1. 1 Open Book Management Prepared by: Mostafa Wahdan MBA-2 nd year, June 2009 Under Supervision of Under Supervision of Prof. Dr. Ahmed Fahmy

2. 2 Open Book Management (OBM) Definition Philosophy of involving every employee in making a firm more successful by sharing financial and operational information. Philosophy of involving every employee in making a firm more successful by sharing financial and operational information. financialinformation financialinformation OBM involves four basic practices (1) training employees so they become business literate and can understand financial statements, (2) empowering them to use that information in cost cutting and quality improvement, (3) trusting them as business partners on equal footing, and (4) rewarding them fairly for the firm's success. OBM involves four basic practices (1) training employees so they become business literate and can understand financial statements, (2) empowering them to use that information in cost cutting and quality improvement, (3) trusting them as business partners on equal footing, and (4) rewarding them fairly for the firm's success.practicestraining employeesbusinessfinancial statementscostquality improvementbusiness partnersfirm'ssuccesspracticestraining employeesbusinessfinancial statementscostquality improvementbusiness partnersfirm'ssuccess

3. 3 Definitions of open-book management vary but it is generally accepted to include the following components: Sharing the income statement and balance sheet with most employees; Sharing the income statement and balance sheet with most employees; Sharing other data with employees (such as productivity and plant utilization/quality data); Sharing other data with employees (such as productivity and plant utilization/quality data); Encouraging employees to use the information in their daily work; Encouraging employees to use the information in their daily work; Training employees to understand financial numbers; and Training employees to understand financial numbers; and Sharing the financial results through a gain sharing program. Sharing the financial results through a gain sharing program.

4. 4 What Is Open-Book Management? It is a simple yet very powerful approach to managing a business. It means a firm: — It is a simple yet very powerful approach to managing a business. It means a firm: — * shares a broad array of financial and other information with employees; * trains employees to become more business literate; * empowers them to use the information in their work, trusting them as partners; and * rewards them when the company is successful.

5. 5 The relationship between these four essential elements of open-book management is shown in the following Exhibit (next slide). The relationship between these four essential elements of open-book management is shown in the following Exhibit (next slide). All four elements must be present to achieve the necessary alignment of employee and company goals upon which open- book management is based. All four elements must be present to achieve the necessary alignment of employee and company goals upon which open- book management is based.

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7. 7 Because of its emphasis on financial information, open-book management appears to be primarily an accounting phenomenon. Because of its emphasis on financial information, open-book management appears to be primarily an accounting phenomenon. Although accounting plays a major role, open-book management is much more. Although accounting plays a major role, open-book management is much more. It represents a fundamental change in the traditional way most managers operate their businesses. It represents a fundamental change in the traditional way most managers operate their businesses. Open-book management requires that business leaders be committed to teaching their employees to think and act like owners. Open-book management requires that business leaders be committed to teaching their employees to think and act like owners.

8. 8 Employees are likely to share company goals when they:- * understand how the business makes money, * possess a basic understanding of critical information about the business, * regularly receive reports and explanations of company operations, * use their knowledge about the company in their jobs to improve operations, * celebrate exceptional performance together, and * receive benefits when the company does well.

9. 9 Open-book management is not a quick fix for a business facing a major challenge such as financial problems, declining markets, or increasing competition. Open-book management is not a quick fix for a business facing a major challenge such as financial problems, declining markets, or increasing competition. Since it requires a sustained commitment to training employees about business operations and financial statements, a company's leadership should decide to create an open-book culture only if it is committed for the long term. Since it requires a sustained commitment to training employees about business operations and financial statements, a company's leadership should decide to create an open-book culture only if it is committed for the long term.

10. 10 Open-book management does provoke some controversy. Sharing sensitive financial information with employees is risky because such information might fall into competitors' hands. Open-book management does provoke some controversy. Sharing sensitive financial information with employees is risky because such information might fall into competitors' hands. However, companies that have implemented open-book management have concluded that the benefits of harmonizing employee and organizational goals exceeded the costs (or risks) of competitors obtaining sensitive information. However, companies that have implemented open-book management have concluded that the benefits of harmonizing employee and organizational goals exceeded the costs (or risks) of competitors obtaining sensitive information.

