In 2005, Randy Haran cut the bill for his company's shop supplies by 91%. Better, Haran wasn't the one who found the savings. His employees did.
Of course Haran, CEO of Texas Air Composites in Cedar Hill, Tex., deserves some of the credit, and not just because he's the boss. He's one of a growing number of entrepreneurs embracing open-book management. That's where CEOs share financial information to encourage employees to boost productivity and cut costs.
In 2003, Haran's $9 million, 100-employee company, which repairs airplane parts, was spending $15 for each roll of heavy-duty tape that mechanics used in the shop. After laying out for sanding disks, rags, and other supplies, the shop tab came to $200,000. Haran's 35 mechanics were shocked when they heard that number. They found perfectly good tape that cost $2.50 a roll, used sanding disks until they wore out, and stopped wasting rags. By 2005 they'd driven the bill down to $12,000. Says Haran: "When people have a stake in a company's profits, they feel and act like owners." In 2005, his hourly workers received bonuses equal to 30% of their base pay in return for their cost-cutting.
More than 1,000 companies, most of them small businesses, now use open-book management, according to Jack Stack, author of The Great Game of Business, which advocates open-book techniques. Beyond motivating employees, the technique may stem turnover and reduce bureaucracy. "With an open approach, employees make more decisions, so there is less need to hire managers," says Joseph H. Astrachan, a business professor at Kennesaw State University in Georgia.
SPELLING IT OUT
Still, the notion of disclosing financial data gives many business owners pause. What if employees ask for raises or leak information to competitors? But keeping employees in the dark may be a bigger risk. "If employees are going to innovate," says Stack, "they have to understand the big picture."
For an open-book program to work, you'll need to educate your employees about finance. That won't work at companies with high turnover, because workers won't stay long enough to develop an understanding. And don't expect long-held attitudes to change overnight. Some employees will still believe you are getting rich on their hard work, or even that the data you disclose are falsified. Says Astrachan: "The programs only work if you trust employees and you are willing to put time into making the ideas work."
Some owners give workers a few key numbers such as profits or revenues, while others let it all hang out. Companies typically set a goal for a business unit or the company as a whole--be it cutting costs or reaching growth targets--and employees get bonuses if they succeed.
Doug Lurvey, CEO of Interactive Hotel Solutions, told employees they would receive bonuses of up to 20% of their salaries if the company met its annual goals. The Springfield (Mo.) company is an online provider of hotel reservations, and a key indicator of its health is the percentage of Web site visitors who make reservations. A year ago, with that rate stuck at 1%, Lurvey started holding weekly meetings, going over financial data with his 37 employees. Together they forecast sales. "It's an exciting process for employees," says Lurvey. "They get instant feedback and have the chance to make improvements right away."
Krystal Simon, director of affiliate development, says the effort has improved the company's culture and its customer service. "People took the initiative to learn more and reach out to customers," says Simon. When the tech staff realized customers were getting error messages when they tried to book rooms, they zapped the system's bugs. Other employees redesigned the Web site to make it easier to use. Within three months of Lurvey's first meeting, the number of visitors making reservations had tripled.
By Stan Luxenberg