Opening the Book on Open Book Management

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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There has been a lot of discussion in the popular business press over the last 15 years about the concept of open book management — sharing financial information with employees — in privately held businesses, and rightfully so. For every benefit that is cited, there seems to be at least one drawback. Does that mean we should dispense with the idea?

Not to my way of thinking. There are as many pros and cons with opening the books to employees, as there are companies who consider doing so. The secret to profiting from the benefits of open book management (“OBM”) is to design an OBM system that fits your particular business and company culture. Simply put, OBM is nothing more than another set of tools in your tool kit that you can utilize to improve the success of your business.

Here’s an important point, which is sometimes misunderstood: there is no requirement that you share 100 percent of your financial information. It’s quite possible to have a successful open book management system without ever disclosing total company profitability.

The Pros

In general, open book management can be defined as the process of sharing the company’s financial results with employees, combined with teaching them how their decisions and job performance impact those results. It is often combined with some sort of variable compensation plan in which the employees share in improved profitability from the use of the process.

This is the biggest touted benefit of OBM: that it leads to greater profitability since everyone is pulling together toward the same goal.

There are other benefits as well:

• Workers feel a greater sense of ownership;
• Employer and employees develop a more trusting and collaborative relationship over time;
• Turnover is reduced;
• Employees understand the company and its cost structure better, and can make suggestions for improvements;
• Employees better understand the need for cost control and are more responsible in how they utilize company resources. For example, if your company needs to keep cost of goods sold to 50 percent of sales in order to be profitable, it’s good to share that information with your employees so that they can better understand the pricing and cost decisions you make; and
• Possibly most importantly, there is less pressure on the business owner and senior managers to manage every little detail of the business. Lower level employees will be more motivated to manage themselves and their own processes, since they will be able to clearly see the improvements in results when they do so. The feedback loop that gets established is really powerful.

The Drawbacks

Most small business owners are understandably hesitant to share financial information with employees, for three major reasons.

• If the company is successful, employees may become resentful, or want a bigger piece of the profits;
• If the company is struggling, employees may become concerned about job security, morale can suffer, and some employees may leave the company; and
• Unhappy employees may share proprietary information (such as gross profit margins) with competitors.

There are other issues to overcome as well, such as:

• The difficulty of determining which results to track and share with employees;
• The expense of designing and administering the reporting required;
• Training requirements for employees and managers. Not everyone is financially literate, and training is often necessary; and
• The effort and expense of implementing a pay system that shares profitability increases with employees.

Remember, it’s not absolutely necessary to share every detail of your financial statements with your employees. Sometimes less is more. In practice, many companies start small, and work up to more disclosure over time as trust is developed.

Design an Approach that Works for Your Business

The first step in deciding whether open book management is for you is to make sure that you and your senior managers clearly understand the linkages between day-to-day business operations and financial performance.

Once you have identified the revenue drivers or cost centers where more employee knowledge could lead to better results, pick one or two. Analyze those processes, and determine where your employees could easily help improve things if they had the right information and motivation. Motivation could be as simple as a company party when goals are met, to something as complex as a profit sharing plan.

Then, you’ll run some projections to see what the financial impact of the improvement would be. For example, how much would costs go down if your production crew increased productivity by 5%? What would it take to share productivity information with them, and what financial numbers will you need to share to show them the difference? What might the benefits be to them?

You can try out a 90-day pilot program, and see how it works, before committing to go any further. But if you’re like many business owners who have given OBM a shot, you’ll be a convert to this process in no time!