Jul 11, 2010

The Open Organization - Open Book Management

In a recent conversation with a CEO of firm - he mentioned that his organization practices Open book management - and that he often wonders how and why more and more organizations don't adopt the same practice. Having never heard of the specifics of open management I asked him where I could learn more about it. Is it something similar to the transparency that Ricardo Semler talks in Maverick, or what Tony Hseih talks in Delivering Happiness. The CEO then told me that Open-book management focuses on financial transparency. According to Wikipedia:
The basis of open-book management is that the information received by employees should not only help them do their jobs effectively, but help them understand how the company is doing as a whole (Kidwell & Scherer, 2001). According to Case, "a company performs best when its people see themselves as partners in the business rather than as hired hands" (Case,1998 as cited in Pascarella, 1998). 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.

Stack and Case conceptualize open-book principles in similar ways.

Stack uses three basic principles in his management practice called, The Great Game of Business

His basic rules for open-book management are:

* Know and teach the rules: every employee should be given the measures of business success and taught to understand them
* Follow the Action & Keep Score: Every employee should be expected and enabled to use their knowledge to improve performance
* Provide a Stake in the Outcome: Every employee should have a direct stake in the company's success-and in the risk of failure.


Similarly, in 1995, Case made sense of open-book with three main points:

* The company should share finances as well as critical data with all employees
* Employers are challenged to move the numbers in a direction that improves the company
* Employees share in company prosperity

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 sharing financial statements with employees. The true success of open-book management is when companies allow numbers come bottom-up (as opposed to traditional top-down management)(Johnson, 1992 as cited in Aggarwal & Simkins, 2001). While employees need to be trained to understand income statements and balance sheets; open-book's true triumphs are when employees understand the numbers to a level that they are able to report predictions to upper-management (Stack, 1992). In order to motivate employees to strive for change, 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.

So how ready is your organization to embrace Open Book Management?

Why not?

Personally, I think something like this will actually take the pressure off leadership to "meet the numbers" and give everyone a line of sight to how their job is linked to a larger purpose.

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