Netflix’s expense policy is not what you expect, but it works

Research shows that employees working at companies like Netflix or Google can be up to 40% more productive than average workers. This is due in large part to eliminating organisational drag, like internal processes or policies… and that includes how they handle expenses.

Slide number 76 of the now-legendary-and-HR-redefining presentation “Netflix Culture: Freedom & Responsibility” explains the tech and entertainment giant’s expense policy in just five words:

“Act in Netflix’s Best Interest”.

Since the release of the presentation in 2009, Netflix has been able to foster a radical, high-achieving culture by increasing employee freedom and trust. CEO Reed Hastings and former Chief Talent Officer Patty McCord claim the outcome of their approach – initially seen by many as controversial – has increased talent density and pushed employee productivity to new heights.

The numbers follow. Less than a decade later, the company has grown from 12m to more than 125 million monthly subscribers worldwide. Today Netflix is one of the fastest growing and most innovative companies in the world, employing more than 5000 people….

… Without an expense policy in place.

The Netflix Way: “Treat People Like Adults”

While this sounds common knowledge to plenty of small or family businesses, where people know each other and where trust comes naturally, things change when companies start to scale. A growing number of policies and procedures get put in place. While most organisations find this inevitable and welcome it, Netflix started approaching things a bit differently.

As Hastings puts it, these processes emerge as an urge to stop the overwhelming chaos. “Time to grow up” becomes a management mantra as they try to justify the new rules and regulations. As a result, policies pop up in different areas, including the one about how much money employees are allowed to spend on business expenses.

But this is where another, often overlooked problem actually occurs.

As companies get bigger, the growing number of procedures, rules and policies start to decrease employee freedom. Netflix realised a different type of chaos happens as a result: the increased complexity significantly reduces the productivity of high-performing employees, who become unhappy or can even end up leaving.

Research published in the Harvard Business Review shows that on average, a company loses more than 25% of its productive power to so-called “organisational drag”.

Research published in the Harvard Business Review shows that on average, a company loses more than 25% of its productive power to so-called “organisational drag”. These are bureaucratic processes that waste time and prevent people from getting things done, one of the most common ones being expense reporting. This is especially unpopular with millennials, who don’t want to be micromanaged and find that autonomy is the most valuable company perk, sometimes even more important than the size of their salary.

Netflix is not alone in realising this. Companies in the technology sector, whether smaller startups or huge corporations like Google, often trust that the people who they hire will end up doing the right thing, so policies are not just a drag but quickly become obsolete. And according to research from the leading consulting firm Bain & Company, employees in companies like Netflix and Google are on average 40% more productive as a result.

“If they can do it, so can we?”

What does a “no limits” expense policy actually look like?

In Netflix’s case, it’s quite simple. Their five-word policy actually means employees are instructed to “expense only what you would otherwise not spend, and is worthwhile for work”. They don’t have any limits, rules, reporting or tracking set in place to follow that, as it has proved as a waste of time.

“We assume you are not here to rip off the company, and we’re not going to put in place processes that consume human capital, waste time, and zap energy.”

– Patty McCord, former Chief Talent Officer at Netflix

On the other hand, Google does things a bit differently:

Today, most companies have corporate cards reserved only for senior management. Google, on the other hand, has decided to give one to every employee (see tweet above). This doesn’t just symbolise the amount of freedom and trust, but it is also a rational business decision to automate their expenses. In this case, the employees are not just allowed to spend what they need to in order to get their job done well, but also to use the company funds to do so.

And this is a huge disruption to the status quo.

In most companies, the majority of employees have to first follow a strict expense policy and put their own money upfront for a simple business purchase. This is where the “expense report” comes in, as a detailed record and description of each company’s purchases, left for review by the finance team so that workers can later receive their money back.

By definition, this goes against everything the approaches mentioned above stand for. Unfortunately, this cumbersome bureaucratic process has become a norm for the majority of businesses nowadays. And people have learned not just to hate it, but even worse, it can lead to employees facing financial straits through no fault of their own, as per this report.

At Pleo, we’ve already written pieces about why the era of expense reports is coming to an end and what the overlooked costs for organisations are.

