Open Book Management – What is it & How Can it Help my Company?
Originally my topic for this article was to be a Federal tax update but upon further consideration, due to the fact that Congress has virtually accomplished very little in this area, I decided to talk about a subject that will bring great financial benefit to the companies that utilize open-book management properly.
Open-book management is a way of running a company that engages employees in making money. People learn to understand the economics of the business. They track and forecast key numbers. They figure out how to move those numbers in the right direction and they share in the rewards of better performance. Open-book management has been called the most important management trend in the country.
Definitions of open-book management vary, but they generally include the following components:
Sharing the income statement and balance sheet with most employees;
Sharing other data with employees (such as productivity and plant utilization/quality data);
Encouraging employees to use the information in their daily work;
Training employees to understand financial numbers; and
Sharing financial results through a gain sharing program.
Research on Open-Book Companies—It Really Does Work, Builds Profits and Employee Loyalty
Why should anyone bother with a whole new approach? Why not just keep on keeping on, managing your business the same way you always have? One reason is simple; open-book management nearly always improves near-term financial results. Empirical data reflects, companies register as much as a 30% increase in productivity and profitability in the first year alone, and in addition, employee ownership companies were nearly twice the size as expected in a 30-year period when they implement the approach properly. In addition, non-employee ownership companies saw an increase in sales of 1.66% per year and employment of 1.27% per year relative to what would have been expected without open-book management. The real business case for open-book management is that it makes a company stronger over the long haul. It improves the lives of employees, building loyalty and commitment. It helps create a business that can thrive year after year in today’s mercurial economy—and that can be sold for top dollar when and if that time comes.
Originally the idea of open-book management—that employees should actively concern themselves with a company’s business objectives—has a short pedigree. Frederick W. Taylor, the father of scientific management, would have thought it idiotic. So would generations of traditionally-minded executives, middle managers, union leaders, and frontline workers. Recently, though, the idea has gained currency. It underlies some innovative compensation systems such as gain sharing and employee stock ownership plans (or stock option plans). It is implicit in so-called empowerment or employee-involvement programs, yet such plans and programs are at best only half measures. Owning a few shares of stock does not magically enable employees to think and act like owners; they may want the company to succeed but have no idea how to help it do so. Although teams of workers are often empowered to manage their own work areas, nothing in conventional employee-involvement programs gives those teams a reason to care about how the business unit as a whole is doing.
The Seven Sources of Strength and Competitive Advantage It Develops:
More engaged employees;
If employees are to act with the organization’s business objectives in mind, senior managers must see that three conditions are met. Taken together, these requirements are the building blocks of an open-book system.
First, information previously shared only among those in charge must be seen—and understood—by everyone in the organization. That means all relevant information—not just sales and shipments, for example, but financial goals, budgets, income statements, and forecasts (Hence the moniker “open book”). Financial information is a business’s ultimate measuring stick; it explains the reasons for managerial actions and allows employees to gauge the real success of their own actions. How many companies have, say, reengineered a process only to reengineer it again when the hoped-for financial benefits didn’t materialize? If employees aren’t privy to the same data as management, they’ll decide that management doesn’t know what it wants. If they do have the same data, they’ll understand as well as management why the initial reengineering didn’t work.
Second, managers must hold employees responsible and accountable not just for scheduling their work or hitting quality targets but for making their unit’s budget or profit goals. Executives and senior managers—but, in most companies, few lower-level employees—know that a business unit’s performance reflects many elements, including sales, cost of goods, labor productivity, and budget variances. Managers responsible for those numbers learn to identify and watch key drivers, to forecast and forecast, to analyze the budget for possible trade-offs and fallbacks, and to figure out ways they can get additional or better work done in the same amount of time. In open-book companies, all employees learn those skills.
Third, in addition to paying employees for their time, the compensation system must reward them for the success of the business. That usually involves creating a sizable bonus plan. Unlike many variable-compensation systems, open-book bonuses are always tied to some easily understood measure (or measures) of business-unit performance, and progress toward the goal is publicly tracked. The system is thus wholly transparent: people see and understand the numbers that determine success, learn the part they play in making those numbers, and know in advance how they will be rewarded if the unit achieves its goals.
