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Drive Profits By Sharing Financial Data

Apply open-book management to boost employee ownership

The first time Elizabeth Wilder tried open-book management at her firm, she dissected annual revenue numbers in a staff meeting. It didn’t go over well with employees.

“People just weren’t interested,” she recalls.

Then she read The Great Game of Business and applied its lessons. Written by Jack Stack and Bo Burlingham in 1994, the book introduced open-book management principles to a wide audience.

Instead of delivering dry presentations, Wilder led more interactive meetings. She let managers report their unit’s revenue and explore ways to improve the numbers. Their awareness of profit and loss cascaded down the ranks.

“Now, even our lead carpenters who are actually out on the job project revenue,” says Wilder, president of Anthony Wilder Design/Build in Cabin John, Md. “Our projections have become more accurate as a result.”

Helping employees at all levels understand a company’s financial performance requires training. You and your management team need to educate workers on the most critical numbers within their control that drive bottom-line profitability.

The numbers will vary based on each employee’s role. A claims adjuster at an insurance company might track the average settlement payment, the amount of outstanding claims reserves and the percentage of claimants that hire an attorney. A shipping clerk might focus on the number of on-time deliveries and the percentage of returns or shipments with damaged items.

“Critical numbers are easy to measure and they’re not intimidating like an income statement or balance sheet,” says Corey Rosen, executive director of the National Center for Employee Ownership in Oakland, Calif. “Once you get employees to understand these numbers, dangle rewards for those people who meet or exceed them.”

Four Steps to Get Started

Lay the groundwork for open-book management by following these four steps, says John Schuster, founding partner of the Schuster Kane Alliance, a consulting firm in Kansas City, Mo.:

  1. Gain employee buy-in. Explain what’s in it for your workers so that they’re eager to learn the financials. 
  2. Determine your readiness level. Assess the financial information you track and to what extent you’re willing to share it with employees.
  3. Define your goal. Whether you want to institute a new employee reward or bonus system or simply educate your team, identify your motivation for getting started.”Open-book management is often a complete cultural change,” says Schuster, co-author of The Power of Open-Book Management. “You have to start with a specific goal so that it’s not amorphous.”
  4. Establish an implementation team. Delegate roles and responsibilities to your senior executives, managers and human resources staff. You want as many people as possible contributing to the program’s success.

 

Establish Building Blocks of Knowledge

After you teach staffers to track critical numbers that relate directly to their jobs, use the numbers to analyze the company as a whole. If you run an insurance firm, you may scrutinize the loss ratio (the total amount paid out in claims versus premiums taken in); if you manage a power plant or airline, you may track load factor (the ratio of average load versus carrying capacity).

Introduce new concepts that piggyback on what employees already know. Taking an incremental approach helps your workforce “build a foundation around the language and key numbers you’re presenting to them,” says Karen Berman, founder of the Business Literacy Institute in Woodland Hills, Calif.

Beware of assigning your chief financial officer or an accountant to lead open-book management training. A numbers whiz may overlook what non-financial employees need to know, says Berman, co-author of Financial Intelligence for Entrepreneurs.

In the rush to implement open-book management, some executives mistakenly dump too much data on disinterested employees. If they lack context to wrap their minds around the information—or they’re not motivated to pay attention—then they may withdraw and your well-intentioned effort will backfire.

When Ellen Rohr started using open-book management at her plumbing firm in Park City, Utah, her three employees didn’t catch on. She reviewed the balance sheet, profit-and-loss statement and supporting documents with them, but they didn’t know what to make of all the data.

“My first mistake was I tried to show them too much,” says Rohr, who now runs BareBonesBiz.com, a business planning firm in Rogersville, Mo. “It was too steep a learning curve for them.”

She recalls that her husband, the plumbing firm’s co-owner, urged her to consolidate financial data into a one-page report. Rohr took his advice and developed a simplified form entitled, “Monthly Summary of Critical Numbers.” It proved a hit with the staff.Translating Data Into Action

The real value of opening the books is what happens next: Armed with the latest financial information, employees figure out how their actions can improve the numbers and boost profitability.

