Without a doubt "No Rules Rules" by Reed Hastings and Erin Meyer is one of my all-time favorite books about culture building. The book contains of countless real life cases and valuable advices. For me, every book offers a couple of interesting concepts and this time what really stuck with me was a talent density concept.

What is the Talent Density?

As far as one can find on the Internet, this concept was pioneered by Netflix. In simple terms talent density is the density of skills, capabilities, performance — simply said talent — you have in your company. So, if you have a company consisting of 100% high performers, then you’re very dense in terms of talent. Or if you have 80 talents out of 140 employees then your talent density portion accounts to 57%. Yes, it’s easy to understand, but hard to implement, because it gets to the point of how we define talent itself: who is the talent?

Netflix story

In the spring of 2001, Netflix “welcomed” its first serious crisis. Yes, it was an infamous dot-com crisis which resulted in vanishing all the venture capital funding for most of the startups including Netflix. Long story short, Reed Hastings— a Netflix CEO and Founder — has to lay off a third of his workforce.

First, he and his Chief HR studied the contribution of each employee to understand whom to fire but they found none obviously poor performers. So they decided to divide the staff into two piles: the eighty highest performers who they would keep and forty less amazing ones they would let go. Those who were exceptionally creative, did great work, and collaborated well with others went immediately into the “keepers” pile. The difficulty was that there were many borderline cases. Some were great colleagues and friends but did adequate rather than great work. Others worked like crazy but showed uneven judgment and needed a lot of hand-holding. A few were exceptionally gifted and high performing but also complainers or pessimists. Most of them would have to go. It wasn’t going to be easy.

The biggest concern was that motivation in the office would plummet after you let go the friends and colleagues of those who stayed who would think
that the company wasn’t loyal to employees. Could company bear a further collapse in morale?

Finally the day of the layoffs arrived, and it was awful, as expected. Those who we laid off cried, slammed doors, and shouted in frustration. By noon it was finished, and Reed waited for the second half of the storm: the backlash from the remaining employees… But, despite some tears and visible sorrow, all was calm. Then, within a few weeks, for a reason they couldn’t initially understand, the atmosphere improved dramatically. Reed states:

We were in cost-cutting mode, and we’d just let go of a third of the workforce, yet the office was suddenly buzzing with passion, energy, and ideas. A few months later the holidays arrived and by early 2002, our DVD-by-mail subscription business was growing rapidly again. Suddenly, we were doing far more work — with 30 percent fewer employees. To my amazement, those same eighty people were getting everything done with a passion that seemed higher than ever. They were working longer hours, but spirits were sky-high. It wasn’t just our employees who were happier. I’d wake up in the morning and couldn’t wait to get to the office.

What was going on here?

In the days and months following those 2001 layoffs, Reed has discovered something that completely changed the way that he understands both employee motivation and leadership responsibility. The lessons they learned became the foundation of much that has led to Netflix’s success.

Every employee has some talent. When Netflix had 120 people, they had some employees who were extremely talented and others who were mildly talented. Overall Netflix had a fair amount of talent spread across the workforce. After the layoffs, with only the most talented eighty people, Netflix had a smaller amount of talent overall, but the amount of talent per employee was greater. Their talent “density” had increased.

A company with really dense talent is a company everyone wants to work for. High performers especially thrive in environments where the overall talent density is high. Your employees learning more from one another and teams accomplishing more and faster. This was increasing individual motivation and satisfaction and leading the entire company to get more done. Most importantly, working with really talented colleagues was exciting, inspiring, and a lot of fun.

A team with one or two merely adequate performers brings down the performance of everyone on the team. If you have a team of five stunning employees and two adequate ones, the adequate ones will:

Sap managers’ energy, so they have less time for the top performers;
Reduce the quality of group discussions, lowering the team’s overall IQ;
Force others to develop ways to work around them, reducing efficiency;
Drive staff who seek excellence to quit;
Show the team you accept mediocrity, thus multiplying the problem.

After surpassing the crisis successfully, with a new understanding of what makes a great place to work, Reed and Patty — his Chief HR — made a commitment to retain the post-layoff talent density and all the great things that came with it. As Reed Hastings states:

We would hire the very best employees and pay at the top of the market. We would coach our managers to have the courage and discipline to get rid of any employees who were displaying undesirable behaviors or weren’t performing at exemplary levels. I became laser-focused on making sure Netflix was staffed, from the receptionist to the top executive team, with the highest-performing, most collaborative employees on the market. Jerks, slackers, sweet people with non-stellar performance, or pessimists left on the team will bring down the performance of everyone.

Questions to Trigger Your Next Moves

When I originally wrote this article, I was in the midst of building my company, and this concept was something I constantly pondered day and night. After reading the book, I began “interviewing” myself, asking critical questions to guide my approach. A few thought-provoking questions emerged, which I’m sharing here as they were at that time. They helped me clarify my direction and could serve as a starting point for you if you ever find the need to implement this concept:

What is the definition of “talent” in my company?
How many talents are in my team?
What is the talent density share within my organization?
What actions should I take to increase that share?
How is talent density distributed across departments and teams?
Does my remuneration system align with my talent density philosophy?
Should there be exceptions to this approach?

These questions were instrumental in shaping the decisions I made back then, and reflecting on them now provides an interesting perspective on how far things have come.

Talent Density Concept of Netflix

from author