Zappos knows how to kick it
Fortune- Thursday, January 22, 2009
Zappos knows how to kick it
The quirky retailer has a reputation for flat-out fun. But when it cut 8% of its staff, Zappos became a model of how to nurture employees in good times and bad.
By Jeffrey M. O'Brien
Zappos fits with creative types
NEW YORK (Fortune) -- Five things you can learn from the obsessively Twittering chief executive of Zappos: 1. No matter the season, eggnog never works as an acceptable substitute for gravy when nuking mashed potatoes. He's tried. 2. Everything you need to know about business can be gleaned from playing poker - act strong when weak and know when to bluff. 3. Despite the crippling economic downturn, sales jumped almost 20% in 2008, passing the $1 billion mark two years ahead of schedule. 4. Pajama party at the boss's house! 5. The time has come for him to lay off 124 of his friends.
Welcome to Zappos, the Las Vegas-based e-commerce site with 1,500 perpetually chipper employees who have a thing for parades and a CEO intent on broadcasting all aspects of life, business, and philosophy in 140 characters or less.
The company's debut at No. 23 makes it the highest-ranking newcomer on the list of the Best Companies to Work For. For nearly ten years the online retailer has sold shoes and, increasingly, apparel and electronics to fawning customers who love the policy of free shipping in both directions. Zappos is also adored by employees, providing a model of how to manicure culture and treat staffers like adults, while simultaneously reassuring them that sometimes it's okay to behave like children.
Unfortunately Zappos is a leader in another aspect as well. Like many companies on our list, including Adobe, (ADBE) eBay, and Goldman Sachs (GS, Fortune 500), Zappos has been smacked by the slowdown and has had to lay off employees this year. The downturn has forced the company to show that it can be great in times of contraction as well as growth. The leader of the Zapponians, Tony Hsieh (pronounced shay), is both the original investor and the architect of the company's offbeat culture (the privately held company is funded by Hsieh, who owns "less than half" of it, and by Sequoia Capital).
Zappos is Hsieh's second tour as an entrepreneur; when he was 24 he sold his first company, the ad network LinkExchange, to Microsoft (MSFT, Fortune 500) for $265 million. He unloaded his brain child because he couldn't stand it anymore. "When it was just five or ten people, it was a lot of fun. We were working around the clock, no idea what day of the week it was, sleeping under our desks," says the soft-spoken 35-year-old bachelor, giving his keyboard a rare break for a few sit-down interviews. "We hired all the right people in terms of skill sets, but by the time it was 100 or so, I dreaded going to the office."
Zappos was founded in San Francisco in 1999; Hsieh joined the company within a year as co-CEO. He eventually took the reins, moved the operation to Las Vegas for the cheap real estate and abundant call-center workers, and vowed to avoid a LinkExchange-style fate. Looking back, he realized what happened: In boom times it's easy to make ad hoc decisions that feel right because they assuage short-term pressures. But that's the equivalent of driving without a map. "One of the biggest enemies to culture is hyper-growth. You're trying to fill seats with warm bodies, and you end up making compromises," says Hsieh.
The culture code
Inspirational leaders tend to be larger-than-life personalities, but that's not true of Hsieh. He's probably the least bubbly, most reticent person in any room, especially at Zappos. (With a $36,000 annual salary, he's also one of the least well paid.) But with a computer science degree from Harvard, Hsieh knows how to write code, and he decided to try a similarly algorithmic approach to creating culture.
He devised a Ten Commandments-type list that includes such tenets as "Be humble," "Create fun and a little weirdness," and "Build open and honest relationships with communication." From that moment, those core values have driven all key decisions - in Vegas and at the distribution facilities in Kentucky - from hiring to customer relations to, most recently, downsizing.
The first core value, "Deliver WOW through service," is obvious if you've ever ordered from Zappos. Hsieh never outsourced his call center because he considers the function too important to be sent to India.
Job one for these front-liners is to delight callers. Unlike most inbound telemarketers, they don't work from a script. They're trained to encourage callers to order more than one size or color, because shipping is free in both directions, and to refer shoppers to competitors when a product is out of stock.
Most important, though, they're implored to use their imaginations. Which means that a customer having a tough day might find flowers on the stoop the next morning. I listened to one Minnesota customer complain that her boots had begun leaking after almost a year of use. Not only did the rep send out a new pair - in spite of a policy that only unworn shoes are returnable - but she also told the customer to keep the old ones, and mailed a hand-written thank-you.
The bean counters fully support such gestures: "Seventy-five percent of our purchases are from repeat customers," says Zappos chairman, COO, and CFO Alfred Lin. "There are a lot of things we do that seem overly costly. But we have always been focused on the long term when looking at whether something should be cut."
Like the free lunch in the cafeteria? It's not exactly Google-esque - cold cuts, mainly - but still. What about the regular happy hours, the nap room, profit sharing, or paying everyone's health insurance in full? There's also a full-time life coach. People come in to bitch, to look for confidential advice on how to move up - or out - or just to talk. The only rule is that they sit on a red velvet throne.
