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.”

BUILDING THE OPERATING SYSTEM STEP-BY-STEP
Financial literacy is crucial, but you have to go beyond the financials and build the Open Book operating system. Financial statements are mostly about the past. They’re too general to be actionable, and they don’t package numbers in ways that help employees figure out what to do next. So, the next step is to build the system that provides a direct line of sight between daily actions and financial results.

“There has been no silver bullet in regard to profitability. Rather, it has been the sum of many small improvements.”

Start by identifying your critical number. For SRC in 1983, it was the $8.9 million loan. Everything was aimed at reducing that number. For Atlas Wholesale Food Company in Detroit, MI, net profit percentage is the critical number. CEO John Kohl and his employees identified key activities that link each person’s job directly to this number. They forecast these numbers and track actuals on a weekly basis, having these discussions in group “huddles” and deciding what actions should be taken.

Atlas has eight huddles, each with its own specific critical number. For example, the night shift/warehouse huddle’s critical number is mispicks. The accounting huddle’s critical number is accounts receivable days. And, the purchasing huddle’s critical number is cost of goods sold.  Every employee participates in at least one huddle.

Atlas also develops mini-games—small-scale incentive plans designed to fix a problem or exploit an opportunity. For example, one mini-game focused on reducing dead inventory, resulting in a 15% reduction in just four weeks. Another mini-game focused on reducing mispicks, yielding a 37% reduction in costly picking errors.  A third mini-game focused on energy use, slashing energy costs by 30%.

“There has been no silver bullet in regards to profitability,” says John. “Rather, it has been the sum of many small improvements.” Net profit for the last two years is the highest ever. Sales grew 13% in 2013 and 11% in 2014 in an industry where double-digit internal growth is unheard of.

IS OPEN BOOK FOR YOU?
If you want actively engaged employees who think and act like business owners, and you have the courage to share the financials, then Open Book is the way to go. You can start with financial literacy and mini-games, gain experience, and build the operating system step by step.  Open Book is an essential component of a positive business that produces superior financial performance and a workplace in which people thrive.

 

Wayne E. Baker :Wayne E. Baker is a professor of management and organizations at the Stephen M. Ross School of Business at the University of Michigan, which is hosting its second annual Positive Business Conferenceon May 14-15 where Baker will be presenting a session titled, Inspiring Employees Through Radically Transparent Finance.