Open-book management is about sharing financial performance data with employees to foster trust, educate, and improve the firm’s overall performance.
I’m such a believer in open-book management that I try to implement it in every company I am involved with – AEC and otherwise.
What is “open-book,” you may ask?
Well let’s get one thing out of the way first, and that’s what it isn’t. Open-book does not mean everyone in the firm knows what everyone else makes. It is, however, a system of reporting key financial performance metrics to all employees on a consistent basis.
What’s so great about open-book management? There are many positive outcomes of it, including:
- Building trust between management and employees.
- Schooling everyone in the business on how the business makes or loses money.
- Preparing the next group of managers and leaders to run the business which makes it more sustainable.
- Providing the basis for quantifiable performance goal setting and tracking.
- Providing the basis for an incentive compensation scheme that everyone understands.
- Encouraging teamwork and focus on overall firm performance versus just one area of the business.
- Forcing management to improve its financial systems and reporting in terms of better quality information and faster reporting.
With all of these benefits, why do so many firm owners still resist implementing open-book? I have heard two primary objections. They are:
- “Our employees won’t understand the numbers if we share them with them.”
- “Employees will find out how much money this place earns and be upset with us.”
Neither of these are legitimate, in my opinion. If your employees don’t understand the numbers, it’s your job to educate them. How can you expect them to do the right thing every day for the business if they don’t understand what performance metrics are important to the company’s success? Plus, this stuff isn’t that hard to understand. Compared to whatever technical or design or business discipline they have been educated in, the financial aspects of the business aren’t difficult to understand if someone explains them to you.
And as far as employees finding out how much money the business makes, studies have shown that employees generally assume the owners make much more money than they actually do. Wouldn’t it be better to share the facts with them so they don’t make assumptions that owners of the business are taking cash out of the place in wheelbarrows every day? Wouldn’t knowing that isn’t the case encourage them to do the right thing and not be wasteful, or waste or give away their time? I think so.
So what information is typically shared in an open-book report for an AEC firm? There are many performance stats you can include. Some of these are:
- Accrual basis profit or loss.
- Cash basis profit or loss.
- Sales of new work.
- Number and value of leads for new work.
- Web hits.
- Size of client/potential client database
- Number of press mentions.
- Backlog of work (expressed in dollars of net service revenue).
- Firm-wide effective labor multiplier (net service revenue divided by direct labor).
- Firm-wide utilization rate (direct labor dollars over total labor dollars).
- Firm-wide revenue factor (utilization rate times effective labor multiplier).
- Average collection period (expressed in days).
- Working capital position (cash and AR less accrued payables, current portion of short-term amortizing debt, and line of credit totals).
Of course, there may be other metrics you will want to track. And you will enhance the value of this information if you show it graphically to identify trends and if management provides definitions for each of the items you track. It also helps if there is one page of interpretation or summary of the story the numbers are telling. And finally, a brief monthly meeting may be in order to answer any questions or reinforce what the employees must be focusing on.
While I despise catchy names for management initiatives, I haven’t found a better one than “open-book.” I’m sure I could write about open-book all day long, but am out of space here. Try it – you won’t ever go back!
Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.