Lightning In A Bottle

November 1, 1995

More and more CEOs have discovered what was missing from all the past decade's management cures and have invented a new way of running a company that overturns a hundred years of managerial thinking. The new system gets every employee to think and act like a businessperson to compete and it gets astonishing results. It's called open book management, and this is how it works.

Editor's Note: Earlier this year, PCT and Zeneca Professional Products co-sponsored Business Strategies 2000, a gathering of leading pest control professionals who addressed key issues impacting the pest control industry as we approach the 21st century (i.e. business ethics, standards and practices, consumer issues impacting industry growth, employee training and certification, industry image, business management, etc.). In addition to the "White Paper" distributed at the NPCA Convention last month and being mailed with this month's issue of PCT, we plan to publish articles further addressing these important issues throughout 1996. In this particular two-part series focusing on business management (Part 1 appeared in last month's issue), we take an in-depth look at an innovative management style called "open book management" which is paying big dividends for many companies across the U.S. This second half of our two-part series focuses on how to go about implementing open book management in a small business.

There isn't any cookbook-style recipe for open book management. "It's more a philosophy than a how-to-do-it, step-by-step program," says Ronnie Miller, a plant manager at Pace Industries' Cast-Tech Division, in Monroe City, Mo. Still, if you put all the open book practitioners into a room and asked them what they do, I think they'd come up with four precepts four steps you have to take before open book management can work.

STEP 1. Get the Information Out There. Tell employees not only what they need to know to do their jobs effectively but how the division or the company as a whole is doing. Every company has some pivotal operational numbers: On-time shipments. Customer returns. Most managers understand that employees have to see and track those numbers if they're going to affect them. Operational numbers alone, though, won't get anybody to think like an owner. Employees may keep a wary eye on the charts. But they're likely to feel as much resentment "Big Brother is watching us" as motivation. People aren't lab rats; if they don't understand why they're supposed to lower the defect rate or take those calls faster, they soon figure out it isn't worth the trouble.

Open book management is about the why and in a business, the why is told by the financials. So along with the operational figures, show people the income statement, the cash-flow statement and the balance sheet.

Will they understand those documents? Not until you explain them, a subject we'll take up later. But numbers alone send a powerful message, even if they don't yet make sense. Everybody is a part of the company. Everybody sees the same information.

Then too, chances are good that employees will readily understand some financial figures the ones that are most important to your business.

• At Commercial Casework, a Fremont, Calif., furnishings and cabinetry company, the crucial number is variances on each job. So CEO Bill Palmer posts "Job Cost, Over and Under" up on the lunchroom wall. No one needs an M.B.A. to know which direction is good.

• At Acumen International, a personnel-assessment company, employees keep a hawkeye on the company's weekly cash. "What hits everybody's gut? How much money we have in the bank," says one manager.

• At Sprint's Government Systems Division it has operations in Kansas City, Mo., and Herndon, Va. revenues per employee is one of several critical financial gauges. "It's one way of looking at how well the organization is doing," explains Rick Smith, director of services for state and major local government. Again, no M.B.A. required.

How do you get the information out there? Put up scoreboards. Distribute it at meetings. Or avail yourself this is the information age of any number of high-tech methods.

When you walk into the lunchroom at Manco, for example, the first things that catch your eye are the big charts on the wall. The charts tally yesterday's sales, year-to-date profits, return on operating assets, and a dozen other key numbers, each compared with figures from the budget and from the previous year.

And at Wednesday-afternoon managers' meetings at Foldcraft, a manufacturer of institutional seating in Kenyon, Minn., every manager reports the week's numbers and projections. Every number goes into the computer as it's reported, creating an income statement on the spot. "Then our cost accountant takes the disk out and has copies run," explains company president Chuck Mayhew. "In half an hour everybody has a copy. They take it back to their units and review it in their staff meetings."

As noted, this is the information age. Anderson & Associates, an engineering firm in Blacksburg, Va., puts its financials on its computer network. Herman Miller, the big furniture maker based in Zeeland, Mich., distributes videos detailing and explaining the company's numbers. Commercial Casework always has some of its employees out on job sites. They can't come to meetings, so Bill Palmer's brother Tom calls them on their cellular phones and walks them through the company's weekly income statement.

