In-Depth

Best Practices: The Narrative of Numbers

Opening the books can help your employees better understand your company's story-and empower them to help write its future.

• By Fred Bayles
• April 01, 2007

Some years ago, Mark Leary sat in his then-employer's boardroom, listening to the management team struggle over how to word the company's internal mission statement. He found that the people at the head of the table were being purposely vague about certain financial aspects of the company, including profitability and the firm's general fiscal health.

Leary suggested that management should be more open about sharing company information with its employees. "Knowledge is power," he reminded his boss.

"And he said 'Exactly!'" Leary recalls. "He was afraid of giving the numbers to the staff and further empowering them. He felt you definitely had the power by controlling the numbers."

Leary moved on to become CEO of Serenity Systems Inc., a small Houston-based Gold Certified Partner specializing in systems integration and core infrastructure. Now that he's the boss, he gets to practice what he once preached about sharing company information with his employees.

He says there's no question that opening the books for his staff has generated innumerable benefits.

"They can now see how what they do affects the company," he says. "They understand the implication of something as subtle as a new opportunity with a client. They don't just see a commission from a managed-service account. They see it as a portion of a new hire or the ability to buy a new server."

The notion of sharing the detailed numbers of your business with your employees, known as open-book management (OBM), has been part of the business landscape since the 1980s. It was even something of a craze during the rock 'n' roll days of the mid-1990s. Back then, the employees of many start-up companies were also major stockholders with more than a passing interest in profit-and-loss statements. Then, like many trends, OBM faded in the glare of the IT bust during the earlier part of this decade.

Now, though, certain aspects of OBM are coming back strong. One indication: A recent survey by Inc. magazine found that one-third of the Inc. 500-the nation's fastest-growing privately held businesses, as ranked annually-share full financial information with their employees.

John Case, the business writer who coined the phrase "open-book management" in 1990 and went on to write two books on the subject, says today's competitive IT business climate requires that a company's employees not only understand their duties, but also how their work affects the bottom line.

"OBM is similar in concept to other forms of participative management, which has a long history," says Case, author of "Open-Book Management: The Coming Business Revolution" (HarperCollins, 1996) and "The Open-Book Experience: Lessons from Over 100 Companies Who Successfully Transformed Themselves" (Perseus Books, 1999). He draws the distinction between OBM and other approaches to participative management, which were aimed at providing the same kind of financial numbers that stockholders receive. "It's different in that [OBM] expects employees to learn to think and act like business people," Case says.

Seven Tips for Successfully Opening Your Books Dealing with company numbers is always tricky. Consult with your company's lawyers and accountants before releasing-even internally-what may be proprietary data. We won't attempt to offer such specialized expertise; instead, here are some general issues to consider in deciding whether to share the numbers with your employees. Consider what you intend to accomplish. Despite the name, open-book management isn't simply a matter of opening the books. Have a clear idea of what you hope to communicate with all those numbers-and, more importantly, what benefits you hope to gain from doing so. That will help you decide exactly what information to share. Provide training. Many people feel lost when staring at a P&L statement for the first time. Or the second. Or the third. Handing them books won't get them out of the woods. Schedule sessions on how to read the numbers-and be sure to provide context about why each piece of information is important to your business. Introduce change gradually. Don't hit people with all the numbers all at once. Most people need time to understand complex finance and accounting issues. Begin with the basics; add more information as people become comfortable with it. Make the numbers meaningful. The net income of $50,000 on a 12-month service contract may seem like a lot of money to one person and not that much to someone else. Translate the sum into something everyone recognizes, such as more equipment, a new hire or seed money for another venture. Anticipate feedback. Once you've empowered your employees with the numbers, be prepared for their input. You may, for instance, start getting new cost-saving ideas from employees who previously had trouble balancing their own checkbooks. Expect to be challenged. After all, that's one reason that you opened the books in the first place. Realize that not everyone will buy in. Especially at first, the new philosophy will probably prompt some grumbling-and possibly some resignations. Some employees may feel that being required to participate in number-crunching wastes their time; others may dislike having their own statistics-such as billable hours-shared with colleagues. Those who can't adapt to the new culture will probably move on. Recruit and hire accordingly. You've decided to make the numbers important. Make sure new employees understand the open-book approach and are willing to participate. If prospective employees seem unwilling to learn about what affects the bottom line, you may be better off considering other candidates. --F.B.

Such philosophies were given a boost during the tech boom of the 1990s, when small startups were peopled with well-educated, ambitious employees, many of whom held stock options. "Employees naturally wanted to know what was going on with the business, and smart managers learned to tell them," Case recalls.

For a while, OBM reached a near-cult status, generating a plethora of articles, conferences and speeches. Then came the various business crises, consolidations and management changes that shoved such lofty egalitarian experiments into the storage locker of ideas. But in many places, the practice has either held on or reignited, morphing to meet individual companies' goals.

Case says whatever form of OBM is used, company managers must have a clear idea of what they hope to accomplish. "It's a philosophy, not simply a set of practices," he says. "A real open-book company helps everyone understand the importance of key numbers"-and involves them in setting goals. (For more advice on adopting OBM, see "7 Tips for Successfully Opening Your Books," p.39.)

Different Motivations
Company leaders have many different reasons for adopting OBM practices. Chris Canada jokes that his decision was based mostly on selfishness.

"It was too hard to make all the decisions by myself," says Canada, the president and CEO of On-Site Computer Solutions, an IT consulting, solutions and services company and Gold Certified Partner. "I was the only guy who was losing sleep at night [and] the only one who had all the joy about a good day or a good week."

Sharing highs and lows was only one of Canada's reasons to open his Austin, Texas-based company's books to his employees three years ago. The real reason was his company's tremendous growth: a 30 percent increase in revenues last year alone.