11. 11 Another controversial issue centers on a company's financial executives, who may be reluctant to open company books to employees and explain the intricacies of accounting and finance. Another controversial issue centers on a company's financial executives, who may be reluctant to open company books to employees and explain the intricacies of accounting and finance. Financial executives who believe the typical employee dislikes work, avoids responsibility, rejects organizational values, works only for pay and security, and needs to be closely monitored and controlled are probably not going to embrace open-book management. Financial executives who believe the typical employee dislikes work, avoids responsibility, rejects organizational values, works only for pay and security, and needs to be closely monitored and controlled are probably not going to embrace open-book management. Also, financial executives who have risen through the ranks of command-and-control organizations may have a difficult time accepting an open-book management system. Also, financial executives who have risen through the ranks of command-and-control organizations may have a difficult time accepting an open-book management system.

12. 12 There are those who question the belief that employees can and must learn how the business makes money. To do that, they must understand financial information. Most businesses are complex, and financial statements are difficult to understand, particularly for people with no prior training in accounting and finance. There are those who question the belief that employees can and must learn how the business makes money. To do that, they must understand financial information. Most businesses are complex, and financial statements are difficult to understand, particularly for people with no prior training in accounting and finance. Accordingly, some view open-book management as an extreme and naive method. It is unrealistic and idealistic, skeptics say, to believe a few training courses will enable employees not previously schooled in accounting and finance to become knowledgeable about business and financial issues. Accordingly, some view open-book management as an extreme and naive method. It is unrealistic and idealistic, skeptics say, to believe a few training courses will enable employees not previously schooled in accounting and finance to become knowledgeable about business and financial issues. Nonetheless, a number of companies have successfully established formal and informal training to accomplish just this goal. Effective training is absolutely essential to open-book management; otherwise, employees will not understand the numbers and, even more important, will not know how to affect the numbers. Nonetheless, a number of companies have successfully established formal and informal training to accomplish just this goal. Effective training is absolutely essential to open-book management; otherwise, employees will not understand the numbers and, even more important, will not know how to affect the numbers.

13. 13 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 Jack Stack, CEO of Springfield Remanufacturing Company in Springfield, MO, originated and popularized the essentials of OBM in the 1980's

14. 14 What's OBM Require? What's OBM Require? OBM requires five things: OBM requires five things: 1. Leadership 2. Education 3. Information 4. Involvement. 5. Rewards

15. 15 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: 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.

16. 16 A leader must give people the real numbers about their firm's financial performance to achieve both credibility and motivation. 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. 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. 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. Leaders must be willing to share the wealth created by the efforts of employees.

17. 17 2. Education Education means training and developing the knowledge and skills of employees to do everything their jobs require. 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. 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. 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. Financial reports like the income statement, balance sheet, and cash flow statement become new tools for everyone to understand and use.

18. 18 Education helps establish a "line-of-sight" between an employee's everyday actions and the larger operating and financial results of the business. 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. 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. 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.

19. 19 3. Information To be an informed and responsible business partner requires having access to pertinent financial information about the firm. 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. Sharing financial information is the defining hallmark of OBM. Revealing "confidential" data about a company's financial performance has constituted "opening the books." 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. While this is crucial to the success of OBM, it is hardly all there is to it.

20. 20 Giving information to persons who are not educated to properly interpret it can create problems, not solve them. 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. 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. 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. 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. This misses the point. They should argue for better education so that the shared information is properly understood and used.

21. 21 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. “ 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. OBM uses an information exchange system to track and achieve these critical numbers. Information must loop quickly back to the people who contribute the data as well as move upward to inform managers. Information must loop quickly back to the people who contribute the data as well as move upward to inform managers.

22. 22 4. Involvement 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. 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. 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. The more thorough the education, and the more extensive the information exchange, the greater the involvement can be. The more thorough the education, and the more extensive the information exchange, the greater the involvement can be.

23. 23 5. Rewards Giving everyone a significant personal stake in the financial success of the firm is also characteristic of OBM. 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. 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?" When everyone sees the company's numbers turn out well, a logical question arises : "What's in it for me?"

24. 24 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. 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. 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. 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 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.

25. 25 Some firms focus on sharing profits, while others provide equity stakes in the firm through ESOP's (Employee Stock Ownership Plans). 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. 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. The secret is to keep it simple, easy to understand and administer, and on-target for organizational performance.

