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Talent Management
An Open Book
Vol. 58   No. 4
Involving employees in business decisions can improve the bottom line. That’s why fans of open‑book management are so dedicated to the approach.

By Dori Meinert  4/1/2013
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When Craig Durosko's remodeling company was projecting a loss during the recession, he turned to those he thought might be able to help—his employees.

He explained the looming revenue shortfall, and they immediately went to work identifying $50,000 in potential savings for that month in 2010.

"No less than 20 employees gave line-by-line specific things they could do to make a difference," Durosko recalls.

Their response reaffirmed his decision two years earlier to implement a process called open-book management at Sun Design Remodeling Specialists Inc., the Northern Virginia company he founded in 1988.

"Unfortunately, the way most employees find out when a company isn't doing well is when their paychecks bounce or when they show up and the front doors are locked. When changes go down and they don't know about it, they can't do anything about it," Durosko says.

By sharing financial information with its 50 employees and inviting them to participate in decision-making, Durosko's company is thriving again. After revenues dropped to $6.4 million in 2009, Sun Design ended 2012 with revenues of $8.7 million. Last August the company opened its second office.

Key to the company tapping into employees' ideas: teaching them to understand financial statements and what they can do to improve the bottom line—and rewarding them when they do so. Those critical training, communication and incentive functions usually fall to the HR team.

Open-book management is a "good tool for companies to get people working together as a team," says Sandy Harris, director of administration, who handles Sun Design's HR duties.

"We don't have a lot of conflicts and issues in the office, and I think it's because from the top leaders on down we treat each other the same," Harris says. "We respect each other and want to share knowledge."

She says use of open-book management shows employees that they're "as important to this process as anybody else."

The Pioneers

Durosko and his high school chum Bob Gallagher, president and chief operating officer of Sun Design, became fans of the open-book management philosophy after reading the classic The Great Game of Business (Doubleday, 1992).

In the book, Jack Stack, president of Springfield Re­manu­facturing Corp. in Springfield, Mo., describes how he and his partners borrowed $9 million in 1983 to buy a failing division of International Harvester. To boost morale among SRC's 119 employees, and to get them to turn the engine rebuilding company around, Stack made a game of it. He taught workers how to read financial statements, work as a team, earn cash bonuses and beat competitors.

Today, SRC Holdings Corp. employs more than 1,000 workers and has spawned 30 entities, including a dozen core companies that earned annual revenues of $400 million in 2011.

One spinoff, The Great Game of Business Inc., teaches executives how to implement open-book management. To date, leaders from more than 4,000 companies have gone through "great game" training. Many other consultants teach variations of the process.

Open-book management involves more than just sharing financial statements with the rank and file, according to those at SRC Holdings. It also includes:

  • Teaching employees to understand the business and what makes it profitable.
  • Helping employees determine how they can affect the bottom line by setting companywide and department-level goals, keeping score, and holding people accountable.
  • Providing employees with a stake in the outcome, through bonus and incentive programs that encourage them to get involved in improving business results.

"Our job is to make a business of businesspeople," says Keith Boatright, corporate director of HR at SRC Holdings, an employee-owned company.

"There should be nothing mystical or magic about reading financial statements," he says. "Unfortunately, I think the working world has made those somewhat of a taboo topic below certain levels of management."

Financial Transparency Is Rare

While those who practice open-book management are enthusiastic about the approach, financial transparency isn't common.

Only 7 percent of private companies share financial information with all workers, according to an April 2012 survey by Robert Half Management Resources. Another 17 percent provide quarterly or annual financial data to select employees, while 76 percent don't share financial updates with employees at all, the survey of 1,300 chief financial officers found.

Many CFOs and CEOs "don't want to let the secrets out because they are afraid … information is going to get to their competitor that can harm them," says Paul McDonald, a senior executive director at Robert Half.

However, younger workers in particular are seeking companies whose leaders value their ideas and make them feel part of the team, McDonald says. Sharing financial information may lead to employee buy-in for corporate goals and may generate good ideas from workers who now believe that their input may make a difference in company performance, he says. Companies that share financial information tend to have higher retention rates, he adds.

Yet some employers fear what will happen if workers find out how much profit they make. Workers often think their employer's profit margin is more than it actually is, Gallagher says. At Sun Design, "Once we laid it out for them, it was pretty eye-opening," he recalls.

Does It Work?

In one of the few studies measuring the impact of open-book management, Michigan-based Denison Consulting in 2010 found that 12 companies using the Great Game of Business method had more-productive and more-positive cultures than the 443 other private companies in its benchmark database. Researchers discovered that open-book management companies, on average, scored in the 92nd percentile—35 percentage points higher than the other private companies—on the 12 indexes that the Denison survey researchers use to measure culture. The indexes include elements such as strategic direction, teamwork and customer focus.

If a company scores in the 75th percentile or above, "we would say that's a high-performing culture," explains Jay Richards, a private consultant who conducted the study for Denison. Other Denison studies show that companies with high-performing cultures financially outperform other organizations, he notes.

A 1994 study by the National Center for Employee Ownership in Oakland, Calif., found that open-book organizations experienced a 1 percent to 2 percent annual increase in sales growth above typical sales projections.

Yet the effect of open-book management is hard to assess, says Corey Rosen, the center's founder and senior staff member. For example, it's hard to know when open-book management begins. "Most companies stick a toe into open-book management and gradually wade deeper; others cannot remember when they started," Rosen says.

Financial Literacy Training

Durosko and Gallagher took the slow route. They began sharing quarterly financial statements with Sun Design employees in the late 1990s. But they weren't getting much feedback, Durosko says.

