RSM Resources

Reservations were plentiful at a profitable Canadian hotel, a favorite haunt of English royalty. But operating costs at the 250-room inn were higher than expected: Expensive plates, bowls and stemware frequently cracked or chipped from rough handling by dining-room employees.

Some managers considered urging workers to use extreme caution in handling the elegant china but feared that would signal value and encourage theft. So the hotel owner lived with the high cost of replacement.

Then the owner learned about open-book management (OBM), a way of doing business that’s based on the belief that people can be a company’s greatest strength. If employees understand and believe in a company’s mission, and are empowered with relevant financial information, they will help improve performance.

OBM inspired the hotel owner to tell dining-room employees the exact cost of each item. Thefts didn’t rise. Instead, fewer plates, bowls, cups and wine glasses shattered, thereby decreasing expenses.

Tony Dimnik, a professor at Queen’s University School of Business in Kingston, Ontario, cites that example as a simple way of understanding the principles — and potential benefits — of OBM.

"If you give people the information they need to make decisions, the impact can be huge," Dimnik says.

Many growing companies have succeeded in implementing OBM. But it doesn’t happen overnight. And it requires top-level management commitment and in-depth employee education.

According to Dimnik, OBM is founded on these four principles:

• Give employees access to appropriate financial information.
• Ensure employees understand their role in a financial context.
• Empower employees to make decisions based on financial knowledge.
• Allow employees to share in the success of the company.

Following these principles gives employees a stake in the company both philosophically and financially — OBM programs often offer bonuses for meeting specific goals.

"Don’t underestimate a powerful mission and people who have bought into it," says Joseph H. Astrachan, business professor at Georgia’s Kennesaw State University.

For business owners, one of the biggest hurdles to implementing OBM is the idea of sharing profitability numbers with employees. They fear employees might believe every penny of profit goes to an owner’s wallet, not understanding that a portion of those funds must be reinvested in technology, equipment, expansion, health benefits and other expenses.

That’s why a methodical financial education program for employees must precede OBM implementation, experts say.

How businesses benefit

Businesses that embrace OBM benefit in several ways. In addition to empowering employees, open-book management adds measurement tools. A company is more likely to reach cost-cutting and sales yardsticks if every employee understands the goals and works toward them.

To put it another way: What gets measured gets done; what gets rewarded gets improved.

At interactive Hotel Solutions of Springfield, Mo., only 1 percent of Website visitors made reservations. Then the owner began sharing financial data and paying bonuses if sales goals were met. Weekly meetings focused on financial results and goals. Employees improved the Website, and sales increased threefold.

An estimated 1,000 companies, mostly small and midsized firms, have adopted open-book management. Many of those firms are experiencing explosive growth.About 40 percent of firms in the Inc. 500 — a list of quick-growth, privately held companies — embrace OBM.

"One of the things I’ve learned about open-book is that it is hard," said John Case, a former Inc. magazine writer, who coined the term open-book management in 1990, in a New York Times article. "It takes a passionate leader. It takes sustained commitment. It involves training and a lot of hard work."

Business leaders thinking about adopting OBM should consider the following guidelines.

Focus on what matters. You don’t need to share every financial detail from the balance sheet,profit and loss statement, and cash-flow statement with employees. That will likely cause confusion. Experts suggest focusing on three to five key revenue and expense line items for the company as a whole and for specific work units.

Make financial data relevant to each work unit. Employees in shipping don’t need to know marketing costs to improve their performance. But they do need to see labor, material and equipment supply costs for their unit, and perhaps revenue, credit and return rates for the company and their own area.

Make data accessible. Track data at least monthly in frequent employee meetings and post the information prominently in workplaces. "The more information people have, the more aligned they will be with a company’s mission," Astrachan says.

Communicate in good times and bad. It doesn’t matter if sales are soaring or sluggish; OBM can help a company improve performance in just about any economic situation. Take a word of caution, however: Senior managers should commit to open-book management for a minimum of one year. Pulling out of the process earlier could cause cynicism among employees.

Educate. Don’t jump into open-book management without planning to teach employees about company finances. Unlike owners and business school graduates, many workers find profit and loss statements confusing. They may focus on certain numbers without understanding the big picture. A comprehensive yet not overly complex education program will help.

Reward employees. Open-book management isn’t just about sharing data so employees can help cut costs. They need to benefit from the company’s success. Tie employee bonuses to financial goals. Hitting targets in cost savings,quality improvement, increased sales and higher profits should result in employee bonuses.

Remember, OBM is about more than money. It’s about trust. It’s about people. If you believe that people are basically good, that they will not share your trade secrets with competitors — that they will not steal your fine china — consider adopting open-book management.

"Most people want a company to bemore than a job, more than just making money," Astrachan says. "They want to be part of a team that wants to be the best."