Other offbeat policies: Zappos managers are encouraged to spend 10% to 20% of their time with team members outside the office, and any employee can give any other employee a $50 bonus for a job well done.
Those may not directly translate to profits, but Hsieh and Lin consider them essential. Of the life coach, Lin says, "You can't provide great service if you're upset about something in your life. He easily pays for himself." Hsieh polls managers after they've taken teams to dinner or on a hike, and they invariably talk about improved communication, greater trust, and budding friendships. "Then we ask, 'How much more efficient do you think your team is now?' " Hsieh says. "The range is anywhere from 20% to 100%."
The weirder the better
Now seems a good spot to learn how the Zapponians feel about their workplace. If that might interest you, look no further than the official Zappos Culture Book. Every year the company publishes an unedited commentary from employees about life at Zappos and distributes a copy to everyone. The 2008 version is a 480-page tome. From my reading and from many interviews, several keywords jump out: fun, family, smile, proud, weird, thank you, and "I heart Zappos."
Zappos isn't for everyone. Most employees are hourly, and you won't get rich on a call center salary. If you need a wall between work and life, you probably wouldn't make it through the interview process anyway.
The Zappos HR team uses offbeat, cartoony applications and wacky interview questions (How weird are you? What's your theme song? What two people would you most like to invite to dinner?) to screen for creativity and individuality while filtering out egomaniacs and wallflowers.
All new hires complete four weeks of training, including two weeks on the phones, beginning every day at 7 a.m. They can't be late or call in sick. Anyone too good to work the phones during a holiday rush isn't Zappos material. New recruits are even offered a $2,000 bribe to leave the company during training, one final effort to weed out the half-hearted (only three people accepted last year). The net effect is a culture of extroversion and nose rings - hold the cynicism.
"We do our best to hire positive people and put them in an environment where the positive thinking is reinforced," says Hsieh.
During an hour-long guided tour of Zappos, employees rang cowbells at me, chanted, and sang at every turn. Some of these people are making $13 an hour. The experience felt unique; it wasn't.
During one day of the recent CES trade show, 50 groups toured the building. Executives from the likes of Lego, Southwest Airlines, and others have sojourned in Vegas to witness the Zappos ethos firsthand. For those who can't make the trip, Hsieh has started an online service called Zappos Insights. For $39.95 a month, anyone can watch videos and read white papers on how the company hires, deals with vendors, evaluates workers, etc.
Now Hsieh may be able to add another topic: how to lay people off. In late October, Sequoia Capital staged a now-famous meeting imploring portfolio companies to cut costs. Unlike many venture-backed companies, Zappos is already profitable - a 5% margin on 2007 net sales, per Hsieh - and also cash-flow positive. Still, the executives knew they wouldn't be immune to the downturn. They settled on 124 employees out of 1,500.
Hsieh wanted to get the news out fast to mitigate stress. He announced the move in an e-mail, on his blog, and with Twitter. Almost 30,000 people follow Hsieh's Twitter feed. Hundreds of Zappos employees have their own accounts.
The Internet can be a hostile place, but the blogosphere and the Twitterati had a surprisingly positive reaction to the way the downsizing was handled. Many wrote to Hsieh directly. Said one departing staffer: "I felt like a young Michelangelo, learning under the best artists the Medici family had."
Laid-off employees with less than two years of service would be paid through the end of the year. Longer-tenured staffers would get four weeks for every year of service. Everyone would receive six months of paid COBRA health coverage. At the request of departing employees, Zappos also allowed them to maintain the 40% employee discount through Christmas. Says Hsieh: "The motivation was, let's take care of our employees who got us this far."
Nineteen companies on our list cut jobs this year. But a few set themselves apart for the way they handled the situation. Communication was key: At Camden Property Trust (No. 41), a real-estate trust specializing in apartment communities, the CEO regularly communicated the effects of the downturn as the subprime crisis took hold.
In October, having exhausted all other resources, it cut 46 positions. Everyone received at least three months of severance. When eBay (EBAY, Fortune 500) (No. 83) cut almost 1,000 people as part of a global reorganization, most U.S. employees were allowed to stay on for four weeks to take care of personal needs and say goodbye to colleagues, and received at least five months of severance and four months of paid COBRA, and one to three months of outplacement services. "How you treat the leavers has a strong impact on how the stayers feel about the company," says Beth Axelrod, eBay's SVP of human resources.
As hard as the layoffs were for Zappos, Hsieh acknowledges an uncomfortable truth about downsizing: It's an opportunity to make the kinds of tough decisions that are impossible during headier times, such as cutting employees who are underperforming, don't quite fit, or have grown in a different direction. And the experience hasn't dimmed Hsieh's ambitions.
He considers customer service highly portable and sees Zappos becoming a company that spans industries, like Virgin. To do that he's going to need a lot of good people. And in this bleak economy, his story has a happy ending, at least for now. Zappos is hiring again - mainly in engineering and marketing, piercings optional. Check the Web site for details. Or just look for Hsieh on Twitter.