An article in the WSJ extols the virtues of Open Book Management. OBM is a concept that became popular a decade or so ago when some business owners came to the realization that they were not getting a sufficient level of productivity and devotion from their employees. The fix, was to share and educate employees on company financial information. The theory being that if employees were better educated and had empathy for the company’s situation they could solve problems and be more productive.
Most of the case histories that have been written on OBM have been fantastic success stories. When employees understand how the company makes money, employees suddenly change their behaviors and invent solutions to problems that had mystified management. Here are the untold stories:
* Once employees found out how much money the owner was making they demanded to participate in the profits. Rarely, was there ever an offer by the employees to take on risk in the business via a variable compensation plan or loaning the company money (like most owners do).
* Employees saw how profitable certain lines of the business were and decided to start their own company, competing with their former employer. They were also armed with all of the company’s financial data.
* Employees began making value judgements on departmental expenses. Most prevalent of which was the disdain for the highly compensated salespeople that generated all of the revenue for the company.
As B2B entrepreneurs, there may come a time when we entertain the idea of opening up our books to our employees. When the time comes, lie down until the feeling goes away. If you feel your employees don’t understand how your business makes money, then you have two choices. More education (without sharing your P&L!) or find new employees. I have done both.
Financial information is not a right or a privilege for your employees. You take the risks. You reap the rewards.
Your thoughts?
To your success!
Scott
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February 28, 2009 at 1:21 pm
Dan
Scott, your posts are totally in sync with where we are with D&A Design. I wonder if OBM works best in the “micro business” setting? The design firm I worked for that operated using OBM was a really tight group, but there were never more than 4 people employed by the firm at any one time, so we felt (and knew) that we had a huge role in the failure/success. Interestingly, though, since moving to Cincy, I’ve yet to work for a design firm that utilized OBM. I think you’ve convinced me not to operate using OBM when we hire full-time employees. Thanks!
February 28, 2009 at 3:59 pm
Scott Miller
dan,
i personally don’t like “full OBM” in any setting. the professional service business should not be that hard for employees to grasp. employees should be acutely aware of how much revenue they are producing. sharing with them their “fully loaded cost” (salary, benefits) is also important. from there, letting them know what the gross margin expectation is (revenue less cost) is appropriate. then instituting some kind of incentive compensation based upon individual gross margin achievement.
finally, the holy grail is to do substantial education with them on how to make follow on offers to clients for additional work. once they learn this skill, they become empowered to generate revenue instead of “waiting to be fed” by the owner.
s.
March 2, 2009 at 11:16 am
Brian
“Most prevalent of which was the disdain for the highly compensated salespeople that generated all of the revenue for the company.”
Part of the source of that disdain may be the attitude that all company revenue is generated by salespeople. Are you really saying that the products or services offered have no value, but for that which the salespeople create?
My issue has always been with the sales force that is compensated as a straight percentage of the project budget. In my experience, this has always provided a strong incentive to close the deal at any cost, including promising the client unrealistic deliverables and/or timelines. After all, it doesn’t affect the salesperson who gets his cut off the top.
Later, when the projects are late and over-budget, management is only too happy to tell the employees “We’re sorry, there’s just no money for raises this year.”
March 2, 2009 at 11:33 am
Scott Miller
great comments and questions, brian!
no, i am not saying that the products or services have no value. simply, that nothing happens until somebody sells something. as service professionals, we can strengthen our hand by becoming competent in the domain of sales. for the entrepreneur, freelancer, etc. this skill is essential to long term growth and survival.
yes. i agree with you that there are many bad structures in place that reward salespeople for bad behavior. not really the salesperson’s fault. this is a mgt. error. so when unleashing salespeople, it is critical to have compensation structures in place that insure that the promises made can be delivered on by the service providers. upfront involvement by the “doers” goes along way to help manage the expectations.
March 3, 2009 at 5:36 pm
Brad Wike
We are in the service industry with 50 employees and while I acknowledge there are risks associated with OBM there are also several rewards associated, such as employee growth and improved financial performance for the company. Many employees believe the owner is taking home buckets full of money and when the books are truly open the realization is quite different. They not only see how they affect the business but also how the economy affects the business. OBM teaches them to make informed choices not only in their business life but also in their personal life. It adds accountability to both management and team members. If you have visited a site that has OBM you will see informed employees who not only feel they have a stake in the outcome but feel more empowered and less helpless. They have a realistic picture of how the business is run and how their personal performance makes a difference. Employees who are empowered are more productive, reliable and happier.
To address the idea that employees may take this information and become a competitor, that risk factor is always present. The employee who has that in his or her mind will make that decision whether there is an OBM style or not.
We believe that if the owner truly believes in their people and the increased competiveness and financial success that can be gained by tapping into the collective wisdom and intelligence of their team then there isn’t a better strategy than OBM.
