Your company is in business to make money. Open-book management is a system that teaches managers and employees how to keep track and win the game of business. In sports, everyone knows the score, their playing statistics, and what they need to do to win the game they’re playing. Without open-book management, most employees have no clue how well their team is doing and what game the company is playing.
When you don’t know the score, it also doesn’t matter how hard you play. Making money is the score in business. Opening your books and creating scorecards and scoreboards will help your people get excited and play to win as they learn how their role contributes to the company’s bottom-line.
Open-book management is not a tool to manipulate or control employees. It’s a system that helps companies who are interested in making more money and getting their people to think and act like business owners instead of workers. Open-book management is simple and uses common sense. It can be taught and used by every person in your company, regardless of their position.
Are you open to open-book management?
Many business owners are afraid to open their books to their employees for various unfounded reasons. Whatever your reasons or excuses not to open the books, you are hurting your company’s results and restricting your profits. You probably haven’t tried open-book management because you think most of your employees aren’t interested in the business of your business. Or you think that sharing numbers will cause a lot of problems, or they will share them with your competitors, or they’ll think you make too much money and therefore won’t want to work harder. Or you don’t think your people are as smart as you and can’t understand business or numbers, and don’t want to learn more.
Is the problem your employees or you?
Don’t you believe your employees are smart enough to understand the numbers and targets? Don’t you believe employees can contribute more to your company’s performance than they are now? Don’t you think employees can learn what makes your company achieve the results you want? Don’t you want to have employees help you make more money? Don’t you think you could grow your business if employees received a part of the financial improvement? Don’t you think if your employees had an incentive to improve the company, they would?
When I speak at conventions to company owners, I often get asked about bonuses for employees and the best way to give them out. That’s the problem! When you ‘give out bonuses’ without showing employees how they earned them, they don’t connect their efforts to the bonus, their contributions aren’t really appreciated, and they don’t really know how they contributed to the overall performance of the company. These types of bonuses are no more than gifts that won’t change or improve employee performance.
Since most employees never see any financials or numbers, they become apathetic about their ability to influence them. In reality, surveys show a majority of employees want to know what’s happening at the company. And, if they knew more, they would work harder to achieve the company’s goals. When everyone knows the score, everyone can get focused on achieving the results you want to hit. Plus, most all employees have checking accounts, save for vacations, buy cars, and understand basic revenue versus expenses accounting. All you have to do is teach them the basics of business accounting and the terminology to get them on board to help your company improve the bottom-line.
The basics of open-book management
Open-book management is a better way of doing business. It is about sharing financial targets and results with employees and asking them to contribute and help improve the bottom-line. If the company’s profits improve, everyone wins and receives a piece of the net improvement dollars. In the National Basketball Association, the winning teams that reach the playoffs get a bonus which is shared with the players. Likewise, in business, if your team reaches beyond and achieves above their normal or average results, your bottom-line improves and you should share a piece of the improvement money with your employees.
Open-book management starts with opening your books, sharing financial information, developing financial targets, and explaining the results with your managers and employees. With this information, people can use this feedback to improve the company’s short-term and long-term performance. To insure success, management must actively manage the open-book process, hold regular company meetings explaining the numbers, and coordinate the improvement efforts.
The steps required to succeed with open-book management include:
- Explain the information
- Share the information
- Develop goals and targets
- Create a tracking system
- Encourage employee involvement
- Identify potential improvement areas
- Design a reward system that works
You have to be willing to honestly communicate the good and bad news, transfer responsibility for achieving the numbers to the team players, and believe in your people. You can’t do this alone. This is not a one time program or seminar. It is a process to get your team up to speed, on the same page, and then continue to monitor and encourage everyone to get involved with ongoing improvement.
Decide what you want to improve
Open-book management will ultimately improve your bottom-line by getting everyone working together towards a common goal. It can also accomplish lots of other positive attributes as well.
Take a look at this list of where you might want to improve your company:
- Bottom-line profits
- Reduce costs
- Improve field productivity
- Become more competitive
- Faster schedules
- Improve quality workmanship
- Better customer service
- Less mistakes or call-backs
- Make employees accountable
- More employee involvement
- Build a winning team
You can decide what numbers to share. Individual salaries are never disclosed, just the big picture, project, and production numbers that influence company profitability. Your people will need to be taught the concepts and understand how they contribute to the monthly income statement (profit & loss), revenue, direct costs, indirect costs, and profit. These numbers can be broken down into departments, jobs, or accounts so people can see how they personally contribute to the overall performance of the company.
After your decision to implement open-book management, hold a company meeting and explain what is going to happen over the next several months.
- Explain what your goals are for the program.
- Pass out a simple income statement and explain how it works.
- Make sure everyone clearly understands how the numbers all tie together.
