Eric Stromberg An Analysis of Zappos Training Process Through Transaction Cost Economics and Occupational Rhetorics Theory Introduction

Zappos.com is one of the worlds most successful e-commerce businesses, selling shoes to 9.7 million customers since its founding in 1999. From the beginning, founder Nick Swinmurn and CEO Tony Hsieh took an innovative stance, especially for an ecommerce company: Zappos would be a service company that just happens to sell shoes. Superior customer service, they knew, had to begin with their employees. Because its employees drive much of Zappos success, the company puts all new employees through a unique and well-planned training process. The theories put forth in Oliver E. Williamsons The Economics of Organization: The Transaction Cost Approach and Gary Alan Fines Justifying Work: Occupational Rhetorics as Resources in Restaurant Kitchens offer insight into why this training process is effective, and why Zappos has evolved to incorporate these unique elements into its training process.

Zappos Background Nick Swinmurn founded Zappos.com in 1999 with a single mission: to create a website that offered the absolute best selection of shoes.1 Swinmurn hired Tony Hsieh, an early investor, to be the company CEO in 2000. By 2007, the company had $840 million in sales and was the number 1 footwear retailer on the web, according to Business 2.0 magazine, commanding a fifth of the online footwear market.2 In 2009, it debuted at number 23 on Fortune magazines annual list of Best Companies to Work

Zappos.com. The Zappos Story. http://about.zappos.com/zappos-story/in-thebeginning-let-there -be-shoes 2 Durst, Sidra. Shoe In. Business 2.0. March 15, 2007. http://money.cnn.com/magazines/buseinss2/business@_archive/2006/01/8394493/index. htm

Eric Stromberg For. Today, the company has its headquarters in Las Vegas, Nevada, a warehouse in Shepherdsville, Kentucky that spans almost 1 million square feet, and employs 1,500 people, half in Las Vegas and half in Kentucky.3 The Zappos organizational goal is to create a family-style environment that challenges workers to learn and grow everyday. They want employees to own and build the culture, so that each worker feels that he or she has a real stake in the direction of the company. They set out to create a strong culture that encouraged fun and creativity in an upbeat, family-feel environment that would attract repeat customers and spread word of mouth advertising. Their motto became repeat customers through superior customer service.4 They correctly expected that this model would gain Zappos a position atop the e-commerce market. Hsieh explains, customer service is not our number 1 priority, it is company cultureif you get company culture right then most of the other stuff like great customer service or building a great brand will happen naturally on its own.5 Zappos uses a unique four-week training process that aims to give employees a holistic view of all aspects of the company. For this reason, Zappos sends all of its employees, regardless of position, to the Kentucky warehouse to learn how the warehouse operates. Trainers teach all employees the general guidelines for answering phones, and importantly, how to improvise on phone conversations, even if the employee is never expected ever to talk to a customer as part of the job description. A unique element is that at the end of each week of training, the company offers the trainees money to quit. Moreover, each week the amount increases, rising to a final offer of $2,000 to quit the company, which is known within the company as the bribe. In addition, new

Lin, Alfred, External Presentation, Feb 3, 2009/ http://www.slideshare.net/zappos_ alfred/zappos-preso-2009-02-03-shoporg 4 Hsieh, Tony. How I Did It, Inc. Magazine. Sept 2006, h 5 Zappos.com CEO Tony Hsieh: $1 Billion in Sales, Feb 7, 2009. From youtube.com

Eric Stromberg employees read a 476-page book, written by Zappos employees. Nor does training end with the 4-week program; Zappos now offers leadership and development classes to its employees throughout their careers through its pipeline program.6

