Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: How did the Keeper's Test literally work? Like, how was it rolled out across the company? [00:00:00] S1: Well, it was always there that, you know, in the original slide deck, adequate performance gets a generous severance package. So it's really just starting up front. 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, you know, all the relief we sometimes feel when someone not great moves on. [00:00:00] S0: Was there an episode in Netflix's history that you can remember where you were on the edge of chaos and it either did or very nearly cost you very dearly? [00:00:00] S1: During Netflix's 25 years, there's a couple small things that we did wrong, and one big one, being the Qwikster separation of DVD and streaming. [00:00:00] S0: Maybe taking the Qwikster example, what is it like to see high talent density operate against something like that? Like, I'm just curious what it felt like to watch that happen. [00:00:00] S1: So Qwikster, for your listeners, 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. [00:00:00] S0: Disagreed.
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: Disagreed. [00:00:00] S1: So, yeah, they were still mailing me the discs. And, so they didn't like it. Lots of cancellations, stock dropped by 75%. So it was a tough time. And, ultimately, it's the right thing to have separated DVD and streaming, but we did it too fast. The big analysis of it afterwards was lots of the executives thought that it was very problematic. But they kind of said to themselves, geez, Reed's made 18 decisions right before. So, you know, I'm probably wrong, and Reed's probably right. So they kind of suppressed their own significant doubts. And what we realized is, if they all knew of each other's doubts, they would have 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, and it's all in a big shared document, so everyone sees what everyone else thinks. So that way, if we had had that decision process in place, then I think I may well have thought, well, these are all fantastic people, and they're all horrified at this idea. So I may be right, but let's at least go a little bit more gently to figure out that, and we wouldn't have had as deep a hole.
· Patrick O'Shaughnessy, Reed Hastings
[00:00:00] S0: If you think about all the value creation that you've been a part of, or the leader responsible for, was most of that the result of a fairly non-consensus idea? Because that seems like a consensus process, or at least, if not decision by consensus, at least being aware of what the consensus is. And I'm curious about that tension there. It seems like very often, non-consensus is where the value comes from. Is that generally true in your personal history of decisions that you made that created most of the value? [00:00:00] S1: Well, I think 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, you know, flying blind. So I think there's a high value on information, gathering opinions, but then not averaging them. We would never do that. We were very clear that the concept was the informed captain. So we wanted to make it like the captain of a ship. Okay, the captain of the ship makes the decisions, but it's good for them to collect a lot of information. And, so we were very strong on no committees; individuals make decisions, but we want them to be informed about that decision, and then it's up to them to make it. [00:00:00] S0: I'm so interested in the bucket of "seems like a bad idea, but turns out to be a good idea" because there's just less competition if it seems bad. What has been your process of coming up with good ideas in the first place?
· Reed Hastings
[00:00:00] S1: I fall in love with ideas easily. Like, I'll see some combination or insight. The original one was that DVD, which was just coming out when Netflix started, was very lightweight. And this was coming out of the AOL mailing CDs to everyone to install AOL on CD-ROM. So I was kind of, like, pretty familiar with mailing because I've gotten tons of these discs through the mail. DVD for movies was just replacing VHS, or just starting. So I kind of like, clicked on that. And then 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 to send a backup tape by FedEx. So you start thinking about networks a little bit differently. So all those combinations made me think of DVD by mail as an extremely efficient digital distribution network that someday the internet would be faster than, and cheaper than, and lower latency than. So I never thought I loved the mail business. I thought I loved a network business to deliver entertainment. So that was an example. And then the contrarian part of it was 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 it didn't matter, they were excited about it and 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.