26. 26 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. 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 is not a panacea. It's tough to run a business, big or small. OBM doesn't make things easier. It makes them better. 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. 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.

27. 27 When is OBM Finished? OBM requires continual attention, energy, patience, and the firm's resources. 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. 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. 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. 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. The perpetual dynamism of the marketplace guarantees an OBM firm will remain a learning organization.

28. 28 Open-Book Management and Corporate Performance CEOs who open their books and share financial information with their employees will most likely be rewarded with greater productivity. CEOs who open their books and share financial information with their employees will most likely be rewarded with greater productivity. In a research study conducted by the National Center for Employee Ownership (NCEO), companies that shared such information with their employees experienced a one to two percent annual increase in sales growth over what would normally have been expected. In a research study conducted by the National Center for Employee Ownership (NCEO), companies that shared such information with their employees experienced a one to two percent annual increase in sales growth over what would normally have been expected.

29. 29 Earlier studies, conducted by the NCEO and others, have consistently shown a positive connection between employee ownership, participation, and corporate performance. Earlier studies, conducted by the NCEO and others, have consistently shown a positive connection between employee ownership, participation, and corporate performance. A 1986 study by the NCEO showed that highly participative companies grew 8% to 11% faster than they would have been expected to grow. A 1986 study by the NCEO showed that highly participative companies grew 8% to 11% faster than they would have been expected to grow. But to date, no research had been conducted on open-book management which typically combines both increased worker participation and financial incentives for increased productivity. But to date, no research had been conducted on open-book management which typically combines both increased worker participation and financial incentives for increased productivity.

30. 30 Putting Principles in Practice There is no steadfast set of rules for implementing open-book management. But there are a few basic principles There is no steadfast set of rules for implementing open-book management. But there are a few basic principles

31. 31 Step One: Take the wraps off information Open-book management is about the why, and in a business, the why is told by the financials. So along with the operational figures, show your colleagues the income statement, the cash-flow statement, and the balance sheet. Open-book management is about the why, and in a business, the why is told by the financials. So along with the operational figures, show your colleagues the income statement, the cash-flow statement, and the balance sheet. Share with them client proposals, contracts, billables, and receivables, any information that employees may need to know to do their jobs effectively, according to Case. Share with them client proposals, contracts, billables, and receivables, any information that employees may need to know to do their jobs effectively, according to Case. You can make the information available in hard copy, in e-mails or on your company intranet. You can make the information available in hard copy, in e-mails or on your company intranet.

32. 32 Step Two: Teach the basics of business. It's amazing how little most people know about business. Some believe that revenues are the same as profits. It's amazing how little most people know about business. Some believe that revenues are the same as profits. Or that profits are whatever a company has in the bank. Not many employees can name all the expenses a company must pay. Not many know how little is often left at the bottom line, says Case. Companies pay for that ignorance in at least three ways. Or that profits are whatever a company has in the bank. Not many employees can name all the expenses a company must pay. Not many know how little is often left at the bottom line, says Case. Companies pay for that ignorance in at least three ways. First, it spawns resentment. Employees wonder who is getting rich off of their hard work. First, it spawns resentment. Employees wonder who is getting rich off of their hard work. Second, it leads to bad decisions. Employees get lazy about about spending company money. Second, it leads to bad decisions. Employees get lazy about about spending company money. Third, it takes the fun out of business. Third, it takes the fun out of business.

33. 33 Every entrepreneur knows that business is fun. It's a game. You take on the competition. Obstacles and opportunities crop up as frequently as in a video game. Every entrepreneur knows that business is fun. It's a game. You take on the competition. Obstacles and opportunities crop up as frequently as in a video game. Every month or quarter you tally up the results and see how you did. What's more, there's real money at stake. Employees can share in the excitement -- and once they do, they'll give your company a kind of turbocharge. But not many people get excited about a process they don't understand. Every month or quarter you tally up the results and see how you did. What's more, there's real money at stake. Employees can share in the excitement -- and once they do, they'll give your company a kind of turbocharge. But not many people get excited about a process they don't understand.