“Yeah sure, but we are not Google”

The positive benefits of avoiding the “organisational drag” like trust and employee happiness are hard to track with metrics or KPIs. For most finance teams it’s much easier to default to something familiar as it gives them more sense of control over what is happening. When thinking about new approaches, we’ve found the following two concerns come up most often.

1. “Would this really work in our company?”

The cases of Google and Netflix prove that different approaches can work, even at huge scale. But most often, the concern about such a change in systems is not the just the culture shift. It’s also regulation.

Company spending needs to be tracked properly and receipts serve as proof of purchase for tax and audit purposes. Expense reports work today because employees are urged to save and hand in their receipts in return for a reimbursement. They have a clear incentive to do so, because it’s their own money at stake.

Expense management software apps make things easier by just adding the image of the receipt instead of storing it. As Netflix & Google are technology companies, it won’t surprise you to learn they have developed a variety of custom smart apps to make sure they oblige with the regulatory requirements, but in the easiest and smart possible way for their employees.

Secondly, consultancies or other professional services firms require a set of policies and rules in place to properly tag expenses, since they are often not just internal and non-billable, but need to be tracked against different projects or clients in contrast.

The majority of tools out there today will make sure that employees can track their expenses a bit more easily, but most end up being too clunky. They don’t allow employees enough freedom to follow their judgment when buying things for work, and most importantly, in most cases workers are not trusted with company funds to do it.

And the only way to change things is by handing them a company card.

2. “But wouldn’t the employees just spend more money?”

Netflix realised that “97 percent of their employees will always do the right thing… the other 3% were wrong hires in the first place”.

Similarly, Basecamp (which gave their employees the freedom with a no red tape expense policy to spend “within reason” and equipped them with company cards to do so), had just one case that was worth digging into from their 100+ employees. And guess what? The employee involved in the one case that was investigated still works there, according to their co-founder Jason Fried.

At Google, which employs more than 85,000 people worldwide, things are of course harder to dig into on a case-by-case basis. This is why they had to find a way to give employees trust and freedom, but at the same time let them know what is deemed acceptable by the company.

“On a very fundamental level, people like being told what they can and can’t do. They want flexibility, choice and to be able to do what they want to do, but they also want to know what’s reasonable and what’s acceptable in this company. 

-Michael Tangney, Global Lead: Travel, Expense and Credit Card at Google

They have managed to redefine the concept of a travel policy in everyone’s favour. Employees are allowed to book flights and hotels by themselves, but have a system in place to suggest the best option available, with incentives for choosing the cheaper options.

At last, the technology and tools are here

For the past few decades, the trade-off between the requirements of the finance team and the ease of use demanded by the employees has resulted in a bad compromise for both: an expense report.

This has combined manual reconciliation times, no real-time overview, expense fraud attempts and unhappy employees waiting to get reimbursed. All of this is a source of stress and time loss for the entire organisation. The most innovative companies in the world have found ways of making it easier for their employees by building cutting-edge tools to fit their needs and even help them attract new talent.

Thankfully, the fast developments in business and finance technology are moving things in the right direction for forward-thinking companies everywhere. Expense and travel tools are becoming smarter by automating the necessary regulatory requirement parts, and at the same time they give employees a much easier and a smarter way to just get things done.

An example of a tool that comes to mind is Rocketrip. Inspired by Google’s internal travel system, it found a way to build an enterprise platform that rewards employees with gift cards if they go under budget on travel and transportation. Finance managers can follow all travel bookings and can set policies, while employees can book by themselves and earn rewards to save company money.

Another example is Pleo. Employees are trusted with smart company cards, while at the same time finance teams can set expense policies in place. Cards come with individual spending limits and employees are reminded to snap the image of the receipt and add project or customer tags if needed. Finance teams sees everything in real-time, categorised and automatically synced with their accounting software. This means everyone is compliant, everything is tracked, but no one has to do an expense report.

Both cases are just two examples of a win-win-win situation for employees, managers and companies. It brings the best of both worlds: a way to keep your staff agile and fast, while at the same time giving companies more control over all their spending to help them save time and money.

And with all the saved time, there must be a show you’ve been meaning to catch up on… or some work to do.