It sounds like a crazy idea: Every employee has unfettered access to the company’s financial information. This means everyone, from CEO to sales accountant, knows which departments, roles and processes impact the company’s revenue. And by how much.
Why would a CEO or management team willingly give employees this information? Because an open-book management style works, according to a report published by the National Center for Employee Ownership (NCEO).
In non-employee owned companies, there was a sales increase of 1.66 per cent per year and in employee-owned companies an annual sales growth of 2.21 per cent, NCEO reports.
The term open-book management is most commonly linked to a 1989 text written by John Case and published in Inc., a well-known the business magazine. Case writes about a US-based company, Springfield ReManufacturing Corp., which had to radically change its management style in order to help the failing company survive.
The company adopted the open-book management style in 1983 and by 1992 their annual revenue increased from $16 million to $83 million, Case reports. The company’s president, Jack Stack, even wrote a book about the approach, called The Great Game of Business.
“The hallmark of open-book management is employees’ joint responsibility for moving numbers in the right direction,” Case writes.
Is the open-book management model feasible in a startup?
Basically, yes. At early stages, a company can easily make transparent decisions regarding strategy, finance and performance, which helps employees see the bigger picture when it comes to ensuring the startup’s success.
But it is hard. A wholly transparent system, which holds people accountable, requires organization, a bit of micro-management, easily measured units of performance, forecasts and budgets analyzed for trade-offs and fallbacks. And all of it needs to be comprehensible to the startup’s employees so they stand a chance of understanding their role in the bottom line. It requires thorough planning and time.
How is it implemented?
While exact implementation can vary, there are four broad guidelines for applying the open-book management style:
- Get the information out there: show the operational figures, the income statement, cash-flow statement and the balance sheet. Do not hold back.
- Teach business basics: not every employee will understand what they are looking at. Start simple! Teach the difference between profit and revenue, and go from there.
- Empower decision making: implement structures and procedures that help employees make decisions based on what they know.
- Ensure everyone shares in the company’s success and risk of failure: track employees’ progress and let them see how much they’ve contributed to the company’s bottom line. Reward their hard work.
Pitfalls of an open-book management style
In small companies and startups there is a lot of movement: movement of employees, information and money.
Honing employees’ business acumen is an investment and with many startup employees being young and entry level, they often look for better-paying opportunities after one to two years.
Secondly, being open with financial information means always being held accountable and not being able to fake it through rough times.
And needless to say, there is a risk that shared information could be used against the startup, either by employees as they come and go or by competitors, who manage to get ahold of information.
Reasons why it might be worth trying
It could provide an enormous sense of relief. Per Fragemann, CEO of Small Improvements Software, does not manage his ccompany in an open-book style, but incorporates elements of transparency.
“We’ve been pushing the envelope and publishing our financial numbers publicly,” he tells the Heureka. Fragemann uploads this information on their blog.
His motivation for doing so? “I want people to know what they are signing up for,” Fragemann says. “We don’t have to pretend we are a gigantic company. Otherwise people will be disappointed.”
Another reason, Case argues, is to ensure employee loyalty and engagement. With the open-book management approach employees share “joint responsibility for moving numbers in the right direction,” Case writes in a Harvard Business Review article.
Case continues by saying that the two best ways to ensure loyal and engaged employees is by “enabling employees to build real ownership in the business” and “encouraging employees to think and act like business people rather than like hired hands.”