STEP 2. Teach the Basics of Business. It's amazing how little most Americans know about business. Some believe that revenues are the same as profits. Or that profits are whatever a company has in the bank. Not many employees can tick off the expenses a company must pay. Not many know how little is often left at the bottom line.

Companies pay for that ignorance in at least three ways.

It spawns resentment. "When you're doing well, the question everyone asks is, `Gee, that money must be stacked up in the basement we want more of it,'" says Clarke Kawakami of Black Diamond equipment, a Salt Lake City maker of mountaineering hardware.

It leads to bad decisions. Should we throw out this part or remachine it? Does that customer deserve a refund? Should maintenance check the funny noise in the truck motor or just wait till it breaks? Companies these days expect employees to make those decisions, not to run to a supervisor (who has probably been let go, anyway). But if workers don't understand the financial impact of decisions, how can they make smart ones?

Finally, ignorance takes the fun out of business. Every entrepreneur knows that little secret: business is fun. It's a game. You take on the competition. Obstacles and opportunities crop up as frequently as in a video game. Every month or quarter you tally up the results and see how you did. What's more, there's real money at stake. Employees can share in the excitement and once they do, they'll give your company a kind of turbocharge. But not as many people get excited about a process they don't understand.

How do you teach business? Start in a classroom maybe the way Foldcraft's Mayhew does. He developed a six-hour course in the basics, which he teaches to employees in groups of 30 or 35 at a time.

First Mayhew focuses on employees' personal finances. The class compiles personal "income statements" and "balance sheets." It's an easy way to learn financial language.

Then he creates a fictional chocolate-chip cookie company, with simplified financials. Like Foldcraft, the company has bills of materials ingredients and routings, or the steps in the recipe. The class figures out standard costs and the effect of variances in, say, the price of flour, and compiles income statements and balance sheets for the cookie company.

Mayhew next brings out Foldcraft's actual financials and shows how the company's numbers correspond to the cookie company's simplified ones. At this point he delves into more complex matters, such as inventory costs. He explains the effect of purchasing variances, usage variances and labor variances.

Finally, he brings it all home. "I go around the room and try to get an understanding of who's in there and what jobs they have. I actually try to talk to them individually in the classroom about what their jobs are and how they see themselves impacting profitability."

Classroom lessons won't stick, of course, unless they're reinforced every day on the job.

That's why Web Industries, a West-borough, Mass., converter of roll materials, often asks a front-line employee to explain the income statement at the monthly plant meeting. The designated teacher, usually a machine operator, sits down with someone in accounting a day or two before and, like any teacher, must know the material better than the students do.

And learning by doing is why Jim Jenkins of Jenkins Diesel Power, a Springfield, Mo., truck dealership, might give homework to his 18 service technicians. One recent exercise went something like this: You've learned how much the company bills for your time. You've learned what costs have to come out of the revenues you bring in. Now calculate how much more the company could earn if you could do in 59 minutes what now takes you 60. (The answer: $21,000 "right to the bottom line.")

What reinforces the learning best, of course, is the open book system itself. When people see important information regularly, they find ways to learn what it says. If part of their income depends on that bottom line (see step four), you can bet they will soon understand which numbers have the biggest impact on it.

STEP 3. Empower People to Make Decisions Based on What They Know. Plenty of companies give lip service to the concept of empowerment, or employee involvement. They want participation! They call meetings! They set up project teams, cross-functional teams, self-managing work teams so many teams, a wag once remarked, that companies these days could be mistaken for bowling leagues. But since they don't share financial information, not many employees know how their work affects the bottom line.

That's like empowering someone to drive a truck without giving that person a map or a destination. Open book management provides both.

Of course, you can't just announce that people are now empowered any more than the Founding Fathers could just announce that the United States would have a democratic government. You need structures and procedures.

One approach, pioneered by Springfield Remanufacturing Corp. (SRC) and widely adopted by others, is the so-called huddle system.

Representatives from SRC's departments and divisions meet once every two weeks to report their numbers and their opinions about the upcoming weeks and months. As at Foldcraft (no coincidence Foldcraft modeled itself after SRC), they generate an income statement, a cash-flow statement and a forecast, which people take back to their own units.

