Is Open-Book Management Making a Comeback?

Monday, 22. July 2013

The idea of opening up the books to all employees may seem scary to many business owners and managers, which is understandable. Financial transparency typically raises fears that - depending on the business situation - employees will either ask for more money or leave the sinking ship. Or worse, they could leak sensitive information to competitors. Although such fears are not entirely unjustified, experience has shown that open-book management is a good strategy to improve long-term business performance.

Open-book management was not developed by some prestigious business school or fancy consulting agency but by everyday business people. Jack Stack was the first to apply the approach back in the early 1980s at Springfield Remanufacturing Corporation and, as a result, was able to successfully save the company from imminent bankruptcy. The idea was to awaken the entrepreneurial spirit in the employees.

Three Basic Rules

In his book The Great Game of Business (1992), Stack defined three basic rules of open-book management:

  • Know and teach the rules: Every employee should be given the measures of business success and taught to understand them

  • Follow the action and keep score: Every employee should be expected and enabled to use their knowledge to improve performance

  • Provide a stake in the outcome: Every employee should have a direct stake in the company's success-and in the risk of failure


Stack argues that open-book management reaches its full potential when employees know and understand the performance indicators to a level that they are able to report their meaning to management bottom-up.


Benefits of Open-Book Management

Companies, such as General Electric, Southwest Airlines, and Harley Davidson, which have been practicing open-book management successfully for years, report on a wide range of benefits:

  • Employees develop a stronger sense of ownership because they feel valued and trusted as business partners rather than as hired hand (Case, 1998, as cited by Pascarella, 1998).

  • Employees have a more realistic understanding of the financial and competitive situation of the company. Therefore, they spend less time speculating and worrying about the company’s future and more time on the actual work.

  • Employees at all levels of the organization develop a sense of urgency and the drive to do their best to improve things (Welch, as cited by Henglein, 2009).

  • Employees repay the trust placed in them by the management by addressing problems at the front lines more openly. This way the organization’s collective knowledge gets to be fully exploited and unpleasant surprises in the implementation of strategies and measures can be more easily avoided.

  • Having a good understanding of the organization’s cost structures helps employees to make better informed decisions in their everyday work. For instance, an engineer would not decide to equip a product with additional features when the company is struggling with serious cash flow problems.

  • Employees understand the need for cost control and become more responsible in using the organization’s resources.

  • Cost-saving measures are more likely to be accepted by the staff.

  • Employees see the “big picture.” They understand how they can contribute to the organization’s success – both individually and as part of a team. This makes them more engaged and can lead to increased cross-departmental collaboration.

  • Transparency regarding the organization’s financials and the strategic direction enables employees to make better informed suggestions how to improve processes and productivity.

  • Open-book management encourages innovative thinking as employees feel more vested in the organization’s success (Henglein, 2009).

  • Finally, open-book management ensures regular monitoring of the management making it more accountable for results.



Challenges

The key challenge is to decide what information to share. One of the most common misconceptions about open-book management is that everything must be disclosed, from salaries to email correspondence. This may be the case, but is certainly not necessary. Particularly for organizations experimenting with open-book management for the first time, it is recommendable to focus on just a few key performance indicators, such as sales, profit, or break-even-point. As the employees learn how to use these figures, the degree of transparency can be increased with time. Also, it is not necessary that each employee receives all information. What matters is that the employees get the information which is relevant for performing their jobs and that they understand how their job fits into the overall financial plan of the organization.

Open-book management requires mutual trust and ongoing communication. Before starting to share financial information with employees, it is advisable to develop an appropriate communication strategy. Ideally, such a strategy should specify the communication lines and intervals, provide for training opportunities for staff, and create means for effective employee feedback.


New Interest in an Old Idea

Three decades after it was first conceived, open-book management has been gaining new popularity in recent years. More and more companies are adopting this approach, albeit sometimes using different labels for it, such as "ownership thinking" or (less catchy) "sharing information to improve financial performance" (SFITIP). In times of economic crisis, which we still find ourselves in, open-book management can pay off as a "turnaround strategy." Another reason for the renewed interest in the approach is that particularly young employees and managers who belong to the "Web 2.0 generation" are accustomed to greater openness and transparency in all spheres of life and are increasingly demanding the same at their workplaces. For many young people, an open corporate culture has become an important factor when choosing which company to work for.


To sum it up, open-book management is not simply about sharing financials. When used correctly, it has the potential to improve employee satisfaction, motivation, and retention, as well as the bottom line!
 



Literature

Case, J. (1995). Open-book management: The coming business revolution. New York, HarperCollins.

Henglein, G. (2009, 22. April). The pros and cons of Open-Book Management. Allbusiness. http://www.allbusiness.com/company-activities-management/financial/12302038-1.html

Pascarella, P. (1998). Open the books to unleash your people. American Management Assoziation International, 87(5), 58-60.

Stack, J. (1992). The great game of business. New York: Currency Doubleday.