Material Excerpts: Open Book Management




This material is reproduced from the book Open-Book Management, Your EZ Intro to OBM, Copyright © 1997, Donald F. Barkman, The Business Center, Oak Ridge, TN, All Rights Reserved. This web site material may be copied and reproduced by persons interested in learning about and promoting the book. "The Business Center, Oak Ridge, TN 888-988-2275" must be acknowledged as the source of the material. For complete information, please purchase the book. Thank you.


"Open-Book Management" (OBM) is a popular model for running a for-profit business. Many firms are interested in how it works. It has been featured in Inc. magazine, and several books have promoted it. 


If you are not familiar with Open-Book Management, you'll find this overview a quick and easy way to get acquainted with the concept. If you are already familiar with Open-Book Management, this overview will serve as a handy reference to share with others who need information. The book provides more detailed explanations and examples of the material provided in this overview. It also contains a complete OBM reference list.



What Is Open-Book Management (OBM)?


Open-Book Management has been used to describe a management style where financial information is openly shared with all employees. It is, however, a more complete set of activities in support of a unique management philosophy. OBM is:

Educating all employees about the firm's business and exchanging business information among them to support their involvement as responsible business partners with significant and timely rewards based on business performance.

Open-Book management requires its practitioners to be insightful, creative, persistent, and disciplined. The OBM model looks simple, but requires a significant investment in people and systems to work. It is not a quick fix. It is a broad and powerful approach to running a firm.



Where Did OBM Originate?


Jack Stack, CEO of Springfield Remanufacturing Company in Springfield, MO, originated and popularized the essentials of OBM in the 1980's. He described his experiences in the book, The Great Game of Business. John Case coined the term "open-book management" in 1990. He used it in several articles published in Inc. magazine and in his book, Open-Book Management, The Coming Business Revolution. John's writing is the basis for the acronym "OBM."



What's OBM Require?


ConsultingOBM requires five things:

  1. Leadership
  2. Education
  3. Information
  4. Involvement.
  5. Rewards

1. Leadership

To operate an OBM organization requires a certain personal leadership philosophy. OBM is as much a matter of the heart as it is of the mind. The cornerstone of a leader's philosophy is his belief with respect to sharing. A leader must be eager to share three things with the employees of his organization:

a. Information

b. Decision Making (Control)

c. Wealth

A leader must give people the real numbers about their firm's financial performance to achieve both credibility and motivation. Employees must have the opportunity to make a difference in a significant way. Not everyone gets to make the decisions of the CEO, but most employees will want and need more control over their work. Leaders must be willing to share the wealth created by the efforts of employees.


2. Education

Education means training and developing the knowledge and skills of employees to do everything their jobs require. This includes understanding the business context within which their work is done -- that's where OBM adds its educational element. In OBM, everyone's job becomes larger because each person must understand how the business operates financially and how he or she can affect its financial results. Financial reports like the income statement, balance sheet, and cash flow statement become new tools for everyone to understand and use.


Education helps establish a "line-of-sight" between an employee's everyday actions and the larger operating and financial results of the business. A line-of-sight traces the effect of an individual's actions on the firm's financial performance. Beginning with the key financial measure(s) the company uses, instructors can work backward through the measure's components until the line reaches the employee's department, team, and job.


3. Information

To be an informed and responsible business partner requires having access to pertinent financial information about the firm. Sharing financial information is the defining hallmark of OBM. Revealing "confidential" data about a company's financial performance has constituted "opening the books." While this is crucial to the success of OBM, it is hardly all there is to it.


Giving information to persons who are not educated to properly interpret it can create problems, not solve them. Responsible business partners who act to achieve the mission of their enterprise must be both informed and educated. Managers who cite problems of information sharing with employees usually describe situations where the employees were given the information without sufficient prior education. They argue against sharing information because it was misinterpreted or misused. This misses the point. They should argue for better education so that the shared information is properly understood and used.


Key financial and operating measures are carefully defined, measured, and intensely managed by all employees to produce results. These are called the firm's "critical numbers." OBM uses an information exchange system to track and achieve these critical numbers. This may turn traditional, hierarchically oriented financial information reporting systems on their heads. Instead of being aimed at satisfying managers' needs for information, OBM stresses that the "troops" have information so they can make decisions to respond to changes. Information must loop quickly back to the people who contribute the data as well as move upward to inform managers.


4. Involvement

Involvement may be the least obvious of the four elements of OBM, perhaps because there have been so many employee involvement programs over the last thirty years. Involvement is, however, an indispensable element. Providing a structure for involvement and the mechanisms for it to occur are what turns motivation into action. Problem-solving teams and natural work teams are often used for this purpose.


OBM invites a high level of employee involvement with business affairs. The degree of involvement needs to be proportional to the degree of education and information possessed by those involved. It's like controlling the angle of a dive into a swimming pool based on the depth of the water. The more thorough the education, and the more extensive the information exchange, the greater the involvement can be.


5. Rewards

Giving everyone a significant personal stake in the financial success of the firm is also characteristic of OBM. Educated and informed employees who are deeply involved with the business will produce results. It will no longer be a case of employees coming to work and "doing a job." Employees gain a more tangible sense of accomplishment in an OBM operation. When everyone sees the company's numbers turn out well, a logical question arises -- "What's in it for me?"


This is a question of long standing. Corporate America has not answered it well. Many "merit" pay programs (rhetoric aside) don't really pay for performance. For most employees, the amount in the paycheck has little to do with their organization's current performance or their individual or team contribution. OBM stresses rewards linked directly to the "critical numbers" and profits. These rewards take a variety of forms:

a. Short-term and long-term rewards.

b. Cash and non-cash rewards.

c. Individual and group rewards.

d. Operational and financial performance driven rewards.

These choices are not either/or. Rather, they are both/and. All eight possibilities can be used simultaneously. Some firms focus on sharing profits, while others provide equity stakes in the firm through ESOP's (Employee Stock Ownership Plans). All firms must balance psychological and monetary rewards to create a balanced motivational climate. The secret is to keep it simple, easy to understand and administer, and on-target for organizational performance.



Why Adopt OBM?


The advantages of successful OBM are:

  1. Solid financial performance of the business.
  2. Improved security for the firm and its members.
  3. Increased satisfaction with work.
  4. Substantial and sustainable personal compensation and wealth building.

OBM is not a panacea. It's tough to run a business, big or small. OBM doesn't make things easier. It makes them better. OBM does not mean that employees will suddenly cease internal bickering, customers will become instantly delighted, quality will make a quantum leap upward, or cash flow will be more even. All these things take hard work. OBM is simply one approach to doing that work. In the end, OBM isn't about money at all. It's about excited people tackling a challenge and adding value to their lives and the world in which they live.



When is OBM Finished?


OBM requires continual attention, energy, patience, and the firm's resources. All its elements must be combined to a level of intensity before the synergy and power of OBM take hold in an organization. Partial efforts don't succeed. OBM offers rewards, but only from hard work. OBM is never finished because there are always new twists to running the business. The perpetual dynamism of the marketplace guarantees an OBM firm will remain a learning organization.




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