Understanding Zappos Training Through Williamsons Theory In The Economics of Organization: The Transaction Cost Approach, Oliver E. Williamson details the fundamentals of Transaction Cost Economics (TCE). His theory aids the understanding of several aspects of Zappos training process. TCE holds that, an understanding of transaction cost economizing is central to the study of organizations. (Williamson, 548) Transaction costs include such cost factors as search, information, bargaining/negotiating, enforcement/policing, and social. They can be analyzed on three levels: contracts with suppliers, contracts with other firms, and contracts with labor. Williamson argues that we can understand the structure of organizations by knowing how they seek to minimize transaction costs. The analysis of Zappos training process through Williamsons theory will focus on an analysis of the organizations contracts with labor. The minimization of transaction costs is not the same as profit-maximization, which, Williamson notes, has been less illuminating for organization theory purposes than for economics. Transaction costs, as opposed to commodity costs, must be measured and used to assess governance structures. Williamson clarifies that rather than focus on the traditional cost factors such as technology and production expenses (real cost), transaction cost economics examines the comparative costs of planning, adapting, and monitoring task completion under alternative governance structures. (Williamson, 553) Indeed, the firm exists to reduce transaction costs associated with economic

Houchin, Brett. Training, Leadership and Development Classes from Zappos Company Blog, Jan. 28, 2009

Eric Stromberg exchanges. Williamsons theory yields its greatest insight in explaining Zappos unique policy of offering a quitting bonus to trainees at the end of each of the four weeks of training with no questions asked, a bonus that can be viewed as a bribe to leave the company. Each week, the offer increases in value, culminating with a final offer of $2,000 to leave the company. Williamsons theory helps us understand that this strange bribe is a concentrated effort by Zappos to reduce transaction costs associated with employee turnover in the future. These future transaction costs include the development of an employee, search costs for new employees, and possibly severance costs, among others. Zappos is assuming that the one-time payment of $2,000 will be less than the future turnover transaction costs. Williamsons theory confirms this idea. He argues that critical variables for describing transactions are uncertainty, frequency, and asset specificity. (Williamson, 555) Uncertainty is important because it is difficult to predict what might occur over the lifetime of the transaction, frequency refers to how often the transaction occurs, and asset specificity describes how unique the asset is to the particular end product of the firm. These variables, which affect the transaction costs of the firm, will in turn, affect the type of contract for the exchange that is pursued by the firm, or whether the firm integrates the process vertically. This idea helps explain the Zappos bribe. The key purpose of The Offer, is to gain new information that may reduce transaction costs in the future. Zappos seeks to reduce the transaction costs of developing a new employee, only to have him or her leave or perform poorly within a few months. Williamson argues that variables for describing transactions are defined by uncertainly, frequency, and asset specificity. The Zappos bribe helps eliminate uncertainty about the new employee, thus reducing transaction costs. Zappos believes that taking the bribe, or turning it down, helps clarify the

Eric Stromberg uncertainty as to whether the employee is fully committed to Zappos and its special consumer culture. Bill Taylor of Harvard Business School explains, It may sound like an expensive proposition, but its a lot less expensive than hiring someone who is not fully committed to the companys customer service principles.7 A Business Week article points out Zappos.com is acting on the understanding that the character of a company can be the most powerful yet most difficult competitive advantage to develop and maintain. According to the article, the company feels that this process filters out those who are not fully committed to the core values of the firm.7 To them, it makes more sense to lose a non-committed employee for $2,000 on day one than to pay that person for below average work for several years. Its best to know early if an employee doesnt buy into the vision or the culture, says Hsieh. It just makes economics sense.8 Here, we see that Hsieh has invoked the economic reasoning of reducing transaction costs in instituting the policy of offering prospective employees money to quit during training. Other parts of Williamsons theory also provide insight into Zappos training policies. Transaction cost economics relies on two behavioral assumptions. The first is the recognition that human agents are subject to bounded rationality. (Williamson, 553) Williamson seeks to distinguish the economic man, who is assumed to have hyperationality from the organizational man, who has less powerful analytical and data-processing tools. This does not make the organizational man irrational; rather he is rational, but there are limits to the information he may access. Again, Zappos managers live with bounded rationality; they do not have all the information they need to assess whether each new employee will embrace the Zappos culture in the future. To counteract

McFarland, Keith, Why Zappos Pays Employees $2,000 to Quit. Business Week, Sept 16, 2008 8 Borden, Mark, The Fast Company 50- #20 Zappos Fast Company