In the late 1990s, Theresa Turner made sure to harness open-book management so that it produced tangible results. As vice president and chief financial officer of Draper Aden Associates, an engineering firm in Blacksburg, Va., she began by providing training classes to sharpen employees’ financial acumen.

Over the next decade, workers grew more knowledgeable about how the company earned a profit and more motivated to impact the bottom line. Their heightened engagement has translated into better teamwork and stronger financial results.

“With open-book management, our project managers are more business-minded,” Turner says. “Below the manager level, employees understand how their work affects fees and the importance of delivering quality.”

Like Wilder, Turner encourages active participation from her employees. In one of her favorite exercises, she gives them a blank profit-and-loss statement and instructs them to create their own engineering company. They calculate net service fees, operating expenses and what Turner calls “a mini cash flow statement.” This helps them see how increased efficiency leads to better quality, which in turn boosts fee income and generates stronger overall financial performance for the firm.

“Open-book management enables everyone to look at things from a business perspective, not just a technical perspective,” Turner says. “Now, we don’t just say ‘We had a bad month.’ That would cause fear. Instead, we say, ‘Here are the monthly numbers. Here’s why they need to improve. And here’s what we’re going to do.’”

Calculate Your Cash Flow Ratio

Ellen Rohr, president of BareBonesBiz.com, created a “Financial Quick Check Form.” She instructs business owners to complete the form manually every week. Why do it by hand? Because “that ‘manual moment’ causes you to confront the data,” she says.

A key component of Rohr’s form is calculating the cash flow ratio that matches cash and accounts receivable against current accounts payable. Here’s a simple example:

You have $20,000 in cash and $40,000 in accounts receivable along with $30,000 in accounts payable.

For every $1 of bills you pay, you have $2 in cash and accounts receivable to pay those bills.

Rohr cautions that if your accounts receivable extend more than 60 days, you may not collect the full amount. So recalculate this ratio using accounts receivable of 30 days or less for a more conservative result.

Links and Resources

Websites

1) The National Center for Employee Ownership provides research on its website (www.nceo.org) on open-book management and equity compensation plans.

2) The Business Center’s website (www.bizcenter.com/openbook.htm) provides an overview of open-book management.

3) On YouTube, a 10-minute video explains how a call-center firm based in the United Kingdom, Stellar Global Inc., applied open-book management with its 6,000 employees to improve its financial results. (http://www.youtube.com/watch?v=HOfXQI8c2T8)

Articles/Blogs

1) In a New York Times blog by Jack Stack, he explains how Ellen Rohr learned to apply open-book management (http://boss.blogs.nytimes.com/2010/02/04/explaining-the-power-of-open-book-management/).

2) Paul Solman, business and economics correspondent for PBS Newshour, reflects on the key figures who developed open-book management (http://www.pbs.org/newshour/businessdesk/2010/05/what-is-open-book-management.html).

3) Gregg Henglein, a journalist, summarizes the pros and cons of open-book management (http://www.allbusiness.com/company-activities-management/financial/12302038-1.html).

4) Theo Etzel, chief executive of Conditioned Air Corp. in Naples, Fla., blogs about open-book management (http://www.naplesnews.com/blogs/conditionedair/2010/jul/26/implement_open_book/).

Books

1) The Open-Book Experience by John Case (Basic Books, 1998) is a 256-page book from a leading expert in open-book management.

2) A Stake in the Outcome by Jack Stack and Bo Burlingham (Crown Business, 2003) is a 288-page book that guides readers to implement open-book management. Stack is the chief executive of SRC Holdings Corp., an employee-owned supplier of renovated engines to auto companies.

3) Managing by the Numbers by Chuck Kremer, Ron Rizzuto and John Case (Basic Books, 2000) is a 198-page primer on how to use financial statements to educate employees about your company’s bottom-line performance.

Morey Stettner is the editor of Managing People at Work and the author of five business books, including Skills for New Managers (McGraw-Hill). Based in Portsmouth, N.H., he coaches executives on their communication skills.

About morey stettner

Morey Stettner is the editor of Managing People at Work and the author of five business books, including Skills for New Managers (McGraw-Hill). Based in Portsmouth, N.H., he coaches executives on their communication skills.