Companies can assemble the building blocks of open-book management in a variety of ways, as we’ll see when we examine the implementation process. However they are arranged, though, open-book precepts change fundamental assumptions about how an organization works. In open-book companies, managers and employees are expected to contribute to the business’s profitability by making (or bettering) their unit’s numbers. Managers may still issue instructions—open-book management doesn’t abolish hierarchies—but those instructions derive their authority from a logic that’s understandable to all (“We’re going to have to redesign that process again because, look here, you can see that our costs didn’t drop the way we hoped they would”).
About 30% of US workers say they engaged in their work. An open-book company can double or even triple that figure because employees see the effects of their actions on the business’s performance and know they will benefit when results improve. “I don’t have employees in my plant anymore,” says Roger Grommet, co-owner of Boardman Inc., a specialty manufacturer based in Oklahoma, “I have entrepreneurs who are looking to find ways to make more money.”
Lower supervisory costs;
People who view their work as “just a job” need supervision. Supervisors make sure that these hired hands work hard and don’t screw things up. People who view their work as helping to build a business—a business in which they share—don’t need that kind of supervision. Coaching, sure. Someone constantly peering over their shoulder, not so much. The less a company spends on supervisors, the better its bottom line.
Better front-line relations with customers;
A hired hand’s typical response to an irate customer is usually something like this: “Sorry, ma’am, I’m just following policy,” or “Sorry, that’s not my job.” A business owner’s typical response in the same situation: “We’re terribly sorry, ma’am. Let’s talk about how we can make it right.” At open-book companies, employees learn to think like owners—which means they act like owners toward customers.
Faster, more agile response to changing customer needs;
The difference isn’t relevant only to customer problems. Open-book employees also keep an eye out for longer-term changes in what customers want and expect from their interactions with a company.
A built-in competitive advantage;
Advertising yourself as an open-book company conveys a powerful message. You have nothing to hide. You can be trusted. You are providing your employees with a great place to work, and you are expecting them to think and act like owners. Who wouldn’t want to do business with a company like that? More and more open-book companies are teaching the approach to customers and suppliers through webinars and other methods. One software company found that advertising itself as an open-book organization led to several new hires in the highly competitive market for programmers. You might say that open-book management is the ultimate competitive edge.
Open-book management companies make work fun in a way that it can never be in an ordinary organization. Look at the typical open-book weekly meeting with its highly participatory review of sales, cost initiatives, or anything else that affects the company’s key numbers. Employees “cheer, laugh, clap, sometimes groan, and nearly always have a good time.” That’s because business itself is made fun when the employee is made a part of the decision-making process and is reaping the benefits in the form of goal-achieving financial benefits.
Higher company valuation;
An open-book company requires robust, transparent financial systems. It asks everyone in the organization to learn certain numbers that affect financial results and how they can make these numbers move in the right direction. Many such companies draw on practical techniques to ensure continuous improvement. These are all factors that affect a company’s appeal to potential buyers and hence its valuation.
Putting It Into Practice:
With conventional initiatives, a company’s decision to hire consultants is usually the critical step. The consultants hand out the reading materials, teach the classes, and work directly with managers and employees to implement the prescribed changes. With open-book management, consultants typically coach from the sidelines. Because it affects many different parts of a business, open-book management requires the ongoing support and involvement of senior managers. Because it is in many ways a cultural change—it teaches everybody in the organization new ways of thinking and acting—it also requires the ongoing involvement of middle managers and frontline employees.
Communicating and teaching key numbers;
While the groundwork for change is being laid, an open-book company must develop “scoreboards”—vehicles for regular communication of key numbers to the workforce. Business-unit scoreboards include an income statement and a balance sheet, along with any other numbers that are critical to the unit’s long-term health. Departmental scoreboards may focus on key operational measures, such as units shipped or defect rates, but they, too, must include a financial component. Because the goal is to enable people to take action in anticipation of future events, scoreboards usually include forecasts of months to come as well as actuals for past months. The scoreboards themselves may be electronic or they may be big bulletin boards or paper handouts. An open-book scoreboard is based on the shared understanding that a business unit’s numbers are compiled from performance and financial data from each department or operating unit. The departmental scoreboards thus help employees understand the connection between their own efforts and the business unit’s results (“Employees see how their decisions affect company income”). If a facility sets a goal of lowering vehicle costs, progress toward the goal is tracked on the income statement as well as on an operational chart. Employees learn not just that cost savings are important—any manager could convey that message—but why they’re important. They also learn that cost savings can’t be considered in isolation but only in conjunction with production volumes and revenues.