Eric Stromberg this, they believe the offer will weed out those not committed to the core values of the company. Interestingly, just 3 percent of employees accept the offer.9 The second assumption is that at least some agents are given to opportunism. (Williamson, 553) The organizational man is motivationally more complex than the economic man. Some actors are dishonest in that they disguise attributes or preferences, distort data, obfuscate issues, and otherwise confuse transactions. (Williamson, 553) In the case of Zappos, this could involve an employee disguising his true feelings about the company culture or some other negative factor in order to get the job. Williamson would term this opportunistic behavior, and notes it is costly to distinguish opportunistic behavior from nonopportunistic behavior ex ante. Contracting is more difficult under Williamsons assumption, because, unlike the purely economic theories, Williamsons theory allows for agents who may cut corners or deceive for personal advantage, thereby doing what is not expected by economic motivation alone. These assumptions affect calculations of opportunity cost within organizations. The Offer represents Zappos effort to distinguish opportunistic behavior at a point where it would incur a one-time cost of $2,000, instead of a much higher price in wasted salary or unhappy customers down the line if the employee was hired and proved a poor organizational fit. Hsieh confirms that this method cuts future costs. He explains, you dont see the payoffs right away, you see the payoff a year, two years, sometimes three years down the line.10 Again, Hsieh is acting with the economic motivation of reducing transaction costs. Further, TCE can explain Zappos decision to integrate customer service within the firm, and to highlight this component of their business in their training process. TCE
9

McFarland, Keith, Why Zappos Pays Employees $2,000 to Quit. Business Week, Sept 16, 2008 10 Internet Shoe Shops Unique Step, ABC News, July 8, 2008

Eric Stromberg holds that transactional factors influence the structure of a firm. In particular, TCE looks at the extent to which firms integrate vertically, at where they set their efficient boundaries. For example, a firm either makes a component itself or buys it from an autonomous supplier. The decision is based on transaction cost analysis and is at the center of what transaction cost analysis examines. Using TCEs boundaries analysis, we see that while other firms have outsourced client interaction to third parties, Zappos has placed it at the core of their business. They calculate that the quality of outsourced customer service is declining and to outsource it would incur a serious transaction cost, given the emphasis Zappos places on superior customer service. Because of this, they have integrated it into their organization and stress it to recruits during the training process. TCE can also help understand the relationship between employer and employee in the training process as what Williamson terms a relational team. (Williamson, 565) Especially for the people-centered Zappos culture, human assets are specific to the firm. They are non-interchangeable. Human assets are also difficult to meter especially with regard to their enthusiasm or creativity, two key characteristics that Zappos values highly. Williamson writes, the firm here will engage in considerable social conditioning, to help assure that employees understand and are dedicated to the proposes of the firm. (Williamson, 565) This is very much the case at Zappos, especially concerning training. The training strives to make employees dedicated to the mission of the firm values; incentives to leave are set up to weed out those who are not committed to them. Thus the training and the bribe help preserve a unique asset, an employee pool committed to Zappos service culture, largely free of members who are not committed to the organizations core philosophy.

Eric Stromberg Understanding Zappos Training Through Fines Theory In contrast to TCE, Occupational Rhetoric Theory is a more socialized approach. Gary Alan Fines paper Justifying Work: Occupational Rhetorics as Resources in Restaurant Kitchens provides insight into the occupational rhetorics theory. Through an ethnographic study of restaurant cooks, Fine developed his theory. It is based on the idea that workers rely on a variety of occupational rhetorics as resources to define their work and their identity. These rhetorics help address the central social question, what kind of a person am I? They help workers explain to themselves why what they do is admirable and/or necessary. (Fine, 90) According to Fine, to understand organizations, we must understand employee rhetoric and thereby how the employees think and operate, and what motivates them. Fines theory also helps explain aspects of the Zappos training process, including the holistic approach that Zappos utilizes in training its employees. Fine argues that employees draw on one of several different rhetorics to define themselves, depending on the work situation. (Fine, 91) Fine draws largely from his time observing and interviewing cooks in four restaurants in the Twin Cities area. He found that cooks draw alternatively on images of professionals, artists, businessmen, or manual laborers, depending on the conditions of their work at a given moment. Fines theory thus assumes that workers have a holistic multi-faceted view of their work, and that this allows them to adapt to different situations. Similarly, Zappos training process gives employees the tools to see the company from a birds-eye view and equips them with the skills and information to draw on different self-images or rhetorics when necessary. Fine argues that cooks often draw on the professional rhetoric. Fine notes professionalism is a status market by which cooks gain credit and control in the roughand-tumble world of status politics. (Fine, 98) Cooks find similarities between their

