Open-book management is a system that teaches managers and employees how to win the game of business. In sports, the players know the score, their playing statistics and what they need to do to win the game they are playing. Without open-book management, most employees have no clue how well the team is doing and what game the company is playing. Making money is the score in business. Open-book management will help your people get excited and play to win as they learn how their role contributes to the company's bottom line.
Open-book management is not a tool to manipulate or control employees. It is a system that helps business owners who are interested in making more money and getting their people to think and act like business people instead of workers. Open-book management can be taught and used by every person in your company, regardless of their position.
Are You Open to Open-Book Management?
Whatever your reason or excuse not to open your books, you are actually hurting your company's results and restricting your profits. You probably have not tried open-book management because you think most of your employees are not interested in the business of your business. Or you think that sharing numbers will cause a lot of problems because they will share them with your competitors or think you make too much money and, therefore, will not work hard for you. Or you may think your people are not as smart as you, cannot understand business or numbers and do not want to learn more.
Do you not believe your employees are smart enough to understand the numbers and targets and contribute more to your company's performance than they are now? Could you grow your business if employees received a part of the financial improvement? Would your employees improve the company if they had an incentive?
I often get asked about bonuses for employees and the best way to award them. When you give bonuses without showing employees how they earned them, they do not connect their efforts to the bonus or know how they contributed to the overall company performance. These type of bonuses are no more than gifts that will not change or improve employee performance.
In reality, surveys show that a majority of employees want to know what is happening with the company and would work harder to achieve the company's goals if they knew more. When everyone knows the numbers, everyone can get focused on achieving the results you want to hit. All you have to do is teach them the basics of business accounting and the terminology to get them on board.
The Basics of Open-Book Management
Open-book management is about sharing financial targets and results with employees and asking them to contribute and help improve the bottom line. If the company's profits improve, everyone wins and receives a piece of the net improvement dollars. In the National Basketball Association, the winning teams that reach the playoffs get a bonus, which is shared with the players. Likewise, in business, if your team reaches beyond and achieves above their normal or average results, your bottom line improves and you should share a piece of the improvement money with your employees.
Open-book management starts with opening your books, sharing financial information, developing financial targets and explaining the results with your managers and employees. Employees can use this information to improve the company's short-term and long-term performance. To ensure success, management must actively manage the open-book process, hold regular company meetings explaining the numbers and coordinate the improvement efforts.
The 7 steps required to succeed with open-book management include:
- Share the information.
- Explain the information.
- Develop goals and targets.
- Create a tracking system.
- Encourage employee involvement.
- Identify potential improvement areas.
- Design a reward system that works.
You must be willing to honestly communicate the good and bad news, transfer responsibility to the team players for achieving the numbers and believe in your people. This is not a one-time program or seminar. It is a process to get your team up to speed and on the same page, and then continue to monitor and encourage everyone to get involved with ongoing improvement.
- Increase bottom-line profits.
- Reduce costs.
- Improve productivity.
- Become more competitive.
- Develop faster schedules.
- Improve quality.
- Provide better customer service.
- Reduce mistakes or call-backs.
- Make employees accountable.
- Encourage more employee involvement.
- Build a winning team.
How to Communicate Open-Book Management to Employees
You can decide what numbers to share. Individual salaries are never disclosed, just the big picture, project and production numbers that influence company profitability. Your people will need to be taught the concepts and understand how they contribute to the monthly income statement (profit and loss), revenue, direct costs, indirect costs and profit. These numbers can be broken down into departments, jobs or accounts so people can see how they personally contribute to the overall performance of the company.
Hold a company meeting and explain what is going to happen over the next several months.
- Explain what your goals are for the program.
- Pass out a simple income statement, and explain how it works.
- Make sure everyone clearly understands how the numbers all tie together.
- Pass out your company income statement for the past three years, and explain how well you have done. It works best to also show these numbers in a graphic format.
- Discuss your goals and targets for the upcoming year by quarters.
- Ask for input and ideas on how your company can improve the past results.
- Share how everyone will participate and receive a part of the overall net profit improvement dollars on a quarterly basis.
