The theory behind OBM is that all employees are provided information on the financials so they can and, hopefully, will make better and more informed decisions as workers and in the case of an ESOP company, as owners. The employees are also provided with training so they can properly read and understand the financial information and then provided with a forum to discuss the information.
Each ESOP company is different in terms of what information is shared and how much. There are no hard and fast rules as to the right amount but most people in the employee ownership community can agree that the sharing of some information is important for an ESOP company to fully develop an ownership culture and mindset.
The Wikipedia open-book management page discusses the Jack Stack/SRC Holdings management technique:
The technique is to give employees all relevant financial information about the company so they can make better decisions as workers. This information includes, but is not limited to, revenue, profit, cost of goods, cash flow and expenses.
The basic rules for Open-Book Management are as follows:
- Give employees training to understand the financial information
- Give employees all relevant financial information
- Give employees responsibility for the numbers under their control.
- Give employees a financial stake in how the company performs.
In a company fully employing Open-Book Management employees at all levels are very knowledgeable about how their job fits into the financial plan for the company. However taking a company from "normal" to open is not as easy as just starting training classes on income statements and balance sheets. Employees rarely find it compelling to understand these numbers. In order to overcome this problem Open-Book Management focuses on a "Critical Number". The number is different for every company but it is a number that represents a prime indicator of profitability or break-even point. Discovering this Critical Number is a key component of creating an open-book company. Once discovered then a "Scoreboard" is developed that brings together all the numbers needed to calculate the critical number. The Scoreboard is open for all to see and meetings take place to discuss how individuals can influence the direction of the "Score" and therefore, ultimately, the direction of the Critical Number. Finally a Stake in the Outcome is provided which can be a bonus plan that is tied to Critical Number performance or it can include Equity sharing or both.
Open Book Management How-to-Guide
This Open-Book Management How-to-Guide discusses the origins of open-book management:
"The beauty of open-book management is that it really works. It helps companies compete in today's mercurial marketplace by getting everybody on the payroll thinking and acting like a businessperson, an owner, rather than like a traditional hired hand." So wrote John Case, who was a senior writer at Inc. magazine in 1995 when he coined the phrase "open-book management."
Now, years later, companies are still debating the merits of opening their books to employees and vendors alike. Many tout the benefits, such as improved bottom-line results and employee retention. Still others warn of open-book pitfalls, such as employees using their newfound knowledge against the owners.
To help you learn more about the pros and cons, we've created this guide to the best resources available on Inc.com that relate to open-book management. Learn from the experiences of other entrepreneurs before you decide what's best for you and your company.
The How-to-Guide also contains various open-book management links, grouped in the following categories:
- The Origins of Open-Book Management
- Helping Employees Understand the Financials
- The Risks in Sharing Financials
- From Hired Hand to Businessperson: Changing Employee Perception
- Further Reading
Updates/Related Blog Posts:
- Employee Communications and Involvement in Tough Economic Times/Declining Valuation Multiples (12/4/08)
While many companies will face a downturn in sales and profits, companies that utilize open-book management could have an advantage It also notes that leaders must find the right balance between employee involvement and taking responsibility for making tough decisions and suggests some key principles.
- The Great Game of Business and Open-Book Management (11/10/08)
This post discusses The Great Game of Business, the title of a book and an open-book management system (that is the focus of the book), and discusses four steps to implementing The Great Game.
- Ten Employee Hiring Questions to Consider (10/15/08)
One of the ten questions that employers should be prepared to answer is Do you open your financial books to employees?
- 2008 Top Small Workplaces, Employee Ownership and Other Best Practices (10/13/08)
Open-book management is an attribute shared by many of the 2008 Top Small Workplaces.
- Open Book Management: Helping to Eliminate the Emotional and Subjective Conversations (7/29/08)
Smart companies have recognized that using open book management helps eliminate the emotional and subjective conversations. Open book management is based on the numbers - the facts (unless the organization is so corrupt it cooks its books). Business is about numbers - sales, expenses, inventory, profits, cash, stock value and more.
- Choosing Between a Higher Base Salary and a Higher Potential Bonus (7/15/08)
This post discusses how a company's culture focuses on open-book management and employee ownership, and how the company shares its profits through a separate long-term equity plan.
- In the News: 2008 Innovations Award Winner, Three-Tier Reward System, 600 Hours of Management Training, and Two-Day Personal-Development Leadership Training (4/30/08)
This post discusses the 2008 Innovations in Employee Ownership Award, their extensive open-book management and business literacy training, and their three-tier reward system.
- In the News: Employee Retention, Distinguishing Themselves from Competition, Using Employee Input for Continuous Improvement (4/27/08)
This post discusses a company that uses Open-Book Management to increase quality and productivity. It is run by a three-person Board of Directors and an ESOP Committee.
- Five Training Points: Ownership, Participation, Open Books, Holistic Wellness, and Lean Enterprise (4/26/08)
This post discusses open-book management and four other training points.
- Eudaimonic Well-Being and Factors in Happiness (4/7/08)
This post discusses how a company utilizes techniques like open-book management to promote promoted financial literacy in the organization.
- Participative Management is a Key Driver to Exceptional Business Performance (3/10/08)
Moving from a traditional hierarchal leadership model to an open-book management program for managing financial results is a significant cultural and practical change. Participative management requires .
- More LaRue, Global Equity Survey, Open-Book Management (3/5/08)
Open-book management transforms organizations and gives them a major advantage over others who keep employees in the dark. It's not just about generating profits, cash and wealth but also about distributing it for the good of everyone involved giving those who embrace open-book management a spirit of generosity and a willingness to openly spread the word to help each other succeed.
- Sharing Financial Information (2/20/08)
If a company is planning on sharing financial information with employee owners, it's very important to provide the information in the proper context.
- The Connection between Employee Engagement and the Bottom Line (10/15/07)
Of the 18 winners, 17 Bosses practice "open-book management" and are teaching employees how to read and understand financial documents.
- ESOP Companies are More Productive (4/10/07)
ESOP companies can increase the level of participation by embracing an open-book management style and actively involving the employees (both individually and in workgroups) in the decision-making process.