Demystifying Holacracy: A Deep Dive into Its Principles and Impact

Holacracy has been both overhyped and underrated.

Last week, Quartz published an article implying that Zappos has quietly moved away from Holacracy – the decentralized governance system they adopted company-wide in 2014. The article then describes how Zappos is now attempting to build a new approach based on Market-Based Dynamics (MBD), where teams operate like startups and the company provides seed funding for promising ideas. Reading this article, one might get the impression that Zappos needed to move away from Holacracy because it supposedly dispersed focus on customers and is now doing something entirely different.

So let’s unravel this mystery and clarify the situation.

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Just like any radical new invention, there are many misconceptions in the early stages, with people having various exaggerations and unrealistic expectations. They expect the “new thing” to be a panacea for all the problems they face. Then comes the disillusionment phase when we realize that the “new thing” is not perfect, it may still have some flaws, and it can’t solve all the problems we hoped it would. This is crucial because many people at this point write off the “new thing” and claim that “it doesn’t work.” However, there is usually a group of early enthusiasts who are not deterred by the initial setbacks but continue to venture forth. After learning and refining the “new thing,” they have mastered its usage and know exactly how and when to use it. And when not to. Holacracy is agnostic to values and ideals. Therefore, it doesn’t prescribe any specific “flavor” or organizational focus. You can run an efficiency-focused organization based on Holacracy; you can run a profit-maximizing organization based on Holacracy. You can run a people-centric organization based on Holacracy, heck, you can even establish a hierarchical structure based on the rules and principles in the Holacracy constitution (though I wouldn’t recommend it, as it would waste much of its potential).

Using a piano as a metaphor for Holacracy, saying “the piano doesn’t work” doesn’t make much sense. First, to “make the piano work” and play the piano well, you need practice, practice, practice. This takes time, effort, and perseverance. Many companies haven’t succeeded with Holacracy, not because Holacracy doesn’t work, but because they lacked the commitment and perseverance required to become proficient in it. Similarly, you can play many different styles of music on the same piano. Some of them may have broad appeal, while others may be highly experimental and only appeal to a niche audience. Saying something like “Taylor Swift has slowly moved away from the guitar” would be completely confusing. She might have evolved her musical expression into a different style. Perhaps her new style still incorporates elements of the guitar, but maybe they’re not as prominent as they were in her old music.

But let’s go back to Zappos. Rather than saying that Zappos has left Holacracy, I believe a more accurate and nuanced observation is that Zappos has transcended and incorporated Holacracy. This means that Holacracy still exists, but it has been expanded and added with new elements, perhaps to an extent that is difficult to recognize. By the way, Holacracy has surpassed the best elements of hierarchical management. All the innovations and breakthroughs in management hierarchy still exist, just in a better way. Without the baggage.

In Frederic Laloux book “Reinventing Organizations,” he presents the idea of organizational development:

The underlying idea here is that every organizational form is a response to the challenges of a specific social and historical context.

Secondly, each phase transition in organizational design brings about breakthroughs or fundamental innovations.

These innovations primarily include new ways of thinking. Because the world doesn’t stand still and new challenges constantly arise, these organizational models have their limitations. Therefore, each organizational paradigm has its own developmental process and is surpassed and incorporated by the next developmental stage. Many companies with traditional hierarchical structures are grappling with this challenge as they struggle with an organizational paradigm that is coming to an end.

Establishing and maintaining a strong focus on customer experience is challenging. It is not caused by Holacracy, however, even within Holacracy, it remains difficult.

Ask yourself the following questions:

  • What are the signals of “transaction costs” (this can be an idea, a question, an opportunity, … anything that could lead to a better future state if acted upon) that are quickly and reliably detected in your organization? How difficult is it for organizational members to detect and fully and satisfactorily address these signals?
  • How much time does it take to obtain the necessary support and buy-in from senior management to get new ideas off the ground in your organization?
  • How much mental energy is absorbed throughout the process? Energy that could be used for more productive and purposeful endeavors?
  • How much frustration is there in the process? Internally among your employees and externally among your customers?