- Explain that bonuses will now only be based on numbers, targets and results.
- Develop a schedule where and when financial results will be shared monthly or quarterly.
- Get everyone's commitment to get on board with open-book management and making your company more competitive with better service and quality to be more profitable.
Track Your Key Critical Numbers
- Decide what you want to improve in your company:
- Increase bottom-line profits.
- Reduce costs.
- Improve productivity.
- Become more competitive.
- Develop faster schedules.
- Improve quality.
- Provide better customer service.
- Reduce mistakes or call-backs.
- Make employees accountable.
- Encourage more employee involvement.
- Build a winning team.
Determine which key critical numbers you want to track and share with your employees on a monthly basis. Often, in factories, white boards are hung next to production teams with their daily production goals and actual results posted. What are your key critical numbers? Pick the ones that will make the most sense to your employees and which ones contribute most to the bottom line. Focus on a few critical numbers to start the process. Also, break some of them down into parts that each project or department team controls. This shows employees how they contribute to overall company results.
- Revenue
- Direct costs
- Job costs
- Gross profit
- Overhead/indirect expenses
- Inventory
- Labor cost
- Material cost
- Equipment cost
- Subcontractor cost
- Net profit
- Production rates/units produced
- Waste and scrap
- Cash balances
- Debt
- Investments
- Equity and retained earnings
- Bonding capacity
- Accounts receivables
- On-time completion or delivery
- Customer returns or call-backs
- Customer retention
- Referrals
- Sales success rates
- New contracts or orders
- Employee turnover
- Employee absenteeism
- Employee training
If you selected gross profit as one of your key critical numbers, you can then get your employees involved in discussions on how they can improve their workflow. If you selected customer call-backs, you can get everyone involved in ways to eliminate mistakes or problems with your finished product or service. By identifying a few areas that need improvement as well as profit margin, each employee can make a contribution to your company improvement program.
The goal of open-book management is to improve. To improve, people need to know what is expected. Every employee needs a target to hit and track to get them involved. Then, you must set up an ongoing tracking system to keep everyone informed of his/her score. Everyone must know what the past performance was and how well he/she is currently doing in order to strive for improvement.
Guidelines to Make It Work
Hold regular monthly meetings with all of your employees, by production teams or departments to share the results, and discuss how well or poorly the teams are doing vs. their targets. Ask each team leader to explain what is working and what needs improvement. Ask for input from all of the team members to ensure positive communication. Make sure everyone understands the targets and goals, how he/she contributes to the results and what each of them can do to improve the results. Make these meetings fun, and always explain how the improvement dollars will be split among each team member.
Set up the teams to win at any level, large or small. Winning breeds enthusiasm, excitement and camaraderie. Keep the celebrations and praises coming as the teams start to win more and more-this will encourage them to keep winning. Use charts and graphs to track and keep the numbers real and understandable. And when it is time to pass out the bonus checks, make a big production of the event for everyone.
Share the Profits
Some successful open-book management companies split the net profit improvement dollars with their employees between 25 and 75 percent. Others use an ever-increasing percentage as the teams improve more and more. And some start the employee participation after the company hits a minimum profit goal. For example, if the company target is to make $100,000 net profit, every dollar made above that goal will be split 50 percent to the company and 50 percent to the employee pool. An ever-increasing example might be for the first $50,000 made above the base profit goal, the employees receive 25 percent of the extra dollars made, and then for all money made above $150,000, the employees would receive 50 percent as their share.
Each employee typically receives his/her pro-rata share of the profit improvement pool based on his/her salary or pay as a percentage of all of the employees. As everyone contributes to the overall company success, there is not generally more money given to long-time employees, managers or officers except as a pro-rata percentage of their salary, as explained above.
Start small by selecting a few areas you want to improve. Set some targets, explain the game, decide on a reward system that compensates overall improvement, set-up a scoreboard tracking system, keep the players informed of their progress and then share the dollars saved by the teams when they beat the goals. How can you lose when everyone is working together to build a better business?
Construction Business Owner, August 2010
