The Art of Business: The New Case for Open-Book Management
Do your employees know how much you make? Should they? And, most importantly, will it help your creative business be more efficient, successful, and creative? The answer to all these questions is yes, according to John Case, author of "Open-Book Management: The Coming Business Revolution" and "The Open-Book Experience: Lessons From Over 100 Companies Who Successfully Transformed Themselves." Case pioneered and remains a leading proponent of sharing confidential financial information -- income statements, balance sheets, P&Ls, budgets, forecasts -- with employees.
The underlying philosophy is simple. People in conventional companies, however well paid, typically view themselves as hired hands. People in open-book companies see themselves as business partners and are motivated to help the company in ways they wouldn't before.
Opening Books and Minds
The open-book philosophy became popular in the mid-'90s, but I've spoken to a number of owners of creative and media firms who have implemented or have plans to implement this approach.
"Open-book management creates an environment of mutual trust and respect, an organization in which everyone understands, cares about, and works to further the company's business objectives," Case writes in "Open-Book Management."
Large companies such as Intel and RR Donnelley have successfully adopted open-book management. But according to Case, this unconventional approach works best for small businesses and particularly well for creative firms.
"It's a big competitive advantage for a small business, because it's easier to implement and rally people around the same goals in small settings," says Case.
Case says open-book management is a great way for leaders to practice what they preach about trust. "The only way for a company to boost performance consistently over the long term is to have employees who work enthusiastically and effectively and who take responsibility for their own work. The only way to do that is to trust your employees like you want them to trust you."
Putting Principles in Pratice
There is no steadfast set of rules for implementing open-book management. But there are a few basic principles:
Step One: Take the wraps off information. Open-book management is about the why -- and in a business, the why is told by the financials. So along with the operational figures, show your colleagues the income statement, the cash-flow statement, and the balance sheet. Share with them client proposals, contracts, billables, and receivables -- any information that employees may need to know to do their jobs effectively, according to Case. You can make the information available in hard copy, in e-mails or on your company intranet.
Step Two: Teach the basics of business. It's amazing how little most people know about business. Some believe that revenues are the same as profits. Or that profits are whatever a company has in the bank. Not many employees can name all the expenses a company must pay. Not many know how little is often left at the bottom line, says Case.
Companies pay for that ignorance in at least three ways. First, it spawns resentment. Employees wonder who is getting rich off of their hard work. Second, it leads to bad decisions. Employees get lazy about about spending company money. Third, it takes the fun out of business. Every entrepreneur knows that business is fun. It's a game. You take on the competition. Obstacles and opportunities crop up as frequently as in a video game. Every month or quarter you tally up the results and see how you did. What's more, there's real money at stake. Employees can share in the excitement -- and once they do, they'll give your company a kind of turbocharge. But not many people get excited about a process they don't understand.
Step Three: Empower people to make decisions based on what they know. Plenty of companies give lip service to the concepts of empowerment or employee involvement. They set up project teams, cross-functional teams, self-managing work teams. But since they don't share financial information, not many employees know how their work affects the bottom line, according to Case.
One approach to fix this problem is called the huddle system. Employees meet once a month or so to report their numbers and their opinions about the upcoming weeks and months. Every work group (and a workgroup can be as small as one person) is accountable for its own numbers -- and everyone in that unit shares in the accountability. If the numbers are on target, great. If they're off, than you can work together on fixing the problem.
Work groups manage their own affairs. They track and measure output and figure out how to improve it. They watch costs. If they need new equipment, they must justify it and order it. They get involved in the annual plantwide planning-and-budgeting process. They can even be involved in reviewing one another's performance and assisting in hiring and disciplinary decisions.
Step Four: Reward success. If you want people to think like owners, they must be rewarded like owners. While profit-sharing is a step in that direction, it often falls short, according to Case, because sharing is at the discrection of management. Since employees don't know how the company is doing, any bonus that materializes seems unrelated to everyday work. An open-book company is different. Employees know what they're working for when they start the year. Like businesspeople, they track their progress by watching the numbers. At the end of four quarters, they know if they have been successful -- and they know why or why not.
Learning to Let Go
For owners, the hardest part of open-book management is the fear of letting go. But managers of companies that have implemented open-book management --- and there are scores -- widely praise the approach. With the ecomony set for a revival, it may be worth taking a fresh look at this still unconventional business proposition.
Read more by Eric J. Adams.