- Pass out your company income statement for the past 3 years and explain how well you have done. It works best to also show these numbers in a graphic forma
- Discuss your goals and targets for the upcoming year by quarters.
- Ask for input and ideas how your company can improve the results of the past.
- Share how everyone will participate and receive a part of the overall net profit improvement dollars on a quarterly basis.
- Explain bonuses will now only be based on numbers, targets, and results.
- Develop a schedule where and when financial results will be shared monthly or quarterly.
- Get everyone’s commitment to get on board with open-book management and making your company more competitive with better service and quality, and more profitable.
Track your key critical numbers
Decide what you want to improve in your company and determine which key critical numbers you want to track and share with your employees on a monthly basis. Often in factories you see white boards next to production teams with their daily production goals and actual results posted. This way each team always knows their score and what they have to do to meet or beat their targets and goals for the day or week.
What are your key critical numbers? Pick the ones that will make the most sense to your employees and which ones contribute most to the bottom-line. Keep it simple. Focus on a few critical numbers to start your open-book management process. Also break some of them down into parts that each project or department team controls or is responsible for. This way each employee will feel and see how they contribute to overall company results.
- Direct costs
- Job costs
- Gross profit
- Overhead / indirect expenses
- Labor or crew costs
- Material costs
- Equipment costs
- Subcontractor costs
- Net profit
- Production rates / units produced
- Waste & scrap
- Cash balances
- Equity & retained earnings
- Bonding capacity
- Accounts receivables
- On-time completion or delivery
- Customer returns or call-backs
- Customer retention
- Sales success rates
- New contracts or orders
- Employee turn-over
- Employee absenteeism
- Employee training
If you selected gross profit as one of your key critical numbers, you can then get your employees involved in discussions how they can improve their workflow. If you selected customer call-backs, you can get everyone involved in ways to eliminate mistakes or problems with your finished product or service. By identifying a few areas that need improvement as well as profit margin, each employee can make a contribution to your company improvement program.
The goal of open-book management is to improve. In order to improve people need to know what is expected. Every employee needs a target to hit and track to get them involved. Then you must set up an ongoing tracking system to keep everyone informed of their score. Everyone must know what the past performance was and how well they are currently doing in order to strive for improvement.
Making it work
In order to make open-book management work, follow these guidelines. Hold regular monthly meetings with all of your employees, by production teams, or departments. Share the results and discuss how well or poorly the teams are doing versus their targets. These results are open to everyone companywide. Ask each team leader to explain what is working and what needs improvement. Ask for input from all of the team members to insure positive two-way communication. Make sure everyone understands the targets and goals, how they contribute to the results, and what each of them can do to improve the results. Make these meetings fun and always explain how the improvement dollars will be split among each team member.
Keep everyone focused by using different techniques and ideas to create more involvement. Every win is a good win. Set the teams up to win at any level, large or small. When your team wins, it wants to win even more. Winning breeds enthusiasm, excitement, and camaraderie. Keep the celebrations and praises coming as the teams start to win more and more. Use charts and graphs to track and keep the numbers real and understandable. And when it is time to pass out the bonus checks, make a big production out of the event for everyone to participate in.
Sharing the profits
Challenge your teams to improve upon past performances and share the net improvement dollars with them. Some successful open-book management companies split the net profit improvement dollars with their employees between 25% and 50%. Some use an ever-increasing percentage as the teams improve more and more. Some start the employee participation after the company hits a minimum profit goal. For example, if the company target is to make $200,000 net profit, every dollar made above that goals will be spilt 75% to the company and 25% to the employee pool. An ever-increasing example might be for the first $100,000 made above the base profit goal, the employees receive 20% of the extra dollars made, and then all money made above $300,000, the employees would receive 33% as their share.
Each employee typically receives their pro-rata share of the profit improvement pool based on their salary or pay as a percentage of all of the employees. As everyone contributes to the overall company success, there is not generally more money given to long time employees, managers or officers except as a pro-rata percentage of their salary as explained above.
The beauty of open-book management is how well employees become one and want to win the game of business. Give it a try. Start small by selecting a few areas you want to improve. Set some targets, explain the game, decide on a reward system that compensates overall improvement, set-up a scoreboard tracking system, keep the players informed of their progress, and then share the dollars saved by the teams when they beat the goals. How can you lose when everyone is working together to build a better business?
George Hedley CPBC is a certified professional construction BIZCOACH and popular speaker. He helps contractors build better businesses, grow, increase profits, develop management teams, improve field production, and get their companies to work. He is the best-selling author of “Get Your Construction Business To Always Make A Profit!” available on Amazon.com. To get his free e-newsletter, start a personalized BIZCOACH program, attend a BIZ-BUILDER Wealthy Contractor Boot Camp, or get a discount at www.HardhatBIZSCHOOL.com online university for contractors, Visit www.HardhatPresentations.com or E-mail GH@HardhatPresentations.com.