent of all expenses annually. I trust them to behave frugally and carefully with the company’s money and if finance finds any monkey business, that employee will be immediately fired. It’s not one strike and a warning; it’s “abuse the freedom and you’re out”—plus you’ll be used as an example to others for what not to do. This is the nub of F&R. If your people choose to abuse the freedom you give them, you need to fire them and fire them loudly, so others understand the ramifications. Without this, freedom doesn’t work.

As Leslie explains, freedom and accountability are tied together. It’s not a warning if you are caught. It’s termination. So the stakes are really high for those who want to cheat, especially those who expense a lot and are more likely to get caught. In the end, Netflix has created a way to give employees freedom, eliminate rules and compliance, but still have a safety valve to incentivize the right behavior.

“Fire them loudly” cannot be understated. When people abuse the system, it needs to be communicated throughout the firm. Make sure the consequences are real when you give employees this freedom. It’s not about shaming the fired employees. It’s about showing there are consequences for those who abuse the system. It’s about showing what matters to the company. Firing someone behind closed doors doesn’t help anyone. Secrecy drives skepticism and gossip.

As Hastings explains, when someone abuses the system, you deal with that person, not create more rules:

When you offer freedom, even if you set context and clarify the ramifications of abuse, a small percentage of people will cheat the system. When this happens, don’t overreact and create more rules. Just deal with the individual situation and move forward.

Jason Fried once again explains:

“Policies are organizational scar tissue. They are codified overreactions to situations that are unlikely to happen again. They are collective punishment for the misdeeds of an individual.” This is governing for the exception rather than the rule. At Basecamp, they institute a new policy only when something negative happens over and over again. Ask yourself, What’s the smallest amount of policy required to protect us while preserving the flexibility to learn and act with judgment?

It's not that Netflix nor Basecamp have created the perfect system. But they have put deliberate and considered thought into what is important, what drives value, and how to design a system to minimize the drudgery that so many companies still mandate. It’s not just doing what they’ve always done. They’ve evolved, because they invested time to think about what works, not just going with what they have always done. Avoid the common path of least resistance favored by most companies – more and more rules.

Recommended Reading

• No Rules Rules: Netflix and the Culture of Reinvention, Reed Hastings and Erin Meyer

• Brave New Work: Are You Ready to Reinvent Your Organization, Aaron Dignan