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

Research shows that employees working at companies like Netflix or Google are on average 40% more productive. This is in big part due to eliminating organisational drag like internal processes or policies. Including the one about expense reports.


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 only 5 words:

“Act in Netflix’s Best Interest”.

Since the release 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, by many controversial, approach has increased talent density and employee productivity to new heights.

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

Without an expense policy in place.


The Netflix Way: “Treat People Like Adults”

While this sounds common 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 the professional management’s mantra to justify the need for them. As a result, policies pop up in different business areas, including the one about how much money employees are allowed to spend on what, and how can they actually do it.

But this is where another, often overlooked, problem actually occurs. As companies get bigger, the growing number of procedures, rules and policies in place, starts decreasing employee freedom. Netflix realised a different type of chaos appears 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 Harvard Business Review shows that on average company loses more than 25% of its productive power to so-called “organisational drag”.

Research published in Harvard Business Review shows that on average 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 one being expense reporting. This is especially not popular with millennials, who don’t want to be micromanaged and find that autonomy is the most valuable company perk, even more important than the size of their paycheck.

Netflix is not alone in realising this. Especially companies in the technology sector from smaller startups or huge corporations like Google often trust that 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 side result.


“If they can do it, so can we?”

You might be asking at this point, how does a “no limits” expense policy actually look in practice.

In Netflix’s case, it’s quite simple. Their 5-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 when they need to get their job done, 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 later also put their own money up front for a simple business purchase. This is where the “expense report” comes in, as a detailed record and description of each company’s purchase left for review by the finance team to later receive the 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 financial straits of your employees, as per this report.

At Pleo, we already wrote pieces about why the era of expense reports is coming to an end in lengths here and what the overlooked costs for organisations are.


“Yeah sure, but we are not Google”

The positive benefits of avoiding the ”organisational drag” like productivity, 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, the two following concerns come up.


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

The cases of Google and Netflix proved 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 also that of the regulatory nature.

Company’s spending needs to be tracked properly and receipts serve as a proof of the purchases done 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 is 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, they have certainly 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 a 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.

Majority of tools out there today will make sure that employees can track their expenses a bit easier, but most end up being too clunky. This also doesn’t allow employees enough freedom to follow their judgment when buying things for work, and most importantly, they are in most cases 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. They find that 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 amongst more than 100 employees, just one case that was worth digging into. That employee still works there, explained their co-founder Jason Fried.

At Google, which employs more than 85,000 people worldwide, things are of course harder to dig into on an case-per-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 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 to them what the best option available for them is and are even incentivised for choosing the cheaper options.


Finally, the technology and the right tools are here

For the past 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.

Manual reconciliation times, no real-time overview, expense fraud attempts and unhappy employees waiting to get reimbursed, has become a source of stress and time loss for the entire organisation. The most innovative companies in the world have found ways in 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 forward 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.