"We got so big, I couldn't make change fast enough by myself. I had to start leveraging my people to make change without me," he says. "People are more apt to be able to make change for you if they understand where you're going. You can't just tell them to work harder." He credits the move with keeping growth brisk by making his company more nimble than his closed-book competitors.

While On-Site opened its books to keep up with growth, vSync Corp., a Gold Certified Partner specializing in EDI supply-chain compliance solutions, took the step to jump-start its expansion.

"The company was static and focused on one product and one way to get it into the market," says Bill Knapp, president of the Columbus, Ohio-based company. "I realized we had to make a lot of rapid changes and be of a single mind to focus on the economics of that mission."

Knapp decided that educating his employees on the company's financial structure would help them focus on growing new products and new markets. The initiative worked. Since turning to OBM, vSync's revenues, income and staff have all tripled over the past four years.

"I attribute a significant portion of our success to the openness of communication about our financials," Knapp says. "Everyone feels part of the team and empowered to make decisions."

Multiple Models
There are as many ways of moving your company into OBM as there are reasons to make the leap.

On-Site uses a team approach to spreading the word-or, in this case, spreading the numbers. On-Site's Canada has his different teams gather for 10 minutes each day in a special room where, one by one, they post their department numbers. Costs. Billable Hours. Revenues. They all go up on the wall.

At vSync, Knapp's management team helps flow the numbers to workers. The company's financials are discussed at weekly management meetings and reviewed at monthly company meetings.

"The managers take the numbers back and talk to their staffs," Knapp says. "I think it's important that individual teams rally around their leaders rather than [using] a hub-and-spoke arrangement where I'm at the center. You can't be flexible with that kind of system."

Knapp has experienced first-hand the effects of that employee empowerment. He jokingly complains that his development team now pushes back when its members feel that a new product may not generate enough revenue. "It's a great development, but it's not pleasurable for me when I get opinions from everybody," he laughs.

At Matrixforce Corp., a Tulsa, Okla.-based consulting firm and Gold Certified Partner, President Kevin Fream has created a system that lets employees see both their individual numbers (sales, productivity, costs, billable hours) and those of their fellow workers. Figures are updated daily by noon, he says. "This is a competitive business and people want to see where they're at."

However, Matrixforce doesn't offer a global view of company financials in these daily reports. Fream considers that level of detail unnecessary. "People are informed and everybody is pushing in the same direction but not burdened with the nitty-gritty of the profit and loss numbers," he says.

Employee Education
All these success stories sound enticing. But open-book managers warn that the approach isn't as simple as throwing out some numbers to your employees. People must understand what those numbers mean. Leary, of Serenity Systems, says he's put his staff on a gradual path to enlightenment about economics and finances.

"It's all predicated on people getting the knowledge first," he says. "Nobody's at my door wanting to know the details of our fixed costs. So right now all we talk about is revenue, bottom-line profit and gross margins. We'll get to the other stuff as time goes on."

Canada also takes the go-slow approach with his staff at On-Site. "As you start to open up the books to people, you have to understand that some don't know how to read the books," he says. "You have to explain to some people what a revenue model is. It requires a lot of education."

Knapp says understanding the figures themselves is fine, but developing a passion for what they mean-for the big picture behind them-is more important.

"We took an educative approach in terms of telling people why we're doing this," he says. "They need to understand this is not just a pie-in-the-sky budget. They need to be extremely conscious of their impact and the needs of the company."

Some employers might well worry about the potential side effects of all this information flowing to employees. Is there a danger that this obsession with profit and loss, revenues and expenses, hours and billing will overwhelm your employees-or, worse yet, turn them into bean counters?

No, say the practitioners-as long as you turn those charts and graphs into a compelling tale. "If you just throw financials down in front of people, their heads get lost in the details," Knapp says. "You have to carve out numbers that provide a better story line."

Knapp starts out by reviewing budget and revenue documents, then follows with a narrative of what it all means. Once everybody understands the numbers, he asks for questions and comments. Typically, he says, a good dialogue follows.

Canada, of On-Site, concedes that all this number-crunching isn't for everyone: "I've hired people who, after three months, quit because they say there's too much measurement." In such cases, though, he usually says "Good riddance." In today's sharply competitive environment, Canada says he needs employees who are more than good developers or consultants. He needs people who also understand the importance of the company's financials.

"My feeling is that anyone who's afraid of the numbers is a non-performer," he says. "A player likes to be measured."

The Trickiest Issue: Compensation
There's one number that gives most executives some pause: individual pay. Some executives are fine with sharing those numbers; they believe it creates healthy competition and self-improvement. Others, such as Leary, say the practice only makes for hard feelings.

"Say you hire someone at a reasonable rate and then you need to hire someone [else] at the same level," Leary says. But if the market changes, you may have to offer the second person a different salary than the first, he continues: "If you open that door, you're in a pinch with both people."

Leary keeps the compensation numbers off the table. Instead, he offers up a total for the department, leaving it to his employees to figure out the average salary. "I don't have all the answers," he acknowledges. "I just believe this is the way to go."

Matrixforce's Fream takes the opposite view. Because a major portion of the company's revenues are based on billable hours, he believes that showing who's doing what is beneficial for all. The shared information doesn't reveal salaries, but it does allow all involved to make educated guesses about bonuses, which are a significant part of the compensation plan. "Once you start [internally] publishing information about employees and performance, they're going to want to rise to the top," Fream says.

The last word on this debate is reserved for author John Case, who's followed the trend's birth and growth. He says that limiting financial revelations to only selected bits of information-such as productivity or revenues-isn't a true open-book approach.

"Browbeating employees into hitting targets isn't OBM," he says. "A real open-book company helps everyone understand the importance of key numbers, and involves them in setting their own goals."