The case for open book management for startups
I was recently surprised to come across a startup that exercises closed-book management. They go to great lengths to ensure that no financial information is communicated to employees, not even quotes, hourly rates, or markups. Only the directors, investors, and clients know how much jobs are billed at – the employees are told what they need to do and what their hourly rate is.
I was astounded, and even more so when I learned that many startups today still practice closed book management. In my view, this is nothing but archaic and outdated, which perhaps is a testament to GEN Y’s understanding of modern management.
For those unfamiliar with the terms, closed book management means no financial information or “numbers” are shared with employees who are not executives or managers. Some employers will even advise their employees not to talk about their pay amongst each other, which, in some places, is actually illegal.
Open book management, or OBM as acronym-hungry specialists call it, is the complete opposite. Employees are taught to read balance sheets and income statements and to understand margins and markups. The numbers start from the bottom and work their way up, rather then starting from the top and working their way down.
Although it is absolutely necessary to practice prudence and caution when discussing financials, it has been shown that open book companies do better than their closed book rivals because employees are aware of how their actions affect the company as a whole, and they feel like they’re actively contributing to something bigger than themselves. Employees do not fear that they’re being taken advantage of, and they’ll be more confident that senior management is not carrying out dishonest financial practices.
While some might think that OBM will cause employees to be disgruntled at perceived inequalities in pay, evidence shows that the opposite occurs.
A paper published by Kenan Flagler Business School says that an in-depth analysis found that employees in open-book organisations better understand and therefore accept compensation structures more willingly.
The study adds, “Some management experts like Ed Lawler, director of the University of Southern California’s Centre for Effective Organisations, believe that by keeping compensation plans secret or practicing ‘closed book management,’ businesses tend to generate more distrust and resentment among employees.”
- Suggested reading: Embracing Open Book Management (PDF)
2. Product Development
When your product development team understands how what they do translates to profits, they will be more likely to design products which are higher in quality and profitability, and lower in cost.
The same paper which praised OBM for its HR benefits says that open book management practices also contribute to corporate sustainability efforts by empowering employees with knowledge of the critical numbers, enabling them to see where their innovative efforts can streamline operations, saving money and resulting in increased sustainability.
This effect occurs in companies with both tangible and intangible products, like software and tech products. Look at Facebook and Twitter. As soon as the social media giants went through an IPO, which requires financial information to be disclosed, their advertising products became more developed, sophisticated, and profitable.
It is true that this was most certainly due in part to pressure from shareholders, but for employees to accurately understand that pressure, they had to also understand the numbers behind it.
Studies have shown that companies are able to keep unnecessary expenditure to a minimum when they implement open book management, specifically in tough financial circumstances.
Employees will know that the company may be going through a rough period, and in order to keep their jobs, they will often find new ways of doing things that are more cost effective.
An overview of 4 companies who practice open book management by CBS NEWS showed that when employees saw how their performance was translating into actual dollars and cents, profitability increased and companies reached break-even faster than when they didn’t implement OBM.
4. Tighter teams
One thing I did notice when conducting research for this article is that many of the companies who used OBM also had a daily debriefing where all members of the team would discuss numbers, goals, opportunities, and obstacles – like a daily SWOT analysis if you will.
Participants claimed that they walked out of those meetings with clear direction for the day, and productivity was increased since everyone was aware of what the other was doing. This led to more instances of collaboration, sparked more work-related communication, and resulted in more sales.
Employees felt like they were working together with their bosses, rather than working individually for their bosses.
We use a hybrid method. Some information can only be revealed to directors because of legal requirements, but employees know how much we’re charging them out at, where the profit goes, and what expenses we’re paying for.
What do you use at your company? Let us know in the comments below.