Revealing company finances to employees may seem scary, but CEOs who practice open book management swear by its ability to lower costs and boost profits
Commercial aircraft supplier Tracer was in trouble last November. The 27-employee Milwaukee company, founded in 1993, saw sales fall 20% below already lowered projections. With inventory stuck in the warehouse, Tracer's entire staff knew exactly how much they needed to drive sales to hit their monthly target. Founder and CEO Bill Morales, 52, was on the road, but in his absence his team negotiated a deal that would move some 747 parts out of inventory at a deep discount. Morales approved the price, and his staff did the rest. It was the kind of ground-up effort that has helped Tracer avoid any layoffs, even though 2009 sales are still down 30% from last year.
Most entrepreneurs keep the inner workings of company finances hidden from employees, especially when their businesses are struggling. But executives like Morales have embraced open book management, an approach based on transparency and accountability. They train their employees to understand key financial measurements and show workers how their actions affect profits. More than 10,000 companies practice some form of this philosophy, estimates Jack Stack, CEO of Springfield ReManufacturing, who pioneered the technique in the 1980s. Many executives fear that competitors will learn sensitive information if they open their books to employees, and some think their workers have little to offer. But proponents say open book management makes healthy companies more efficient—and can save a company in distress.
Open book management was born as a turnaround strategy. "I did it in 1983 to save 300 jobs," says Stack, 60. He spun out SRC, then a struggling engine division of farm-equipment maker International Harvester in Springfield, Mo., into a separate company owned by employees. Stack, who reviewed SRC's income statement with the staff on a daily basis, used the philosophy to take the company from the edge of bankruptcy back to profitability.
Stack also created SRC subsidiary the Great Game of Business, a conference and consulting group that does over $1.5 million in annual sales, to spread the idea of open book management. He says open book management holds added currency today because of the recession, when countless entrepreneurs are struggling. "The real tragedy is that we have for some reason created an image and an impression that the CEO is to have all the answers, in good times or bad," he says.
awareness and accountability
At Tracer, Morales began looking to his staff for answers two years ago, after the aviation-supply business had been battered by years of airline bankruptcies and rising fuel prices that followed the September 11 attacks. Putting more power in his workers' hands helped reduce costs. For example, when workers learned that it cost $5,000 a month to heat the warehouse, they found ways to lower the bill to $900 by changing the heating system and wearing coats. "We've cut our overhead significantly just because of awareness and accountability. Now we're in a downturn, and you don't have to sell as many parts to make money," says Morales.
Top managers have to accept transparency for the system to work, and some resist giving up control. And while many open book companies have some form of employee ownership or profit-sharing, not all employees want roles in managing the company. Morales says some workers told him: "Bill, if there's problems with the cash flow, if there's problems with the company making money, I really want you to deal with it. I just want to do my job."
Still, leaders can use the philosophy's tenets of transparency and accountability to empower workers, particularly in a downturn. At one division of SRC last fall, when monthly orders from General Motors fell from 2,000 engines to 200, workers agreed to short weeks, and 35 of the 160 employees accepted voluntary layoffs. The company structured the cutbacks so that Missouri's unemployment program would make up the difference. Five months later, after scrambling for new sales, the division was profitable again and returned to full employment—even rehiring the laid-off workers—with a new contract to make engines for the U.S. Postal Service, among other clients. Moreover, SRC's survey of morale in February recorded the highest score in 17 years. "They at least feel they can do something to avoid a disaster," Stack says.
Business owners can't change to open book systems overnight. First, they have to create a culture where employees want to be involved, and they need to understand the numbers they'll be measured on. "When a company is struggling, they do need to be careful how they present this to the employees. They want to lay out the reality, but in a careful way so they're not just scaring people," says Kent Forsland, founder and chairman of Designer Doors, an 80-employee, $17 million custom garage-door company in River Falls, Wisc.
"the idea spigot opened up"
Forsland, 54, started using open book management in 2003 after two bad years, including a loss in 2001. His biggest fear—that employees would demand more money if they knew details of company finances—vanished after he asked workers at a meeting what they thought the company's profits were. "Most people thought we were making at least 50% profits. There were some who thought we were making 70%," Forsland says. The reality: Designer Doors' net income was just 5% to 7% of sales. Once his employees learned that, Forsland says, he felt the culture shift immediately. He began training his entire staff in financials and explaining spending decisions. And employees started suggesting cost savings. "The idea spigot opened up," Forsland says.
Besides drawing employees into decision-making, open book management is intended to make everyone in the company accountable, which can provide a useful check on leaders. Rich Sheridan, CEO of Menlo Innovations, a $4 million software developer in Ann Arbor, Mich., says his 60-person staff can see when prospective clients are lagging in the sales pipeline. "They can call the CEO on the carpet and say: 'Hey, you're the one whose job it is to give these guys a call,' " he says.
Sheridan, 51, takes a collaborative approach not just to running the company, but to project management and even software design as well. The office is one open room. Note cards on the wall track the progress of every project, and programmers work together in pairs at each computer. Keeping employees in the dark can hobble a company, he says. "When you start pulling the information back, when you start retaining it for yourself, suddenly the organization can only move as fast as you can," Sheridan says. "I'd love to believe I'm the smartest guy in this room, but I'm probably not."