March 3, 2009 at 8:12 pm
Scott Miller
brad,
glad to hear that OBM is working for your firm. i would be interested to know more about the type of service industry you are in. my experience tells me that OBM is more successful in some industries vs. others.
my background in primarily in professional services for the software industry. a well run company in this industry with 50 employees would be making “buckets of money”.
the industry dynamics and associated barriers to entry also impact the potential threat of employees starting their own firm. in the software services sector this is a real possibility. however, with say, an HVAC firm where capital equipment, advertising, etc. are required, the threat may not be as great.
thanks for your comments!
March 4, 2009 at 1:15 pm
Rich Armstrong
I do agree that this issue of “owner risk” can be a significant challenge to overcome when implementing OBM. However, the whole idea behind OBM, at least OBM as we at SRC and The Great Game of Business practice it, is to create a business of business people who clearly understand the risk and rewards of ownership.
I don’t think the question is whether OBM is a good or bad strategy for improving financial results and the lives of the employees who drive the results. That has already been proven time and time again by companies all over the world and in all types of businesses. The question is more about how the owner chooses to run their business. The OBM approach we take, coined the Great Game of Business, is based on a simple, yet powerful belief: The best, most profitable, most sustainable way to operate a business is to teach every employee in the company how the business works, give them a voice in how the company is run and provide them a stake in the financial outcome, good or bad.
If the owner has something to hide or is in business for the short term - to make as much money as possible and then bail-out, then they should find another strategy. In the Great Game of Business the owner must be willing to explain every aspect of the company’s workings to the employees and teach them the ups and downs of business ownership and about what it means to put it on the line every day. If the owner is not prepared to involve the troops at that level, then Scott, you’re right, OBM will not work for them.
March 4, 2009 at 1:19 pm
Rich Armstrong
By the way Scott, thanks for creating the discussion… Fantastic blog
March 4, 2009 at 1:42 pm
Harlan Geiser
Scott,
You are obviously an intelligent and successful person. I understand your perspective and agree with your points in certain situations. However, I do not believe that either side of the OBM issue should be applied broadly.
OBM will not work where there is an absence of integrity and where the employees truly do not care about each other and the success of their collective efforts.
There are business owners who focus on themselves. They may lack integrity. They may run personal expenses through their business to avoid taxes. They do not truly care about the success and well being of their employees and their employee’s families. They extract unhealthy amounts of cash from their businesses to purchase personal depreciating assets. They are highly leveraged. The focus is on the owner rather than the employee – take instead of give. Companies that operate in this fashion are ripe for the pitfalls you describe.
If these factors are present, employees know. They are smart. Like Jack Stack says, “You can sometimes fool the fans (clients), but you can never fool the players (employees)”.
There are also business owners who focus on their employees. They truly want what is best for them. These owners are delighted to take a smaller piece of a bigger pie. As C.S. Lewis suggests, they find pleasure in “turning outward” rather than focusing on themselves. These owners truly have integrity and do not run personal expenses through their businesses. There is nothing to hide.
OBM is more than reading a book, coming up with a critical number or two and imposing them on your employees. To be successful, OBM becomes a process where each employee has a significant role. OBM takes careful study, coaching and teaching. Owners must be open to suggestions and change. Employees given a true “line of sight” to the income statements and balance sheet information will make effective decisions for themselves, their peers and the companies they represent.
You are correct. I do take the risk. However, there would be diminished rewards without the line of sight and commitment of our employees!
Scott, I wish you the very best and hope to have the opportunity to meet you in the future.
Harlan
Harlan Geiser
CEO
INTEGRITY TECHNOLOGY SOLUTIONS
Direct: 309-664-8116
http://www.integrityts.com
March 4, 2009 at 1:49 pm
Scott Miller
rich,
your points are well taken and welcome to the “conversation”. it has been my experience that OBM is most needed when two factors are present:
1. the business begins to outgrow the competency of the owner to run it.
2. the business by its nature is complex.
manufacturing is typically a more complex business to run than a B2B service business. when the business is more complex, more problems arise that need to be solved by the people that work there. in cases such as this, i support a modified OBM approach. i am convinced that bottom line P&L needs to be shown to accomplish the result of having employees understand how we make money. i say, stop at the gross profit line.
now, for B2B service businesses, which is the target market for this blog, i remain steadfast that the proper education can take place to empower employees to make great decisions that benefit the company without showing bottom line profits. this education must be coupled with an incentive program that rewards the type of behavior our education seeks to generate.
March 4, 2009 at 4:22 pm
Rich Armstrong
Scott,
I agree. Teach them how to impact the gross profit line. But, owner beware, once they get a taste of this, they will want to know more and more.
The “books” that employees use in our approach to OBM are not full-scale financial reports. They are simplified versions of standard financial statements that revolve around a company’s Critical Numbers, Key Drivers or lead indicators of financial results. It’s not as important too be GAAP (Generally Accepted Accounting Principles) compliant with these scorecards as it is to make common-sense as to how the busines makes money and generates cash.