Opening company’s books grows profit, performance

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Steve Wychulis, director of corporate development for CEA Technologies Inc., engages in open-book management with employees during a monthly meeting.

In a nation of individuals collectively squeamish about disclosing salaries or profit and loss statements, the concept of open-book management tends to raise eyebrows. But proponents of OBM say sharing P&L statements, performance goals and budgets boosts employee motivation and, hence, performance.
The bottom line improves when management opens its books.
Corey Rosen, executive director of the National Center for Employee Ownership, said statistics and case studies show that companies perform better after implementing OBM, but the process might take two to three years to fully implement.
Rosen said a common mistake is to merely hand out balance sheets written in financial language that employees might not understand, or with numbers that aren’t relevant to their tasks.
Management needs to give employees an opportunity to have real input.
“If management lets employees know whether their ideas are cost effective or not, then they will come up with progressively better ideas,” he said.
Rosen’s organization worked with a company that packed T-shirts by the dozen and had a high error rate of plus or minus one, which cost the company money for replacements and returns. An employee proposed packing the T-shirts by 10s, and the error/return rate dropped dramatically.
“It seemed like a small idea,” Rosen said, but it had a big impact. “Management can be disconnected from actual work, so it makes sense for employees to have input.”
Marcus Boggs, president of CEA Technologies Inc., which designs and manufactures medical devices, recently led a roundtable discussion at BiggsKofford about financial management which focused on how buy-in increases with more sharing.
Boggs has practiced open-book management for 18 years. He said it was initially challenging to get employees engaged. Boggs also said he was concerned about what to tell employees, so he disclosed only revenue, cost of goods sold, overhead and taxes.
Later he began disclosing quality ratings, as well as profit and loss statements. He explained that the company is self-financed and profits are used to help build the business.
“It’s been a real powerful tool — our employees take pride in what they do,” he said. “My employees are my greatest selling tool. Potential clients say they feel good about giving us business because my employees are so engaged in their work and knowledgeable about the company.”
Open-book management has gained popularity during the past decade.
Nearly 20 percent of the private-sector work force participates in a broad-based equity-sharing program, said Rich Armstrong, president of The Great Game of Business Inc, a company founded by open-book management pioneer Jack Stack.
Armstrong said the key to successful OBM is more than financial transparency. Successful open-book companies make business a game that brings the numbers to life so they are interesting, and creates an environment in which employees learn to forecast financial information, communicate progress and identify “critical numbers.”
OBM requires a commitment from the management team, a sincere belief that employees can be taught about financial information, and the desire for input from employees. If employees know their opinions count, they will be motivated and have a direct impact on the business.
“It’s not an easy process to get started, but the rewards are great,” Armstrong said. “Once employees understand the financials, they will think, act and feel like owners.”
The best way for company owners to reward employees is through gain sharing — not profit sharing, which can be construed as entitlement, he said. For instance, if baseline profit is improved from $100,000 to $200,000, employees should share in that “incremental improvement.”
Tony Fagnant, CEO of Qualtek Manufacturing Inc., started open-book policies at his company during 2002. He shares profit and growth information with employees, who help him set goals. When annual goals are reached, a percentage of after-tax profits is distributed among the staff.
“In today’s world, (it’s essential) that employees behave as if they’re partial owners — treating the checkbook and spending money as if it’s their own,” he said. “If employers don’t make money, then employees don’t get a paycheck.”
Fagnant said company profits would have been lower without this program and the incentives.
A year ago, Jeff Schneider, president of EFA Services, started practicing OBM.
“This year when I presented the budget, they questioned and pushed back and challenged me to do things differently,” Schneider said. “What they do on a day-to-day basis impacts our financial results.”
The bottom line: open-book policies make a difference, not only for morale and motivation but for the numbers.
“Everybody who does open-book says they wish they’d done it sooner,” Rosen said. “Nobody says they wish they hadn’t done it.”