Private Sector Red Tape
Private companies, hospitals, and universities often have excessive bureaucratic rules and sludge, similar to government agencies. This increases costs and frustrates employees, but alternative approaches like Netflix's 'spend company money as if it were your own' can reduce red tape and improve agility.
THE IDEA
Private Sector Red Tape
Although government agencies have a well-deserved reputation for excessive bureaucratic rules and regulations even (or perhaps especially) for their own employees, private companies, hospitals, and certainly universities are often not much better. To be hired in the first place, employees often face a lot of sludge. In the workplace, daily life often contains a lot of sludge too. Just ask nurses and doctors in whose workplace documents are sometimes still required to be sent via fax. (One reason for the high costs of health care in the United States is simple: far too much sludge!)
A good example is how business travel is monitored and reimbursed. In fact, in some ways the U.S. government offers its employees a better experience than private companies on this dimension. If a trip has been approved (and we won’t go into what that entails), the government’s travel office will often book the flights and hotel rooms directly and pay for them. They have even negotiated special prices. Now, should your flight get canceled, forcing you to take the train back home, we wish you the best of luck.
Our experience with travel rules and regulations within the private sector suggests that the process is excessively sludgy. Here is an example: You plan to attend a conference in another city that is two hours away by air. The conference is an important one, and getting approval to be reimbursed for the travel is no issue, but it is also up to you whether to go. Your employer does not require you to go but will pay for your travel if you do. Here is the rub: Something might come up that will make you want to skip the conference. It could be anything. Of course, there is always some chance that something comes up, but suppose that in this particular case, you know the risk is higher than normal.
When you look into flights, the airline offers two options. There is a cheap, nonrefundable round-trip ticket for $400, but if you don’t go you lose the entire amount. Or there is an expensive, fully refundable ticket for $1,200. Which ticket should you buy? When this came up for one of us, he asked his university what would happen if he bought the cheaper ticket and did not attend the conference—and was told that he could not be reimbursed for a conference that he did not attend. So, he bought the expensive ticket, attended the conference, and the university paid for the ticket. Sludge!
Someone who shares our view on travel expenses is Reed Hastings, a cofounder of Netflix, who writes about this in his book, No Rules Rules. You can see by the title that he is our kind of guy. Hastings tells the story of someone at his prior company who complained about a travel experience. The corporate travel policy was that if you went to some city, you could either rent a car or take cabs, but not both. The employee had rented a car because the client’s office was a two-hour drive from the city where he was staying but took a cab to an evening event with clients that would involve drinking. When he submitted his expenses the cab fare was not reimbursed. He was furious, and he eventually quit because he did not want to work for the kind of company that would have such a dumb policy. When Hastings started Netflix, he vowed that it would be run differently.
He says that his primary message to employees is “Spend company money as if it were your own.” In practice this means book the flights and hotels that you think are reasonable, and if you are in doubt ask your manager. Managers are told to do some monitoring of expenses, and if they find that someone is abusing the system, initially let the employee know but be prepared to fire anyone who is a repeat offender. Hastings summarizes his view, which applies to more than travel, in two bullets:
- Some expenses may increase with freedom. But the costs from overspending are not nearly as high as the gains that freedom provides.
- With expense freedom, employees will be able to make quick decisions to spend money in ways that help the business.
We would be happy to work for a company like Netflix.
When to use it
Reviewing and redesigning a company's travel reimbursement policy to reduce unnecessary complexity.
Assessing whether new proposed processes add real value or are just more sludge.
Implementing a 'spend as if it were your own' policy in a specific department to test its effectiveness.
Identifying and eliminating fax or paper-based requirements in a hospital or university setting.
FROM THEORY TO EVERYDAY LIFE
In practice
Conference Travel Reimbursement Dilemma
A university employee can buy a nonrefundable conference ticket for $400 or a refundable one for $1,200. The university will not reimburse the cheaper ticket if the employee does not attend, so the employee buys the more expensive one. The authors use the story to show how a rule intended to control expenses can encourage a costlier choice.
Netflix's Alternative: No Rules Rules
Hastings recounts an employee leaving his earlier company after a travel rule refused reimbursement for a cab taken to an event involving alcohol because the employee had already rented a car. His Netflix alternative asks employees to spend reasonably, with manager oversight and consequences for repeated abuse. He argues that this freedom benefits the business.
A MOMENT TO REFLECT
Put it to work.
Where in your organization do you see examples of private sector red tape? What specific rules could be relaxed to reduce sludge?
How would your workplace change if employees were trusted to spend company money as if it were their own? What risks and benefits would arise?
Think of a recent decision you made that was constrained by an unnecessary rule. What would a better alternative look like?
Often confused with
References
- No Rules Rules — Reed Hastings
CONTINUE THE CONVERSATION
Source texts
- Nudge The Final Edition (Richard H. Thaler Cass R. Sunstein)