In the units is where the work gets done. Managers help employees address problems. Every unit is accountable for its own numbers and every man and woman in that unit shares in the accountability. The units report new numbers to the corporate offices each week. If they're on target, fine. If they're off, those same men and women had better have an idea of why, and of how to fix it.

A second path to empowerment: turning the company into a collection of smaller but identical companies.

Published Image, a financial-newsletter publisher in Boston, has established teams that founder Eric Gershman calls "little Published Images." Each has its own editor, art director and salesperson, and a couple of junior staffers. Unlike traditional teams, Published Image's act like self-contained businesses. They line up clients and negotiate prices. They take responsibility for producing their clients' newsletters, start to finish. They collect their own accounts receivable and are learning to keep their own books.

Gershman and other veteran managers oversee the teams, coach and train their members, and set companywide policies on matters such as compensation. But the teams' autonomy encourages members to think like businesspeople rather than like hired hands.

A third option: turning departments into business centers, so that every department becomes a company within a company. The units still have specialized tasks, unlike the teams at Published Image. But they're responsible for satisfying their customers, whether internal or external, and for their finances.

STEP 4. Make Sure Everyone Everyone Shares Directly in the Company's Success and in the Risk of Failure. If you want people to think like owners, they must be rewarded like owners.

That isn't a controversial proposition: thousands of companies already have some kind of profit-sharing bonus system or employee stock ownership plan. But most of those plans don't have the motivational effects the management wants, for the simple reason that employees either don't understand or don't trust them. Maybe the profit sharing is determined each year after the fact, at the management's discretion. Since employees don't know how the company is doing, any bonus that materializes might as well be pennies from heaven. Or maybe the stock-ownership plan puts a few shares every year into employee accounts. But workers don't know how many they'll get from year to year, they don't know what the shares may be worth in the future, and they don't have a clue how their own work affects that share value. That isn't what you'd call a world-class incentive.

An open book company is different. Employees know what they're working for when they start the year. Like businesspeople, they track their progress by watching the numbers. At the end of four quarters, they know whether they have been successful and they know why or why not.

Manco, for example, sets annual targets for net earnings and return on operating assets. If employees hit both targets, the company "makes bonus," meaning that employees collect payouts ranging from 10% to 50% of their total compensation. Want to know the prospects? Check out that lunchroom wall.

A bonus is a reward; it's also a powerful educational tool. So a lot of open book companies use the bonus to reinforce key business lessons. What about stock ownership? Open book management can work without an equity stake I've seen it but it works better when employees own stock in the company.

The reason: business is always a game of trade-offs between the short term and the long. Do we raise everybody's wages and salaries, or do we invest more in expansion? Do we pay a big profit-sharing bonus, or do we hold on to the cash and thus raise our share value? Long-term payoffs, of course, rebound primarily to a company's owners.

"Equity is the basis for all long-term thinking," writes Jack Stack, CEO of SRC, in his book, The Great Game of Business. It is the best reason for staying the course, for sacrificing instant gratification and going after the big payoff down the road. If you have equity and understand it, you know why it's important to build for the future. You can make the long-term decisions. You still pay attention to the day-to-day details, but you're doing it for the right reason: because it's the best way to achieve lasting success."

When you boil it all down, the goal of open book management is to create what Chick-Fil-A's Mark Miller calls a "business of businesspeople."

Most U.S. companies are companies of hired hands. Hired hands aren't just hourly workers. The category includes all employees, whatever their jobs, who assume that it's somebody else's concern whether their company succeeds in the marketplace.

Hired hands do as they're told. Businesspeople figure out what needs to be done and do that.

Hired hands don't bear full responsibility for their actions. Businesspeople do. They know they're accountable to the marketplace and to one another.

Hired hands aren't expected to see or understand the big picture. Businesspeople know they have to.

It's really pretty amazing when you stop to think about it. American employees live in a democracy. They're free, independent, responsible citizens. They raise families, manage their finances and elect the people who govern them. Yet they go to work at companies at which the assumption is that they can't understand the big picture, can't take responsibility for making money and probably can't do much at all other than what the boss tells them to do.

