Invest Like the Best with Patrick O'Shaughnessy
· Reed Hastings
[00:00:00] S1: So I founded Pure Software in 1990 and grew a 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 analyzed, 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. And so it was through that experience that I realized, okay, I've tried to run software like a manufacturing plant and reducing error and putting in process. And then that doesn't get high productivity or high talent. And we should manage software much more artisanally, with inspiration rather than management. So 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. I generally like people that are nice, and yet I want to, in the workplace, to be honest with each other, so that we're more productive. So we have to find a way to give each other permission to not be conventionally nice and instead to be focused on the team success, which is being very direct. Similarly with loyalty. We come to see loyalty, which is something in your family, like you would never fire your brother if you were tight on money, okay? You would share, and that's what we admire. And yet in a company, what we do is we lay people off. And so this whole idea that a company is a family, it's unintentional, but it just derives from, all the structures of society were family. All companies used to be family companies, and then corporations have grown more recently. All countries used to be family countries and kingdoms. And so, basically, family was the deep organizing unit. So it's natural that that spills into how we think about an organization. But the contrast is a professional sports team. And that's an admired model. It's really focused on achievement. And everyone understands that you change players as you need to try to win the championship. Now we all got to fight every year to keep our position, because if we can upgrade, we must, to achieve the winning of the championship, which is producing a great company.
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: How do you protect against the natural way that companies seem to bleed down towards lower talent density over time? Like, there seem to be very few organizations that get it high and then keep it at that same level, especially with scale. What are the ways that you learned to keep talent density as high as possible as the company grew so big? [00:00:00] S1: Well, as the companies grow, you may be able to pay people more. So that will help. If you think of the sports teams in the biggest markets, they can afford the highest compensation. And like the Yankees or the L.A. Dodgers, they often have the best players. It's not a direct one-to-one on how much you spend and quality, but there is a strong correlation. I think the second thing you can do is continue to really evangelize the benefits of talent density over total quantity, so that more and more of your leaders get adept at managing for density. [00:00:00] S0: I would love to talk about each stage of the funnel to creating talent density in the business, starting with how you found people in the first place, what the most reliable ways were of finding people, and then also how you evaluated them. And then I want to talk about further down the funnel. But starting just with top of funnel, what were the most effective ways of finding people that had the potential to be extremely talented inside of one of your businesses?
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: I would love to talk about each stage of the funnel to creating talent density in the business, starting with how you found people in the first place, what the most reliable ways were of finding people, and then also how you evaluated them. And then I want to talk about further down the funnel. But starting just with top of funnel, what were the most effective ways of finding people that had the potential to be extremely talented inside of one of your businesses? [00:00:00] S1: 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? Other people have a view like, very hard to get in, but then you can stay no matter what. And I think that's been more of the Google orientation as an example. And it comes from their graduate school background, right? It's really hard to get into Stanford Graduate School, and then it's hard to get pushed out, too. And so it's just natural that they mapped themselves onto that model. And there's some benefits of that, but that's a different model. And mine is more, have relatively open doors. We'll interview broadly and try to select what we think is the best person. [00:00:00] S0: It stands to reason that maybe your one-year attrition rate was higher than say, Google's or somebody else's? [00:00:00] S1: Oh, quite a bit, yeah. [00:00:00] S0: What was it like? Do you remember? [00:00:00] S1: I think it was probably 20% in the first year.
· Reed Hastings, Patrick O'Shaughnessy
[00:00:00] S1: I think it was probably 20% in the first year. [00:00:00] S0: That's pretty high. What would you tell people on the way in, or tell the organization about that rate itself to make sure it didn't spook people, that lots of people would leave? [00:00:00] S1: Well, it did spook people, and so it's only fair to let them know what they're getting into. We would say, we're not going to guarantee you a lot, but we'll guarantee that we'll always surround you with great people and have you work on hard problems. That was our core, that you may not be happy, the hours may be long, you know, the food may be okay. But like, the essence of what we can do at work is hard problems with great people. Think of it as, if your primary orientation is around job security and you're willing to put up with working with uneven levels of talent, then there are other companies that are a better fit. And there's some benefits of that, which is you have stability in your life. If you're more of a performance junkie and the thing that makes you vibe the most is working around incredibly talented people and running fast and loose with great teammates, then you're willing to put up with the job insecurity. Nobody likes it, but you're willing to put up with it to get the performance density. [00:00:00] S0: You said "fast and loose". Can you say more about "loose"?
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: You said "fast and loose". Can you say more about "loose"? [00:00:00] S1: If you overmanage, for example, a tight process or specific hours that you have to be in the office, or a wide variety of things, you filter out performance and creativity. And the looser that you can run, the more creative that the organization will be. So we talk about it as managing on the edge of chaos. You don't actually want to fall into chaos, okay? In chaos, the product barely gets released. It's full of bugs. People are upset. Payroll's not made. Lots of bad things happen. But it's getting as close to that edge of chaos, where there's last-minute saves and a lot of dynamism, as you can possibly tolerated as opposed to, say, a semiconductor factory, which is trying to reduce variation and reduce error to get rid of variance. If you're going to be a creative organization, you want to be high variance, high creativity, and, again, managing on the edge of chaos. [00:00:00] S0: I'm curious, with the 20% attrition rate, what you learned about letting people go well and the right way. How did you get really good at that specific part of the life cycle?
· Reed Hastings
[00:00:00] S1: Well, I think there's two parts to it to create the competence throughout the company. One is to release the moral thing. Most managers, they're people managers, they like people, they don't want to hurt people. So it's very difficult for them. And so one of the best things is to do large severance packages, like four to nine 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. And then, you know, it just sets up a much better mutual feeling. 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, we think we can get someone better here. Okay, so it's a pity for the person, but it's seen as natural as opposed to like a failure. So typically I would say something like, hey, I see, Patrick, you're working really hard. You're trying. I'm so sorry to tell you that, honestly, if you quit, I wouldn't try to change your mind to stay. The reason I wouldn't change your mind to stay is I think I could get someone in your role that could do what you're doing plus even more, and here's why. The way the company is set up is if I wouldn't work to keep you, I'm supposed to let you go. In that way, we're sort of executing on an agreed-upon framework, that old Keeper Test framework.