If you are a long-time MFA reader or have attended our Focus on Finance seminar, you already know we strongly promote open book management (OBM). For those unfamiliar with the concept, let’s start with some background, some of which is excerpted from the National Center for Employee Ownership materials.
Open-book management has been called the most important management trend in the United States. The practice revolves around sharing a company’s financial books with its non-management employees, training them to understand the information they receive, and encouraging them to make decisions based on what they have learned. OBM often produces a change in the company’s culture, from one in which the employees do the minimum asked, to one in which they give as much as they can.
With more than a decade of proven open book management statistics now available, it has been proven that OBM companies experience 1% to 2% higher growth rates in both sales and employment than their closed-book counterparts. Coupled with employee ownership, sales growth is 2.2% better than normally expected. To translate that statistic into reality, a company with open-book management would be twice as large as their closed-book counterpart over a 30 year time frame!
One of the most interesting studies on high-participation OBM companies was one done by Mark Huselid in 1995. Huselid sampled 986 publicly-held companies with 100 or more employees. He evaluated the links between systems of high-performance work practices and company performance. The amazing results of his study was that high-performance practices were associated with a 7.05% decrease in turnover, a per-employee incremental sales increase of $27,044, a $3,814 bottom line increase per employee which produced an $18,641 per employee increase in company value.
Let’s now translate this to the petroleum industry. For a wholesaler with a staff of 35, the bottom line would improve by $133,349. For a c-store chain with 125 employees, we’d see a $476,750 bottom line increase!
At this point you may be pretty excited about the prospects of OBM, and you should be. However, realize that OBM is not a quick fix. It is a time-consuming, often painful transition. Don’t fool yourself into thinking that if you simply begin to share your financial results at periodic meetings, you’ll magically become more profitable. Nothing could be further from the truth.
OBM requires two crucial steps beyond sharing financial information and financial education. First, it requires finding and sharing data critical to the company’s success that is not part of the financial statements. We call these “Critical Numbers.” (See November 1998 MFA article – Track What Counts.)
These are the kind of numbers employees can actually use to chart their own progress. OBM then relates these numbers to the larger financial picture.
Second, OBM provides the mechanisms for employees to do something with this knowledge. It’s not enough for people to know the numbers, they need to have decision-making authority. Work teams, feedback systems, job enhancement, and other participative management techniques are all a critical part of OBM.
To get started in OBM, the first step is gathering information. Key leaders should become knowledgeable by reading books and articles on OBM. We have listed some starting resources below. Once well-read, you will want to start gathering information about the company’s present situation through employee surveys and focus groups. This is often the first introduction to OBM, and you will easily identify those employees excited about OBM that can help catapult the process.
Remember that knowing where you are is just as important as knowing where you want to go. Be sure to assess the current level of business knowledge, resources, capabilities, and obstacles that exist within your organization.The key to reaching your goals is knowing your starting point and the appropriate path.
If after researching OBM you would like assistance with your initial planning, please give Meridian a call.
Open Book Resources:
Open-Book Management: Getting Started by Cathy Ivanic and Jim Bado, Crisp Publications, Inc. 1997
Open-Book Management: The Coming Business Revolution by John Case, HarperCollins Publishers, Inc. 1995
The Power of Open-Book Management: Releasing the True Potential of People’s Minds, Hearts, and Hands, John P. Wiley & Sons, Inc. 1996
The Great Game of Business by John Stack, Doubleday 1992.
The Open-Book Management Field Book by John P. Schuster, Jill Carpenter, and M. Patricia Kane, John P. Wily & Sons, Inc. 1998
Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century by Margaret Blair, Brookings Institution 1995
Incentive Compensation for Employee Ownership Companies by Scott Rodrick, The National Center for Employee Ownership 1998.