Reed Hastings - Building Netflix

“I founded Pure Software in 1990 and grew kind of typical great software company doubling. I wasn't careful about it, and I would say talent density declined. That company, we went public in '95, got acquired in '97. And when I analyze looking back what happened, one of the major things was declining talent density and then with declining talent density, you need a bunch of rules to protect against the mistakes, and that only further drives out the high-caliber people.”— Reed Hastings

Leadership & Management · Operations & Execution · Psychology & Behavior

DUR_ENDURING

Declining talent breeds rules which drives out more talent

“Typically we humans, we value being nice and we value loyalty. Yet in the workplace, that's a tension because being nice is in contrast or in tension with being honest. Similarly with loyalty, we've come to see loyalty, which is something in your family, like you would never fire your brother if you were tight on money. Yet in a company, what we do is we lay people off. The contrast is a professional sports team, and that's an admired model.”— Reed Hastings

Leadership & Management · Psychology & Behavior · Culture & Society

DUR_ENDURING

Sports team model vs family model in organizations

“What we realized is if they all knew of each other's doubts, they would've been much more likely to weigh in, to probably just have us do it slower. We instituted a much more collective information process on decisions going forward where everybody weighed in 10 to negative 10 on decisions, then it's all in a big shared document. So everyone sees what everyone else thinks. I may well have thought, well, these are all fantastic people and they're all horrified at this idea.”— Reed Hastings

Strategy & Decision Making · Leadership & Management · Operations & Execution

DUR_ENDURING

Transparent voting reveals hidden consensus, prevents groupthink

“You want to be super careful here because this is the source of much value. You want to be totally independent in your thinking and not consensus-oriented at all, but you want to know what other people are thinking. Otherwise, you're flying blind. We were very clear that the concept was the informed captain. The captain of the ship makes the decisions, but it's good for them to collect a lot of information. We were very strong on no committees.”— Reed Hastings

Strategy & Decision Making · Leadership & Management

DUR_ENDURING

Informed captain: gather info widely, decide individually

“The original one was that DVD, which was just coming out when Netflix started, was very lightweight. This was coming out of the AOL mailing CDs to everyone to install AOL on CD-ROM. DVD for movies was just replacing VHS or just starting. The classic computer networking thought experiment you do is what's the bandwidth of a FedEx of a tape through the mail? And it turns out you calculate it and it's like terabits per second at low cost. So I never thought I loved the mail business.”— Reed Hastings

Strategy & Decision Making · Technology & Engineering · Business & Entrepreneurship

DUR_CONTEXTUAL

DVD was never the goal; streaming was always the vision

“Qwikster was a sad episode in 2011 where I became convinced we really had to go all in on streaming and drop DVD and put DVD in its own company that would drift along and free ourselves from that. Unfortunately, most of the customers were mostly using DVDs. Lots of cancellations, stock dropped by 75%. The big analysis of it afterwards was lots of the executives thought that it was very problematic.”— Reed Hastings

Strategy & Decision Making · Leadership & Management · Psychology & Behavior

DUR_ENDURING

Past success suppressed dissent; executives assumed they were wrong

“One of the best things is to do large severance packages, like 4 to 9 months of salary. And so it feels expensive at first, but one is it makes the person who's let go feel a little bit better because they've got a bunch of money in their pocket. Two, it helps the manager do their job because then they don't feel as bad in letting the person go. Third on the terminations is setting a context where it's not a moral issue. You didn't fail. It's just like a professional sports player.”— Reed Hastings

Leadership & Management · Psychology & Behavior · Operations & Execution

DUR_ENDURING

Large severance enables managers to act, removes moral stigma

“The test that we encourage people to use is if someone were quitting, would you try to get them to stay, to keep them? Because that turns out to be a good test relative to all the relief we sometimes feel when someone not great moves on.”— Reed Hastings

Leadership & Management · Psychology & Behavior

DUR_ENDURING

Keeper test: would you fight to keep them if they quit?

“I've come to look at it like keeping a pretty broad funnel and hiring a lot of people. And then over the first year, you really get to know them and you can figure out what you want to do. Do you want to keep them or not? I think it's probably 20% in the first year. We would say, we're not gonna guarantee you a lot, but we'll guarantee that it will always surround you with great people and have you work on hard problems.”— Reed Hastings

Leadership & Management · Strategy & Decision Making

DUR_ENDURING

20% first-year attrition by design, not accident

“Board members want to add value because they're getting paid. The problem is by the conflict rules, they don't really know the business. On one day a quarter, it is super hard to add value. So what you see is a lot of directors who struggle to add value, and then management has to be super polite to them. So I would say first part is board members to realize, okay, I'm not here to add value. I'm here as a board member, as an insurance layer.”— Reed Hastings

Leadership & Management · Strategy & Decision Making

DUR_ENDURING

Board's job is not to add value but to replace CEO well

“When we were fundraising in 1997, '98, '99, everyone was excited by internet delivery. And I'm like, but it's not even close. But didn't matter. They were excited about it. So we were contrarian and we had a contrarian thesis that we could build a business with DVD and then transition it to streaming. And it's precisely because of that contrarian thesis that we didn't have much competition in that because it worked, we created great value.”— Reed Hastings

Strategy & Decision Making · Business & Entrepreneurship

DUR_ENDURING

Contrarian on timing, not vision: streaming was future, but not yet

“If you're on a board, don't measure yourself by did you give a suggestion? Measure yourself by did you get more and more prepared for the small chance that you will have to take big action? And so it's a lot like a firefighter who drills and drills and drills and hopes that there's never a fire.”— Reed Hastings

Leadership & Management

DUR_ENDURING

Board success is preparation for crisis, not daily suggestions