Five years ago, it finally dawned on them: They were giving employees past data. Workers "couldn't effect change in historical data," Durosko says. So he and Gallagher began projecting monthly revenue and expenses and asking employees what could be done to improve projections.

The "energy and involvement from the employees was just night and day. It was just really cool because now they are affecting the forecast, and they are changing it," Durosko explains.

Each month, all 50 Sun Design employees gather in rented space for coffee and doughnuts and a financial update. Most meetings have an educational component, as well.

Make financial training fun, says Harris, who creates the activities and encourages employees to help bring them to life. In one activity, a manager brought in a wheelbarrow filled with play money to represent company revenue. Using the expense sheet, he took out amounts for various line items—until there was nothing left. The lesson? The company needed to take a short-term loan that month.

Open-book management remains a work in progress at Sun Design. The proportion of employees who had a clear understanding of their roles in open-book management increased from 78.8 percent in 2010 to 91.4 percent in 2011, Harris says.

At Central States Manufacturing in Lowell, Ark., all new employees take a Finance 101 class as well as classes on the employee stock ownership plan, the company's values and mission, steel basics, and customer service.

"Every employee in an open-book management company should be given the measures for business success and taught to understand them," says Ladena Lambert, SPHR, HR director at Central States, which employs 415 people.

"We'll break it down in real simple terms," she says. "When they see that the amount of scrap they put out in one week costs about the same as we pay a person, it's no longer just 200 feet of scrap a day. They start thinking about it in dollars."

Constant tweaks are needed to keep monthly financial presentations fresh and meaningful, she says. The company has even brought in customers to talk about the impact Central States has on their operations. Financial data have been simplified to focus on numbers that matter.

As part of its onboarding process, SRC Holdings has new hires attend a two-day workshop at The Great Game of Business, where they learn how a business works as well as the "great game" process, Boatright says.

There are ongoing opportunities for financial education. "It's part of HR's role to track that [training] and make sure we are inundating people with that," Boatright says.

Keeping Score

With open-book management, financial data are typically provided on scoreboards that employees use to measure progress toward company goals. Those in upper management determine critical numbers that employees can rally around. Then, employees in each business unit or department decide how they can best drive those numbers and develop their own goals.

At Jim's Formal Wear, a tuxedo wholesaler based in Trenton, Ill., managers at 10 regional warehouses go over the "business statement" with employees each month. They compare current and last year's numbers and this year's goals. They note trends.

Once a week, employees meet with their teams to discuss their efforts and what changes should be made the next week. Employees frequently suggest ways to improve efficiency or save money, such as reusing shipping boxes and hangers, says Brian W. Burns, HR director. "People can see how the company is doing and consequently are involved in trying to make it better."

If customer satisfaction surveys indicate an area that needs improvement, such as mistakes in orders that result in reshipping, the regional manager will develop a "mini-game" to encourage workers to do better. "No matter if it's our mistake or the customer's mistake, it still costs us money," says Craig Humphrey, regional manager in Seguin, Texas. As part of the mini-game, employees might be treated to ice cream or doughnuts if they maintain 99.5 percent accuracy for the week. If they hit monthly goals, they might receive a catered lunch. Their achievements are posted throughout the workplace.

Cash Incentives

Open-book management works only if built-in incentives encourage employees to participate, proponents say.

Hourly employees at Jim's Formal Wear have the potential to earn up to $1,200 a year in bonuses based on customer satisfaction surveys. In addition, managers reward workers with spot awards, such as $10 gift cards. Employees of the month might get free lunches and $25 each, while employees of the year might receive extra days off and larger gift cards.

When the company does well, hourly workers at each plant split a pool of 3 percent of the profits from that plant in the second, third and fourth quarters through a gainsharing program, Burns says. Exempt employees receive a percentage of the pool based on position, performance and longevity. The company also contributes to an employee profit-sharing retirement plan.

At SRC Holdings, employees receive quarterly bonuses; hourly workers can receive up to 13 percent of pay, while salaried workers can receive up to 18 percent of base wages. The bonuses are tied to annual target goals. In the first quarter, employees collectively can receive 10 percent of the available bonus pool, 20 percent in the second quarter, 30 percent in the third quarter and 40 percent in the fourth quarter.

"This allows us to provide more-frequent bonus opportunities, but protect the company from providing bonus payments early only to find the annual goal isn't met," Boatright says.

The Challenges

When companies try but fail to implement open-book management, it is usually due to a lack of follow-through or commitment, says Bill Collier, coach of The Great Game of Business. After training, company representatives go home and fall into old habits. People get busy. Meetings are canceled.

"This is not an event; it's a process" that requires "pig-headed discipline," Collier insists.

Not every employee or manager can adjust to the open-book environment, Lambert says. Those used to a command-and-control environment won't do well. Managers have to be able to accept employees' ideas, and employees have to accept responsibility and participate, she says.

Business leaders typically seek help implementing open-book management when facing financial difficulties or a transition in ownership, says Rich Armstrong, president of The Great Game of Business.

More than 80 percent of the company's clients represent small and medium-sized businesses. Leaders of smaller companies find it easier to make the culture change. Larger ones, which are typically harder to change, usually limit the effort to specific plants or divisions, he says.

"It's like any change program," Armstrong says. "There is going to be a lot of initial effort." But in the long run, the extra effort pays off.

At Sun Design, open-book management energizes employees and empowers them to make the right decisions with clients.

"They have a vested interest," Gallagher says. "Armed with good information about what's actually going on, they do good and positive things."

The author is a senior writer for HR Magazine.

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