Open-Book Management

I recently read a book called Open-Book Management by John Case, and it had a big impact.

The practice begins with showing your accounting and financials to all your employees, including detailed profit-and-loss statements and balance sheets.

Scary. If you're a business owner, was your first reaction to recoil after reading that? Mine was. We've been trained for so long that financials are for owners and executives only, that the concept of opening the books of your privately-held company to all your employees seems so foreign.

But the further I got along, the more I realized that this is the management technique that I've been looking for. Our business is growing and changing quickly, and I've been looking for ways to get staff at all levels to be more engaged so they can help manage that growth. This book gave me that framework. Over the coming months, I'll be implementing its practices at Helcim.

As a first step, I wanted to provide a summary of the main ideas of the book. Below are those notes, most of them are directly transcribed from the book itself. I highly recommend anyone who's an entrepreneur or who is running a business to buy this book and give it a full read.

I will be following up with more articles on how we go about implementing this in the real world, stay tuned.

-Nic

Open-Book Management, Book Summary

Open-book management is a management system. It works in three ways:

• It forces employees and managers to know their numbers.
• It forces employees and managers to understand their numbers.
• It builds dynamism - a driver - into the system.

There are four core principles to follow:

1. Information "“ Everybody has to know what's going on in the business. This includes opening your Profit-and-Loss statements, balance sheets, and accounting books for all employees to see, and providing updates frequently so that they can measure the impacts of implemented changes. In short, employees need to know how the company makes money.
2. Business Literacy "“ Everybody has to understand the information they get. This includes teaching all employees how to read financial statements and what they mean. It also involves determining what are the key numbers that drive your business and how they are impacted by day-to-day operations.
3. Empowerment "“ Everybody needs to be able to have an impact on the outcome. Distributing the numbers and teaching people to understand them does no good unless they can then act on what they know "“ and unless they have a reason to do so.
4. A Stake In Success "“ Everyone needs to share directly in the company's success, and the risk of failure. Employees need to have a shared interest with executives and owners, which involves both a profit-sharing program and a long-term equity program.

Making Employees Into Business-People

• People should see themselves as partners in the business, not on the opposite sides of some employee-management fence.
• People should be empowered "“ but if they are to be empowered to help run things, they need to understand what the business is all about and how it makes money.
• Empowerment of employees is a common business goal, but most attempts fail. It is only possible to achieve with complete transparency, information, literacy, and a stake in the outcome.
• The magic of business: Business creates wealth, and successful companies create a lot of it. People want to be part of that success and the opportunity to help get it there.
• Without information and understanding, profit sharing and stock options are at best no more than a nice extra benefit. Unless you act and think like an owner, you don't feel like an owner.
• People make better decisions when they understand the stakes. And in business, the ultimate stakes are financial.
• People can't make a good decision unless they have information, and the ability to understand it. And they won't always make decisions in the best interests of the business unless they have a stake in the company's success.
• Treat people like adults. Most businesses don't, they treat employees like children. They order them around, punish them for transgressions, spell out in minute detail exactly what will be required of them. They assume that employees aren't competent to make decisions, so they don't provide them with the information or training they'd need to make smart ones.
• Empowered employees must be willing "“ indeed, should be required "“ to assume responsibility for their decisions and hence for their numbers. Some practitioners call the system no-excuse management. So how do we get people actually interested? To go above and beyond? To actually care? This is the framework: 1) Information 2) Literacy 3) Empowerment 4) Stake in the outcome.

Executive Responsibility

• A company isn't a democracy, so the ultimate responsibility for all those decisions lies with its executives, and the CEO is ultimately responsible for the health of the whole company. But too many companies are hung up on that "ultimate." Their executives and managers start issuing orders and directions that workers are expected to follow without question. That sets off a vicious cycle. Employees "“ who can see they're being treated like children "“ grow cynical and resentful. Managers, seeing that behavior, decide they can't trust anyone. That leads to inanities and over-structured employment policies.
• A political democracy derives its authority from the consent of the government. A company derives its authority from the consent of the marketplace.
• Executives, managers, and employees at all levels in a business must assume responsibility for their decisions.

A Stake In Success

• In order for employees to have a stake in the outcome of the business, companies need both a profit-sharing program and an equity program (such as a stock option plan) for all employees.
• Profit-sharing typically focuses more on short-term decisions and goals. Stock options and equity focus more on the long-term decisions and health of the business. (short-term vs. long-term decisions)
• Usually, long-term payoffs redound primarily to the company's owners. If the decisions are good ones, the company will grow and will create wealth. Its stock value will rise. That's how company builders get rich. If employees don't own a share, their immediate interests will lie in the direction of more payments, now, and less investment in the future. It's a tension that just doesn't need to exist. This may be why so many open-book companies have stock-option / equity plans.
• If employees' stake in the business is only through profit-sharing, employees will howl if the CEO then decides on a course of aggressive growth at the expense of profits. But if employees own equity "“ such as a stock option plan "“ they'll have as much interest as any long-term owner in building up the business.

Common Problems with Profit-Sharing Plans

• The plan is discretionary.
• The plan is incomprehensible.
• The payment is always the same.
• The plan is invisible.
• All of the above problems are mere dips in the road compared to the biggest pitfall of all, which is that employees typically have no clue as to whether, or how, what they do day in and day out affects that profit-sharing payout.

Good Profit-Sharing Programs

• Are tied to the company's financial goals, and people have to understand why the goal is important to the company's success. It's wise to involve as many people as possible in setting the goals.
• The goals must be tracked in public, according to criteria everybody can understand.
• People should be able to affect the outcome.
• The payment must be fiscally responsible for the company's health.
• Finally, the goals should be ambitious, but attainable.

Focusing On Cost-Cutting vs. Growth

• Some companies use open-book management to get employees to focus on cost-cutting and waste; to help bring the business back to profitability. However, some businesses have a different focus, such as growth. Open-book management can be used for both scenarios.
• The point of open-book management is to get people thinking like business people, not like bean counters. Labor efficiency or the cost of office supplies might not be as important to some businesses as others. The focus can be placed on other key numbers, like cost-of-acquisitions, product profitability, product growth, customer attrition, etc.
• Having employees understand the key numbers that are important to the business is crucial. This empowers them to make better decisions.

Common Fears and Concerns

• The great fear is that as an owner, sharing the information will somehow be used against you. Rebuttal: Employee-management conflicts already exist, and people already speculate behind closed doors "“ transparency and showing the real numbers dispels the myths.
• Another common fear is that employees could have concerns over the owner's worth and compensation. Rebuttal: As an entrepreneur, you took a very large personal risk in starting a business. You sacrificed time, personal life, and money to build it, and most people understand that this entitles you to a return on that investment.

Conclusion

We're free, independent, responsible citizens. We raise families, manage our finances "“ we're grown-ups. And yet when it comes to the workplace, most of us assume that our obligation is to look for a job, hope that somebody gives us one, and then do whatever the boss tells us to. We've been told that our obligation is to be a good employee. That's the lesson we have learned from the first hundred years of industrial capitalism and we have learned it well.

But it no longer works in this new economy, so now we have to learn a new lesson. We have to learn how organizations survive and prosper "“ how they make money "“ and how we, as individuals, contribute to that. We have to become entrepreneurially minded "“ not so that we can all start businesses, but so that we can maximize our chances of success in the business we work for.

Open-book management is a training ground for this approach to life. It teaches us how the system works. It teaches us how we can compete. It teaches us to take responsibility for our livelihoods. It teaches us to be business people, not employees. To be capitalists, not hired hands. To be economic grown-ups, not economic children. That's the only way we can survive and thrive in today's new economy.