If your company values customer focus and customer experience, then everything that Holacracy offers will work in your favor and make it easier.

However, it also requires leadership, focus, empathy, common sense, and a lot of practice to truly excel. Holacracy is not magic that grants you three wishes, but it remains one of the best choices for becoming more responsive, innovative, and customer-centric.

The key point is that frameworks like Holacracy or Scrum can be too rigid, and we need to see organizations as living organisms, which means these frameworks need constant adaptation. There are quite a few elements worth further exploration. In this article, I want to focus on the claim that every organization needs to adjust these practices according to its own needs.

I completely agree. An organization needs to continuously adapt to its environment if it wants to succeed and stay vibrant. To achieve this, it also needs a stable core to maintain its adaptability.

Let’s use an analogy: Humans also need to adapt to their environment, and you could say that we have become very good at it over thousands of generations. If you observe the changes from one generation to the next, there isn’t actually a significant difference in adaptability. If we zoom in and examine the foundation of our adaptability coding, we arrive at our DNA. The system or technology that encodes information in DNA hasn’t undergone significant changes over the past thousands of years. It is this stable core that supports evolutionary changes.

Evolution works its magic through many small mutations over long periods of time. Some of these changes have proven advantageous in the current environment, while others have not.

Now, imagine if you could order a CRISPR toolkit online to tinker with your DNA. Would you do it? I would argue that for 99.9% of people, it’s probably best not to start messing with their DNA on a Sunday afternoon. There are probably a few hundred experts on this planet who actually have the knowledge and experience to know what they’re doing, to assess the impact and effects of interventions at the DNA level, and to understand the risks involved. They typically work very cautiously.

Most people who try to adapt and “improve” practices like Holacracy or Scrum (or any other well-established practice) in their early stages don’t actually know what they’re doing. Over the years, I’ve seen many companies attempt this, but in almost all cases, it backfires (though there are few who admit to this). In most cases, the driving force behind these changes is the discomfort, awkwardness, and limitations felt in the early stages of practicing. It’s understandable that many people’s instinctive reaction is to retreat to their comfort zone. But in this case, what is needed is the right scaffolding and support to help people build the practice rather than changing the rules of the game.

Most experienced practitioners of Holacracy have had moments of doubt and skepticism about certain elements of the practice. Many of us have experienced times when things felt “meaningless.” Personally, I have questioned Holacracy on multiple occasions. However, upon closer examination and honest reflection, I have come to realize that these things do have meaning—I may just not appreciate them at this particular moment. In some cases, we have indeed discovered areas that need improvement or have witnessed successful experiments in companies with mature practices. This is a good point to transition to another aspect of this exploration.

The perspective that frameworks like Holacracy or Scrum always need to adapt to the specific needs of an organization implies a common misconception. Many complaints suggest that Holacracy is rigid and dogmatic. However, Holacracy is constantly self-adjusting! It’s just happening in a different way than people expect.

The constitution of Holacracy, which is the DNA of Holacracy, is constantly evolving. It is a developing version that is being improved and refined. But it is done within a sandbox, in a safe environment, and changes are mostly very small and always deeply considered, experimented with cautiously by an experienced community of practitioners. They should be, because what they are doing is the work of upgrading the DNA!

A commentator also pointed out that Laloux book “Reinventing Organizations” indicates that all the companies mentioned in the book have developed their own way of doing things. This is true, and upon closer observation, a seemingly contradictory situation emerges: they have a stable core and a high level of adaptability and responsiveness. It is this stable core that enables these organizations to thrive in highly dynamic environments. Yes, they do indeed try many things and conduct numerous experiments, but most importantly, they always have a very stable (rather than static) core, which changes very slowly.


Author: Leona Smith

Certified Global Holacracy Coach

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