John Robb shares the winning formula that has allowed Netflix to reinvent itself three times. Apart from setting a very different example to the special interest group-led P2P witch hunts of the mainstream entertainment industry, there may be a lesson here regarding ongoing, more focused peer-production projects. The article was originally published in HomeFree America

This means the role of management isn’t oversight, it’s focused on providing employees with context. A context that helps employees make better decisions because they fully understand the bigger picture. Context includes any and all information needed for good decision making, from product strategy to economic performance to customer feedback. In other words, the role of management is to help employees orient their decisions correctly, and let them decide what to do on their own.

Technological change occurs so quickly now, companies need to reinvent themselves every decade just to stay relevant.

That’s extremely tough to do. I’ve seen it first hand when a company I founded grew from a dozen people to over hundred in a year. As our company grew beyond a couple of dozen employees, we fell into the classic growth trap:

For a company to increase its impact, it grows. It adds people, new geographies, and new products. This growth adds complexity to the business. Increasing complexity creates chaos as it outstrips the ability of the start-up’s informal management system to handle it. To reduce this chaos, the company must put in place processes and rules as well as an administrative bureaucracy to manage them.

These rules lock-in the existing business model and enables efficiency improvements that allow the company to rapidly scale revenues and profits in an orderly way. The kind of growth that Wall Street celebrates. However, these rules, processes, and bureaucracy have a pernicious impact. The locked business model drives out the majority of the innovative people, due to the mindless oversight and the limits on what is possible.

Then, inevitably, the marketplace shifts as the technology changes. The company needs to reinvent itself but it can’t because the existing business model is locked into place and most of the people able to make the reinvention possible have left. Unable to adapt, the company “grinds painfully into irrelevance.”

Fortunately, there is a way to avoid the ossification brought on by this trap, and remain innovative despite corporate growth. Given the change underway, it’s something nearly every company is going to need to learn sooner than later or face failure. A great example of this is what Reed Hastings did at Netflix. Reed had an experience similar to mine at his first successful start-up, Pure Software. The growth of the bureaucracy at Pure made the company lethargic and impossible to change. So, when Reed decided to start Netflix, he was determined to find a way to grow without bureaucracy. Despite the odds against him, he pulled it off. Netflix has a market capitalization of over twenty billion dollars and dominates the market for online video distribution. Further, Netflix accomplished this feat by defeating challenges from both Wal-Mart and Blockbuster.

How did Netflix pull this off? Reed hired the right people by throwing out the rule book on hiring. He didn’t hire the brightest people, or the most experienced, or the most ambitious as most other companies do. Those simply weren’t the traits he was looking for. Instead, he hired people according to the quality of their decision making. Simply, could they make great decisions (again and again with regularity), despite uncertainty and without oversight.

With people like that at Netflix, Reed was able to grow and grow without the ossification normally seen at big firms. This allowed Netflix to remain flexible and innovative despite rapid changes in the marketplace and in the technology underlying their offering. This flexibility allowed Netflix to reinvent itself three (!) times in the last fifteen years:

In late 1999, Netflix changed from a classic movie rental business to a subscription service.
In 2008, Netflix added streaming movies and TV shows to its subscription offering.
In 2013, Netflix began offering stunning original programming.

Speaking as a customer of Netflix, I’m a fan of what they’ve done. This record of innovation is why I’ve been a loyal subscriber to the company since 2000. This is an amazing product that gets better and better nearly every year, at a price that’s about the same as it was when I first subscribed to it. So, how exactly did Netflix pull this off? How did they grow in a way that allowed them to reinvent themselves three times when most companies can’t even do it once? Reed Hastings did this by hiring people who used a method of decision used to great success across American history. It’s something I call the American Way (for more on this, check out my short, and to the point, e-book) because it’s more common to find here than anywhere else and it’s responsible for all of the economic progress the US has enjoyed to date.

Specifically, Reed did this by looking for responsible decision making in new hires. People that Netflix calls internally: “fully formed adults.” These are people who who make all of their decisions using a balance of interests — personal, company, co-workers, and customers. They aren’t overtly selfish or blindly loyal like children. They can take care of themselves and they strive for independence, yet they do so in a way that increases the success of others. They constantly seek win-win-win decisions. People like this also see work differently than others. They see their work as a meaningful part of their life and not a chore. For them, work is one of the main ways they achieve success in their lives, and they treat it as such.

People that make responsible decisions don’t need much, if any oversight. They can be relied upon to make the right decision again and again. This capacity eliminates the need for most of the administrative overhead typically seen in companies as they grow. For example,Netflix doesn’t track the hours employees work, count their vacation days, or nit pick them over travel expenses. The employee is expected to manage this themselves.

This means the role of management isn’t oversight, it’s focused on providing employees with context. A context that helps employees make better decisions because they fully understand the bigger picture. Context includes any and all information needed for good decision making, from product strategy to economic performance to customer feedback. In other words, the role of management is to help employees orient their decisions correctly, and let them decide what to do on their own.

However, this emphasis on independence doesn’t mean that employees treat work as a shark tank or financial boiler room. Internal competition based purely on self-interest would increase the number of wrong decisions to an unacceptable level, and necessitate the return of bureaucratic oversight. Instead, Netflix has eliminated competition for a limited number of positions that drives so much selfish behavior in bureaucracies. Instead, if an employee has demonstrated he or she can routinely make great decisions, the company will treat them as an asset that can be employed on new projects.

Sound different than the company you work at? It should. There are very few companies that operate like this, but we’re going to see many more like them in the future. The speed of change underway demands it. It should also be apparent that the type of people Netflix hires could easily become entrepreneurs and start their own firms. They have the capacity to do it. However, they choose to work at Netflix because they get all of the benefit of an innovative entrepreneurial environment, great co-workers to invent the future with, all at a scale and level of impact that only the most successful start-ups can achieve.