Eric Stromberg work and other professions, including surgeons, when they analogize the proper cutting of food to surgery. Further, professionalism is embedded in the circumstances of the work. Cooks take professional pride when experience and expertise permit them to cook without relying on recipes, an autonomy that may be seen as similar to the way Zappos trains customer service employees to answer calls without a set script. Although they are given general guidelines, they are encouraged to improvise and add their own personal touch. Autonomy is a key feature in distinguishing a professional from a manual laborer. Were not a bunch of robots, explains one cook interviewed by Fine. (Fine, 99) Cooks also draw on the rhetoric of art when they emphasize elaborate or elegant preparations. (Fine, 101) This rhetoric highlights creativity. Fine notes, the lack of routine is critical in the establishment of an artistic sense of self. (Fine, 99) Cooks summon the rhetoric of business when they consider the bottom line of the establishment to maximize profit. (Fine, 106) Business rhetoric prevails when financial security is the chefs most important goal and often comes later in his professional life. Lastly, cooks adopt the rhetoric of labor when the work is deskilled which occurs more readily in chains and franchises. Due to the manual nature of cooking, labor or blue collar rhetoric is natural. Even the most artistic chefs must perform routine tasks such as chopping onions or stringing celery. Fine points out of all rhetorical resources, labor rhetoric is the most negative and self-denigrating. (Fine, 107) Fine makes the overarching point that successful organizations encourage multiple employee rhetorics. They encourage creativity, autonomy, and above all, personal investment in their art or trade. The Zappos training process is unique in that everyone that is hired into the headquarters experiences the same training as do the call center reps, regardless of department or title. Hsieh explains, you might be an accountant, or a lawyer, or a

Eric Stromberg software developeryou go through the exact same training program.11 Using Fines rhetoric framework, we see that this is Zappos attempt to provide its employees with all of the tools necessary to allow them to understand the different rhetorics that go into the bigger picture of the business and to do the job with a holistic view, regardless of their particular job within the company. This will allow them to draw on different rhetorics depending on which job they are performing. The training process also includes a one-week trip to the Kentucky warehouse, dubbed KY boot camp by employees, where trainees learn the system for stocking and shipping the shoes. For example, Sari Levine works in the design department, but she attended a recent call center class. After Levine finished her training on calls, she began shipping shoes in Kentucky. We go to our Kentucky fulfillment center, and when you do, you understand every single aspect of how the warehouse works and you physically get to go and put shoes in a box and watch it go down the conveyor belt straight to the customer's door," said Levine. 12 Zappos wants its employees to have a holistic view of all aspects of the business based on first-hand experiences. This will breed a fuller understanding of the entire business cycle, as well as the companys customer oriented mission. Fine would most likely argue that the ability to have this holistic view and thus draw on different rhetorics depending on situation would result in happier, more productive employees. Zappos training with regards to answering phone calls with customers encourages employees to draw on the art or professional rhetoric. At Zappos, all employees are taught proper techniques for answering the phones and talking to customers. Hsieh explains, youre actually on the phone for 2 weeks, taking calls from

11 12

Hsieh, Tony. Your Culture is Your Brand, Zappos CEO Blog, Jan. 3, 2009 Internet Shoe Shops Unique Step, ABC News, July 8, 2008

Eric Stromberg customers.13 This includes customer service client-interaction training for those who jobs will never require talking with customers. Employees who take calls adhere to no script and are not instructed to keep calls short. They are allowed to improvise greetings. One example greeting that is demonstrated to new employees is, Welcome to Zappos, where Elvis was once spotted in our warehouse, looking for a pair of blue suede shoes.14 Hsieh explains that they really encourage employee improvisation. We really trust our reps to do whatever we think will Wow our customer, it is not like we have a list of things for them to say. Each employee must learn how to improvise, and talk to customers. While the shipping work during the training process may be seen as calling on the workers labor rhetoric, the unscripted call work may be viewed as invoking the workers professional or artistic rhetoric because it grants autonomy and requires special skills and creativity. This, according to Fines theory, will lead to more productive employees. This in turn will fuel Zappos core philosophy of creating a unique corporate culture that is fueled by the employees that leads to premier customer service.

