Open-Book Management at Work

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Digital Library > Building and Inspiring an Organization > Open-book management"Open-Book Management at Work"

Letting your staff see into your financial books gives them a sense of ownership in your company. They'll think and act like entrepreneurs, innovating more freely and allocating resources more sensibly.

OVERVIEW [top]

Open-book management helps your employees think like bottom-line business owners. Open-book management involves showing your employees the detailed financial statements for your company, teaching them how to interpret financial results and then sharing the results with them on a regular basis. By helping your employees understand how their actions impact profitability, you increase their accountability and tie their daily efforts to your firm's success.

By letting your employees track the company's performance, you enable them to answer "why" questions: Why must we cut expenses? Increase productivity? Outsource certain functions while handling others in-house? Contain payroll costs?

Armed with answers, employees can innovate more freely and allocate resources more sensibly. They will make smarter decisions and take more ownership for their work product.

In this Quick-Read you will find:

  • A step-by-step process to implement open-book management.
  • Ways to push decision making down the organization and increase employee involvement.
  • Types of information to share with employees.

SOLUTION [top]

Introducing open-book management takes patience. Realize that even the most industrious or intelligent employees may not fully grasp financial data right away. Follow these four steps:

  1. Assemble managers from different departments. Explain your goal: to teach them to read financial statements so they can think more like partners, not hired hands, thus increasing their value to your company. Anticipate these questions:

    • Why are you sharing this information with us?

    • What am I supposed to do with this information?

    • Can I share this information with my colleagues? Employees? Others?

    Encourage them to take what they learn about how their job affects profitability, and apply that understanding toward improving the company's performance. Emphasize that the information should not be shared with outsiders, but accept the risk that leaks may occur.

  2. Pass the information along. Once your managers have a good understanding of how to read and interpret the company's financial statements, consider having them train their own staff members. Open-book management works best when employees at all levels understand how their actions impact the company.

  3. Establish an "anchor document," a simple, streamlined version of key numbers, ratios and benchmarks. This usually takes the form of a one-page income statement that provides essential numbers (such as comparing your monthly and year-to-date budget with your fiscal-year budget) in an easy-to-understand format. Include measures distinct to your business. Examples: In insurance "loss ratio" influences profitability; in airlines "load factor" tracks passenger use; in a lumberyard scrap values may drive profits.

  4. Connect pay to bottom-line performance. Announce that you're going to link bonuses to the attainment of key targets. Example: Set a profit-before-taxes (PBT) objective, and train employees to track the PBT number on your "anchor document." Then promise you'll pay a percentage of any profit above your preset goal.

  5. Follow up. Host meetings every month or quarter to compare year-over-year numbers. Review each line item and highlight recent developments that affected the results (such as one-time expenditures or a seasonal cash-flow crunch). Ask the management team members to share steps they are taking to educate their staff on financial measurements. Ask what improvement this has made in the unit's numbers. You may want to assign employees to track specific cost categories and suggest ways to control costs and exploit growth opportunities.

Open-book management is not without challenges. Companies with multiple locations may find it difficult or expensive to institute, and employers must always be cautious about confidential information being leaked to competitors. Linking employee performance to financial incentives may be tough to balance across different departments.

But if you're worried about how employees will react when you reveal the inner workings of your business, consider the alternative. When workers are kept in the dark about their employer's profitability, they may resent their pay packages, feel detached from the company's progress and expend minimal effort in performing their daily tasks.

While executives at big companies may fret that workers will demand a wage increase once they see how much their employer earns, employees at most fast-growth firms are less susceptible to this risk. Why? Many emerging-growth entrepreneurs pump much of their profits back into the business, which in itself can motivate workers to pull together and think like owners.

Nevertheless, it's wise to shield employees from sensitive information such as individual salary breakdowns. Providing total payroll figures is enough to help them think like business owners; you don't need to flood them with minutiae or violate anyone's privacy.

REAL-LIFE EXAMPLE [top]

Amy DeLouise, president of Take Aim Productions in Silver Spring, Md., shares her firm's quarterly financial results with her six employees. But rather than muddle through all the numbers, she'll highlight a specific area such as operating cycle, R&D expenditures or cost of goods sold as a percentage of gross sales.

"I don't want their eyes to glaze over," she says. "I just point out key things that the numbers tell us about our business."

By guiding her employees to track the company's financial performance, she enlists their help. Example: When her office manager learned from the profit-and-loss statement that the company's overnight shipping costs were soaring, she raised her concern. DeLouise says her team then realized they were "getting lazy" and overusing FedEx.

"Some owners are afraid to share the numbers," she adds. "I figure if the numbers are bad, these are the people who're going to improve them. If the numbers are good, they can help make them better."

DeLouise doesn't share data on individual pay, but she shows employees how much salaries and benefits cost as a percentage of revenue. She offers cash and other incentives to her team to motivate them to produce better bottom-line results.

DO IT [top]

  1. Ask yourself, "What's the most critical number I follow to manage my business?" Then determine how many of your employees have access to the same data and understand its significance.

  2. Help employees establish the connection between what they do and how it affects the bottom line. Define clear cause-effect relationships so that it's easy for them to see how their efforts impact the company's financial results. For example the person in the mailroom makes sure that invoices are sent out quickly and accurately. If they fix a mislabeled piece of mail, it will get to a client more quickly, the company gets paid sooner, accounts receivable decreases and that frees up cash for other uses.

  3. Create a visible scorecard so employees can monitor their progress toward a goal. Examples: Post weekly financial updates on your company's intranet, or track the latest numbers on a central bulletin board.

  4. Offer employee bonuses based on productivity and profits. Consider replacing automatic annual pay increases with incentive bonuses for individuals and teams who achieve bottom-line results.

  5. Create a "lunch and learn" series. Invite a professor from a local business school to speak to your employees about a key measure such as present value discounting, feasibility analysis or cash-flow evaluation. Limit the discussion to one topic per visit.

RESOURCES [top]

Books

Open-Book Management: The Coming Business Revolution by John F. Case (HarperBusiness, 1996).

Open-Book Management Field Book by John P. Schuster, Jill Carpenter and M. Patricia Kane (Wiley, 1998).

Power of Open-Book Management: Releasing the True Potential of People's Minds, Hearts and Hands by John P. Schuster, Jill Carpenter and M. Patricia Kane (Wiley, 1996). More comprehensive than the newer Open-Book Management Field Book.

Creating an "Open Book" Organization: Where Employees Think & Act Like Business Partners by Thomas J. McCoy (AMACOM, 1996).


Videos

Open-Book Management, Cohen-Gebler Associates, 800-208-3535.

The Great Game of Business, Springfield Remanufacturing Corp., 800-386-2752.

The Balance-Sheet Barrier, Coastal Training Technologies, 800-285-9107. This entertaining skit starring John Cleese, could be used to explain balance-sheet features to beginners.


Workbook

Open-Book Management: Getting Started by Cathy Ivancic and Jim Bado (Crisp Publications, 1997), 800-442-7477.


Internet Sites

Open-Book Management and Corporate Performance. National Center for Employee Ownership.

Open-Book Management. Inc.com.

"Open Book Management at General Stores," by Lee Vasquez. College Services Administration (199?). University of Iowa Materials Management.


Article Contributors

Writer: Morey Stettner

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