Smart Business: Managing By The Open Book
About a decade ago, I attended a seminar by businessman and author Jack Stack. He is known as the father of “Open-Book Management,” a methodology centered around sharing financial and decision-making duties among all employees.
Open-book management is not mysterious. Most small contracting companies practice a version of it without being aware of the label. They simply rely on a handful of full-time staffers who know almost everything there is to know about the company and its operations. Yet, even in tiny companies, the field workers may not know all the details of financial performance, and probably don’t care as long as their checks don’t bounce. Heck, in too many cases, even the owners don’t know that much about the company’s financial performance. They just cross their fingers and hope enough cash is flowing to pay all the bills and provide them a decent draw.
As a company grows, jobs become more specialized and only a handful of people become privy to the financial details. Usually that’s just the owner(s) and whoever occupies the position of chief financial officer, whether it comes with that title or not. More often than not the people who do track company finances tend to keep it a secret from other employees. There’s a certain business logic to guarding this information. The more people who know about a company’s finances, the more likely it is for that information to get out to competitors, vendors and customers, which could have negative repercussions.
However, the negatives mainly apply when information leaks out about a poorly performing company. When done right, open-book management should do two things:
Boost operating performance
Give employees a stake in the company, which makes them unlikely to blab about sensitive matters to outsiders, except to tell everyone what a great place it is to work.
In any case, the main reason most owners are reluctant to share financial info has less to do with outsiders than keeping employees in the dark about one overriding secret-how much the owners and top managers get paid. Ingrained in our culture is the notion that it’s nobody else’s business how much you make. Plus, the fear is that lower paid employees will resent seeing how much managers and owners are making.
There are various ways to deal with this problem. Most common is simply to lump all managerial salaries under a heading of “administrative salaries/income.” The larger the company the more difficult it is to guess who’s making what. If there are only two or three administrative staffers it’s harder to disguise the salary levels, but if they are not excessive this should not be an insurmountable obstacle in a well-run open-book program. Keep in mind that public companies have to disclose how much their top executives make.
These obstacles are mostly psychological and somewhat trivial when weighed against the positive outcomes of open-book management. A large body of anecdotal evidence suggests that companies have more to gain than lose when they make employees truly feel like part of a family ownership. A successful open-book system is not simply a matter of tossing the company’s profit-loss statements to the wind. Here are some key elements:
Give employees training to understand the financial statements-and the need to keep them confidential. Without training, a P&L statement or balance sheet will appear as hieroglypics to many employees. Pertinent information may include revenue, direct and indirect costs, profit, cost of goods and cash flow. Some companies may wish to include information about upcoming bids, backlogged work and so on, but too much information can be confusing.
Avoid paralysis by analysis. Don’t provide so much financial data or make it so arcane only a CPA can make sense of it. Successful open-book companies tend to zero in on one or two key financial parameters as a mark of success and encourage employees to do what they can to boost them. The open-book technique pioneered by Jack Stack relied on a “critical number” concept that defined the breakeven point of profitability.
Give employees responsibility for numbers and ratios that are under their control, such as budgets and expenses. Tie their performance reviews in some measure to how well they control the financial aspects of their jobs.
Give everyone a stake in the company’s financial performance. Aside from the individual performance goals referred to above, create a profit-sharing or bonus plan tied to overall company performance.
Engage employees to come up with cost-saving and revenue-generating ideas. The old suggestion box is a cliché, but something comparable to it can be a good way to involve everyone in driving the business toward best practices.
Open-book management is no guarantee of success. In today’s economic meltdown it may well be that open-book companies are facing hard times just as much as traditional closed-book firms. However, employees who have access to the numbers are much better positioned to understand and accept the need for vigorous cost-cutting. Nobody is going to applaud layoffs, salary cuts and other drastic measures, but there’s a better chance of morale holding up at an open-book company where everyone can see the reason for these actions.
One of the messages I remember from that long-ago session with Jack Stack is his emphasis that open-book management takes time to develop and implement. It’s not just a matter of handing out company financial statements. A lot of thought needs to go into determining the kind of information that is most relevant and structuring a program aimed at involving employees and getting them to care about the company’s performance. In addition to orientation sessions, most open-book companies schedule regular meetings with employees on a monthly or at least quarterly basis to discuss performance parameters and share ideas for improvement.
An issue that needs to be decided is whether to hold these sessions on company time or after hours without extra pay. Do them on company time and it’s a drain on productivity. Ask employees to give up some of their free time to discuss company business, then it’s likely you won’t get full attendance. One solution is to split the difference, such as scheduling these meetings to start a half-hour before normal quitting time, with pay, but realizing the session is bound to last longer and attendance is voluntary and without pay beyond that.
If you’re interested in exploring this further, go to amazon.com and do a search on “open book management.” You’ll find various titles listed, including two of the seminal books on the subject: Jack Stack’s “The Great Game of Business” and “Open Book Management: Coming Business Revolution,” by John Case. These and other books on the subject are available in paperback for the price of a lunch, and you may find them even more nourishing. W&C