Limitations of Williamsons Theory in Understanding Zappos With Zappos training program in mind, TCE seems to be a bit limited. TCE may need to incorporate a more socialized approach. Zappos encourages rhetorics that empower workers as part of its organizational framework. At Zappos, creativity and autonomy are encouraged, leading workers to draw on the artistic and professional rhetorics mentioned by Fine. As Fine notes, artists, in theory, are little concerned over the duration of a task. Professionals have temporal flexibility in that they set conditions of their worked. (Fine, 110) Those who draw on the business rhetoric emphasize

13 14

Hsieh, Tony. Your Culture is Your Brand, Zappos CEO Blog, Jan. 3, 2009 Internet Shoe Shops Unique Step, ABC News, July 8, 2008

Eric Stromberg temporal efficiency. In contrast, laborers wish to transform public time into personal time. They attempt to control the clock by working slowly, thus avoiding certain tasks because their hours are completed. Thus, an important factor in an organizations monitoring of costs is the rhetoric the worker draws on. By supporting one rhetoric over another, organizations can lower their transaction costs. Although TCE identifies social measures of transactional costs, it does not develop these in a way that reflects the importance of employee self-image psychology to the costs of the organization. Thus, the integration of some of the principles of occupational rhetoric theory into TCE could go a long way in making TCE a more complete organizational theory.

Limitations of Fines Theory in Understanding Zappos One inconsistency between Fines theory and Zappos training program concerns what Fine terms the business rhetoric. Fine explains that when employees draw on the rhetoric of business, they are encouraged to think about the bottom-line. In Fines example, cooks must look at the business as a whole and weigh, how much youre ordering and how much youre spending. A profit-driven perspective that is drawn upon by cooks does not have much place in the Zappos training program. In fact, Zappos trains its employees to play down the business rhetoric. New employees are encouraged to value pleasing customers above any immediate bottom-line thinking. For example, if an employee cannot find a particular pair of shoe for a customer, he is trained to check at least three competitor websites and direct the customer to the site. In addition, Zappos encourages employees to send customers flowers, or engage in random acts of kindness that will wow the customer, but negatively affect Zappos bottom line in the short term. Of course Zappos expects customer loyalty to grow the bottom line in long-term, but this profit-driven view is not instilled in employees during the training program, Thus, any

Eric Stromberg business rhetoric that encourages profit maximization as the dominant focus is absent in Zappos training program.

A Comparison To gain insight into the differences between the TCE and Rhetoric theories of organization, we can look at Fines theory about a Cooks recipes, and relate this to Zappos policy of encouraging employees to improvise calls with customers. One cook that Fine interviewed said, When a restaurant expands or new cooks are hired, the chef is frequently asked to set down his recipe in writing for others and in case he gets sick of leaves. Standardizing recipes for cooks is analogous to standardizing call responses for customer services employees. Relating this idea to Zappos, in contrast to rhetoric theory, TCE would likely consider scripting phone conversations to be necessary. Scripts cut down on the transaction costs of time and training for a replacement employee. However, Fine explains that, to standardize an employees work is to de-professionalize his occupation to some extent, thus decreasing the workers autonomy to decide. (Fine, 98-99) Fine explains that such routine can lead to boredom, and undercut a workers self-esteem, leading to decreased efficiency. Thus, while TCE would seem to advise the writing down of recipes or call scripts, Fines theory would view standardization as diminishing the image of artistry held by a cook or call center employee and thereby harmful to the organization. While TCE focuses on whether the scripts increase or decrease transaction costs, occupational rhetoric theory asks how the introduction of the scripts makes the employees work more automated, or reduces creativity and autonomy, and therefore, self-worth. If it does, the employee would be more likely to draw on the labor rhetoric.

