Small Business

Open-book management: Doing business in the buff

Becoming fully transparent about every aspect of your business can have profound benefits. Here's how to do it right

Written by Jim McElgunn

It was the sort of disaster that could make opening your company’s books to your entire workforce look like a dangerously naive idea.

The owner of a lab-services company knew sales at his seemingly flourishing firm were about to dive due to regulatory changes and a sharp cyclical downturn. He shared the company’s numbers with his staff to help get their buy-in for a workflow plan he said the firm should adopt to make itself more cost-efficient. Although employees would have to adapt to changes in how they did their jobs, they’d share in the resulting gain in profits.

The move backfired badly. “The employees were scientists who didn’t understand how to read the books,” says Brian Golden, a strategic-management professor who wrote about this case for the Toronto-based Rotman School of Management. “What they saw from the numbers was that the firm was doing very well, but they failed to see the cyclicality of the business.” Figuring the owner was ripping them off, the employees demanded higher pay and rejected the workflow plan out of hand. With the staff/employer relationship poisoned, the firm failed to prepare for bad times and its sales and staff count soon plummeted.

Stories like this show that, even though the case for open-book management (OBM) seems compelling, it isn’t risk-free. Firms that share reams of key numbers with their entire workforce say that if your staff truly understand your business and how they can shape its fortunes, they’ll work harder, propose more business-building ideas and get religion on cost control. Yet there are potential downsides. What if staff leak information to a rival, see that your firm is so profitable that they demand more of the pie, or see that it’s in the red and jump ship? Even so, CEOs who’ve opened their books say these drawbacks don’t amount to much in practice and the main risk with OBM is bungling the execution.

Those used to treating key business indicators as confidential may be unnerved by the “let it all hang out” philosophy of OBM practitioners. Consider Sequel Naturals Ltd., a Port Coquitlam, B.C.-based producer of natural health products. It shares dozens of data points at its monthly all-staff meetings, say whether it’s meeting targets such as filling 99% of orders properly (hitting 100% would cost too much), keeping average “days to pay” for Canadian accounts receivable down to 35 and turning over inventory six times per year. Other firms reveal data such as the profit on each client and the precise status of every prospect in the sales funnel.

If you’re likely to lose sleep worrying about what a rival could do with such knowledge, open books may not be for you. But OBM practitioners say this risk is minimal. For starters, all management teams keep at least some secrets, such as news of a pending acquisition. And entrusting information to staff shows them respect they’re unlikely to repay by spilling the beans to a rival.

And what if someone did? “Come on!” says Charles Chang, Sequel’s president. “I could give you Heinz’s recipe, but then go see how easy is to compete against them.”

Another potential risk is that sharing the ugly details during a bad patch could rattle your staff and have them looking for the exits. Yet Ed Anderson, a managing director at Dyrand Systems Inc., a Burnaby, B.C.-based IT management services provider, says his staff stayed put in tough times, working harder and proposing ways to cut costs because they knew the score.

As the fiasco at the lab company shows, sharing numbers won’t rally staff who misinterpret them. In a society in which even most PhDs know bupkis about business, you need to think through how to educate your team. Don’t cover everything at once and don’t make their heads explode by, say, trying to make them master balance sheets.

Rocky Gaudrault, CEO at TekSavvy Solutions Inc., a Chatham, Ont.-based Internet service provider, advises putting things in simple terms: “If we sell this service for $30 and our cost of goods sold is $20 and our other costs are $8, that leaves us with $2.” At that point, your team is likely to stare in disbelief — you make just two bucks? OBM practitioners say staff are routinely shocked by how small profits are — which may help them understand your reluctance to give everyone a big raise.

Before Dyrand adopted OBM,says Anderson, “Our staff had an idea of our revenue but no idea of our costs. They can’t believe how much we have to spend on office supplies, and none of them knew we had to buy liability insurance. They thought the owners were getting extremely rich.”

Still, it’s not enough to reveal that you aren’t making out like bandits. One risk with OBM is that you spend time compiling and presenting key metrics to staff, only to see no change in their behaviour. You need to show how the financials connect to employees’ key performance indicators. “We’ll ask, €˜Why is gross margin important?’, then explain that when itrises by 1%, the company retains another $100,000, which puts another $500 in your pocket,” says Chang. “We always put it in terms of what’s in their interest.”

Of course, this works only if you share profits, as Sequel does. Chang says you’ll miss most of OBM’s value without such a plan. “Tying in profit-sharing with open books is crucial, because you share what the company makes,” he says. “That’s what creates motivated, engaged people.”

But the trade-off in giving your staff a clear idea of how your firm is faring is that it can limit your executive freedom. Anderson says Dyrand ran into a staff backlash in 2008, when its then-CEO tweaked the profit-sharing formula twice to reduce the total going to employees.

“Because the staff knew the numbers so well, they knew exactly what was happening,” he says. This bred so much mistrust that when Anderson and his partner bought out the CEO,they did away with both open books and profit-sharing.

Yet Anderson sees this episode as demonstrating one of OBM’s strengths: it makes management accountable to staff. He says he plans to reintroduce open books shortly, along with a new profit-sharing plan, because OBM makes employees think like owners. “They think about: €˜Here’s how we can increase revenue without having to hire more people, which will make us more profitable,'” says Anderson. “Our staff started to think about strategy in a way that previously only the owners did.”

Chang has some advice for anyone nervous about OBM: just dive in. He says sharing key information will boost your profits because you’ll tap into your team’s full capacity. “And the trust and fear issue? That’s completely in your head,” says Chang. “There’s no objective reason you couldn’t do it, from a risk point of view.”

Originally appeared on PROFITguide.com
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