Engaging Employees With “Open Book” Finance

With Open Book, everyone thinks and acts like business owners. Companies that use Open Book perform in the top 10% of their industries, according to Denison Consulting. Southwest Airlines, Harley Davidson, and Whole Foods are among the 4,000 companies around the world that use Open Book.

BUSINESS IS A GAME
Open Book is the brainchild of Jack Stack, CEO of SRC Holdings in Springfield, MO. In 1983, he and a dozen managers purchased Springfield Remanufacturing (SRC), a rebuilder of heavy engines and parts, from its failing parent, International Harvester. They paid $9 million—$100,000 in equity and a loan of $8.9 million at 18% interest. Doesn’t sound like a formula for success, does it? But if you had invested $1,000 with Jack in 1983, you would be a multi-millionaire today. Even Warren Buffett didn’t do nearly as well as SRC in the same period.

“Companies that use Open Book perform in the top 10% of their industries.”

Jack had the insight that business is like a game. It has rules. It has scores. And players win or lose as a team. SRC began teaching everyone the rules of business, developing and keeping score with operational and financial metrics, and sharing the financial rewards. The results speak for themselves.  Today, SRC has over 1,200 employees, 17 business units, and a stock price of $199 per share (up from 10 cents per share in 1983).

GETTING STARTED WITH FINANCIAL LITERACY
Financial literacy is the first step. Everyone should know how to read the four basic financial statements: balance sheet, income statement, cash flow statement, and statement of changes in equity (a.k.a. statement of retained earnings).

Rich Smalling, CEO of American Innovations (AI), found a fun and creative way to teach the basics of financial literacy. AI protects people and the environment by helping oil and gas pipelines run safely and efficiently. Rich used the analogy of the checkbook to explain the income statement until he heard about a furniture manufacturer who explained it by cutting up a chair with a chainsaw.  Rich adapted the idea: “We just cut a pipe into four pieces, representing cost-of-goods, people costs, all other costs, and earnings. The first time we used the pipe, I saw more lights going on than in all the years of using the checkbook analogy.”

Now AI employees routinely refer to the pipe, such as making the pipe bigger (increasing sales).  In 2012, Rich started explaining how profit sharing worked and tied it to the pipe. Employees were told how much money was on the line before the year started. “Making it public and tying it to the pipe made a big difference,” Rich says.

Rich doesn’t attribute all their success to Open Book. However, in the five years since introducing the pipe and making profit sharing public, AI grew at a compound annual rate of 14.4% (more than double the rate in the five years before). AI reduced its debt by 70%, improved employee satisfaction scores, and boosted earnings. Profit sharing was a record 8% of salary in 2014.

“The real benefits are broader,” Rich says. “Our team is more engaged and has a better understanding of the realities of running a business.”

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