Eric Stromberg When this occurs, as Fine points out, ones commitment ends with the paycheck and cooks may be bitter towards management (Fine 111) This has important consequences for organizations in terms of how organizations appeal to their employees. There is another important difference between transaction cost economics and Fines theories on occupational rhetoric. Fines theory emphasizes the ability of the employees to shape the organization around them. Successful organizations adapt to allow employees to draw on the rhetoric that makes them the most successful and efficient. This is a very socialized theory. In contrast, TCE is more concerned with the reduction of transaction costs of goods and services. Although noting that transactional costs can be social, TCE is largely quiet on the idea that the emotions and inner psychology of the employee can affect the organizational structure. An analysis of Zappos training practices would seem to validate Fines theory. During training, each employee receives a copy of the Zappos.com Culture Book. The book contains, hundreds of short essays written by Zappos employees and vendors

explaining what makes the Zappos company culture so special and successful.15 In essence, it allows the employees to define what the company culture means to them. Since they place a high emphasis on making this book available to new employees, it would seem the organization is embracing the employees ability to define and change the culture of the organization. This positive definition of selfimage or employee rhetoric is exactly what Fines theory encourages firms to do, while TCE largely is quiet on this subject of the organization impact of employee self-images.

15

Zappos Culture Book Available: http://www.zappos.com/n/p/dp/42746617/c/1.html

Eric Stromberg Further, Fine probably would add a third measure to Williamsons theory that human assets can be assessed in terms of the degree to which they are firm specific, and the ease with which productivity can be measured. (Williamson, 569) Fine might argue that a workers feeling of autonomy and personal investment is a key variable, maybe the key variable, in the assessment of a human asset. The greater the employee is on these measures, the more productive the employee and the organization will be. Another difference arises in an analysis of Williamsons assumptions of bounded rationality. The basis of bounded rationality is that we cannot assimilate all information, cannot evaluate all courses of action, and cannot predict the actions of actors. However, according to Fines theory, there are predictable circumstances under which employees will adopt a given rhetoric, and it is clear which of the rhetorics facilitate organizational efficiency. For this reason, Fines theory allows for more actor rationality. Fine allows for actions and reactions that are more predictable than Williamson allows. With respect to this point, Zappos case exhibits behavior that at once incorporates Williamsons assumptions about bounded rationality, tempered by Fines recognition that rhetoric can tell us much about an employees behavior and its effect on organization. Zappos management seems to assume that employee actions can be predictable when employees enjoy autonomy and the opportunity to be creative. They assume that when employees are learning and growing, they will perform better. However, at the same time Zappos management clearly understands that it cannot synthesize all information in evaluating a prospective employee. Here they recognize that rationality is bounded for predicting behavior important to their organizational goals. Accordingly, they use the bribe technique to weed out those recruits less committed to their culture. By using this technique to get at psychological or other non-traditional economic factors, they affirm the value of TCE theory.

Eric Stromberg Further analysis of the Zappos case reveals yet another rhetoric which employees draw on, one that perhaps should be added to Fines theory. The rhetoric of learning, or growth, is vital to employee performance. Perhaps we could call it something like the upwardly mobile rhetoric because it speaks to a self-image of moving up in skills, knowledge and self-appreciation. Zappos clearly seeks to develop this rhetoric with its employees. Although official training ends after four weeks, Zappos recently created a Leadership and Development department to offer classes to employees in subject areas such as management, culture and history. Nicknamed the pipeline, the department was created in 2009, to further train Zapponians and help them grow as employees, as well as people. Further, the goal of the pipeline is within 5-7 years everyone from a starting point in company to future leaders16 will participate. Zappos appears to place high value on developing an upwardly mobile self-image or rhetoric among its workers in order to strengthen its culture and organization.

16

Houchin, Brett. Training, Leadership and Development Classes from Zappos Company Blog, Jan. 28, 2009

Eric Stromberg Works Cited*

Fine, Gary A. "Justifying Work: Occupational Rhetorics as Resources in Restaurant Kitchens." Administrative Science Quarterly 41 (1996): 90-115.

Williamson, Oliver E. "The Economics of Organization: The Transaction Cost Approach." The Journal of Sociology 87 (1981): 548-77.

*This includes only works not fully cited in the footnotes of the paper