It's also amazing how many hoops some companies jump through to get their employees to stop thinking like hired hands. They preach ownership and responsibility. They teach quality and teamwork and empowerment. They really try.

The new open book companies do much more, though: they teach business. They provide employees with the tools they need to be businesspeople.

These are the companies that will succeed in the brutally competitive marketplace of today and tomorrow.

Reprinted with permission, Inc. magazine, June 1995. Copyright 1995 by Goldhirsh Group, Inc., 38 Commercial Wharf, Boston MA 02110.


Scenes From an Open book World

Who Do You Think You're Talking To?

You can't judge businesspeople by the color of their collars. Like everyone new to open book management, Bill Fotsch had to learn that lesson.

Fotsch is now a business adviser working with Jack Stack of Springfield Remanufacturing Corp. (SRC), but not so long ago he was vice-president for business development at Case Corp., the big farm-machinery company. One day he flew down to visit SRC, which his boss had described to him as a "small but innovative supplier."

Fotsch had heard that SRC employees know the business inside and out, but he was skeptical. When he came across a guy who was polishing crankshaft journals, Fotsch figured he would ask him a crucial question.

"Good morning," said Fotsch. "I understand that most SRC employees really understand their business. I'm curious — What is the price of that crankshaft you're working on?"

At Case, thought Fotsch, such a question would probably provoke a grievance for trying to embarrass a union worker. He figured he'd get no answer and that he'd probably wind up explaining the difference between price and cost. The guy looked up. "List price or dealer net?" he inquired.

Then he went on to explain both prices, how they compared with SRC's cost, and what his own component of the cost was. "At that moment," says Fotsch, "I became a convert."


Worry About Profits?

I'm in Sales, for Pete's Sake

Salespeople who understand the cost of what they sell? Nah — pinch me. But Charlie MacMillan swears it's true.

MacMillan is the controller of Manco, a fast-growing distributor of tape and other consumer products based near Cleveland. Manco sells to Wal-Mart and a dozen other big customers. In the past, its salespeople — like salespeople everywhere — competed for top-line revenues. Profitability? That was somebody else's worry.

Then Manco began producing and distributing monthly account books that broke the company's numbers down by every conceivable category — including profits generated by each salesperson's accounts. Meanwhile, the sales-compensation system was re-jiggered to take profitability into account. Surprise! Suddenly, the salespeople were thinking of ways to improve the bottom line as well as the top.

"Now the sales guys ask me things like why their freight expense is up," says MacMillan. "And it's like, `Well, let's take a look at your freight bill. Hey — you're shipping minimum-poundage loads to the West Coast! It's going to cost more money than if you're shipping a whole truckload or if you're just shipping it to the Midwest.' So they say, `Oh — we've gotta get more on the order.'" In one year, the West Coast salesman cut his freight bill by 14%

To Tom Corbo, Manco's president, sharing that information is a nobrainer. "People make better decisions once they know what they're being charged for."


Before I Start,

OK if I Check Out Those Financials?

Charlotte Eckley got open book fever and proceeded to infect a company halfway across the country.

Eckley's first job was in customer service at Springfield Remanu-facturing Corp. (SRC), where she learned SRC's system of open book management. Then her husband was commissioned into active duty with the marines, and the couple moved to North Carolina. There, she was offered a job with a small aftermarket-parts company.

Great, she said. But first, would you mind if I looked over your financials?

The owner burst out laughing. Sorry, he said, we don't let anybody see our financials.

Pity, thought Eckley, who was all of 24. Without seeing them, she wouldn't know what shape the company was in or have any idea of how to help it do better. But jobs are scarce for military wives, so she took this one anyway.

Once on the payroll as a marketing and new-accounts manager, she found she had more latitude than she'd expected. So she put together an incentive package for her 13 employees: sales targets, gross-margin targets, modest rewards if they hit them. The owner OK'd it — at least it didn't reveal his bottom line. Then Eckley prepared a daily scorecard to show everybody how the company was doing.

So maybe it wasn't completely open book management. Still, two years after her arrival, Eckley's charges had increased sales 35%, held margins steady and earned themselves some nice rewards.