Employees see how their decisions affect company income;
Open-book companies, of course, have no monopoly on keeping scoreboards, but they do face a peculiar challenge in that they expect everyone in the organization to understand the scoreboard’s numbers. Some companies employ specialists to teach employees the fundamentals of developing accountability.
The hallmark of open-book management isn’t just seeing and understanding financial and other numbers. It’s taking joint responsibility for making them move in the right direction and thus for helping the company meet its objectives. Like any system of responsibility and accountability, open-book management needs a structure, a fact often missed in press accounts of open-book companies. The hallmark of open-book management is employees’ joint responsibility for moving the numbers in the right direction. Open-book management usually begins with department-level meetings, which must develop and monitor numbers that come from the ground up. Then employees begin to experiment with ways of affecting the numbers, which may also encourage them to develop better metrics so that they can get a handle on the most important drivers.
Rewarding employees for business success;
Traditional bonus plans are typically designed by compensation consultants, communicated to employees through a handout, and forgotten about until it’s time for the checks to arrive. An open-book bonus, by contrast, is pegged to numbers that employees see regularly, that they understand, and that they can affect. The bonus plan is thus an indispensable part of the management system because it answers the inevitable question: what’s in this for me?
Every manager has seen change initiatives that were introduced with great fanfare slide into obscurity as old priorities reasserted themselves. Open-book management will not succumb to this pattern if it has the full support of senior managers. It can be made competitive and rewarding with game play. A game is simply an initiative focusing on immediate improvement in a given area. Companies call it a game because it has a starting point, a set of rules, a goal, and a reward for winning. Every game focuses on financial results. In effect, a game is open-book management in microcosm. Employees learn that what they do on the job every day affects some number that ultimately affects the financial performance of the business. The satisfaction comes primarily from figuring out how to win and then winning. The other, however, is that game playing is dependent on the entire context of open-book management, which teaches employees to understand and care about the business. In open-book companies, people understand that games are mostly a fun and interesting way to learn the business—and that the real payoff will come as the whole business unit improves its performance.
In Conclusion—Knowing Why Matters;
Readers familiar with the open-book management movement in the United States will recall that financial transparency and immediate feedback on results, in the form of monetary bonuses for employees, are its central elements. However, a major question emerges for open-book managers as finances are made transparent and employees are rewarded for performance. How can performance be improved? Sweat and longer hours are not the answer but will be employed if no one knows how to work smarter.
Open-book management provides the why; it teaches the connection between specific performance improvements and the company’s business objectives. A financial incentive—often missing from conventional how-to programs—is a critically important part of this linkage, even though it is rarely more than a small fraction of an employee’s compensation. It says, in effect, “There’s a reason for all this extra effort that you’re putting in, and that reason is the financial success of the business you work for. As the business produces wealth, that wealth will be shared with you.” Such a message goes a long way toward overcoming the cynicism that greets so many change initiatives.
Because open-book management is a system rather than a how-to program, it is not a quick fix. Implementation is a long and cumbersome process, particularly in a large company, and the effect of the new way of thinking on the bottom line may not be apparent for some time. The power of open-book management lies not in the short term but in the long term, in its ability to change how people think and act, day in and day out. Business success always depends on a wide variety of factors. But this is a constant: whether a company’s employees care if it does well, know how to help it do better, and have a reason for learning new skills and attempting new tasks. The people who work for open-book companies give their employers a powerful competitive edge in that department.
About the Author
Salvatore Schibell, CPA, CFP®, MS Taxation, MBA, CGMA, is the tax partner at Lawson, Rescinio, Schibell & Associates, P.C. One of his specialties is working with contractors to maximize profitability utilizing his certified global management, financial planning, and tax planning specialties. Sal has many years of experience and can be contacted at 732-539-7328.