34. 34 Step Three: Empower people to make decisions based on what they know. Plenty of companies give lip service to the concepts of empowerment or employee involvement. They set up project teams, cross-functional teams, self-managing work teams. But since they don't share financial information, not many employees know how their work affects the bottom line, according to Case. Plenty of companies give lip service to the concepts of empowerment or employee involvement. They set up project teams, cross-functional teams, self-managing work teams. But since they don't share financial information, not many employees know how their work affects the bottom line, according to Case. One approach to fix this problem is called the huddle system. One approach to fix this problem is called the huddle system. Employees meet once a month or so to report their numbers and their opinions about the upcoming weeks and months. Every work group (and a workgroup can be as small as one person) is accountable for its own numbers, and everyone in that unit shares in the accountability. Employees meet once a month or so to report their numbers and their opinions about the upcoming weeks and months. Every work group (and a workgroup can be as small as one person) is accountable for its own numbers, and everyone in that unit shares in the accountability. If the numbers are on target, great. If they're off, than you can work together on fixing the problem. If the numbers are on target, great. If they're off, than you can work together on fixing the problem.

35. 35 Work groups manage their own affairs. They track and measure output and figure out how to improve it. Work groups manage their own affairs. They track and measure output and figure out how to improve it. They watch costs. If they need new equipment, they must justify it and order it. They watch costs. If they need new equipment, they must justify it and order it. They get involved in the annual plantwide planning-and-budgeting process. They get involved in the annual plantwide planning-and-budgeting process. They can even be involved in reviewing one another's performance and assisting in hiring and disciplinary decisions. They can even be involved in reviewing one another's performance and assisting in hiring and disciplinary decisions.

36. 36 Step Four: Reward success If you want people to think like owners, they must be rewarded like owners. If you want people to think like owners, they must be rewarded like owners. While profit-sharing is a step in that direction, it often falls short, according to Case, because sharing is at the discrection of management. While profit-sharing is a step in that direction, it often falls short, according to Case, because sharing is at the discrection of management. Since employees don't know how the company is doing, any bonus that materializes seems unrelated to everyday work. Since employees don't know how the company is doing, any bonus that materializes seems unrelated to everyday work. An open-book company is different. Employees know what they're working for when they start the year. An open-book company is different. Employees know what they're working for when they start the year. Like businesspeople, they track their progress by watching the numbers. At the end of four quarters, they know if they have been successful - - and they know why or why not. Like businesspeople, they track their progress by watching the numbers. At the end of four quarters, they know if they have been successful - - and they know why or why not.

37. 37 Learning to Let Go For owners, the hardest part of open-book management is the fear of letting go. For owners, the hardest part of open-book management is the fear of letting go. But managers of companies that have implemented open-book management, and there are scores, widely praise the approach. But managers of companies that have implemented open-book management, and there are scores, widely praise the approach. With the ecomony set for a revival, it may be worth taking a fresh look at this still unconventional business proposition. With the ecomony set for a revival, it may be worth taking a fresh look at this still unconventional business proposition.

38. 38 Open Book Management: Cautions and Benefits Here are three cautions to sharing information as openly as we do at Kids First. Here are three cautions to sharing information as openly as we do at Kids First. (1) The necessary education must come with any information to ensure the employees have the knowledge to interpret the information accurately. Such education must be viewed as a never- ending process. (1) The necessary education must come with any information to ensure the employees have the knowledge to interpret the information accurately. Such education must be viewed as a never- ending process.

39. 39 (2) If the employees have ever been given a reason to distrust management in anything, they will distrust management in everything, including data. (3) It is correct to assume that some employees lack the loyalty, integrity or discretion to use company data and information wisely and in fact may use it to gain an advantage over you or your company.

40. 40 Primary Benefits of Opening Books. (1) Equipped with the same information as you, employees tend to evolve to understand that a profitable company is in their own best interest. As a result, they tend to do things that generate more profit and avoid things that waste it. (1) Equipped with the same information as you, employees tend to evolve to understand that a profitable company is in their own best interest. As a result, they tend to do things that generate more profit and avoid things that waste it.

41. 41 (2) Equipped with the same information as you, employees are capable of making the same good decisions as you. You, therefore, can delegate decision-making, which frees you to work on other aspects of the company. (2) Equipped with the same information as you, employees are capable of making the same good decisions as you. You, therefore, can delegate decision-making, which frees you to work on other aspects of the company. (3) Arguably, the greatest benefit is the sense of appreciation employees feel when they are included. (3) Arguably, the greatest benefit is the sense of appreciation employees feel when they are included. Finally, in addition to the company-related benefits, there is a personal benefit that trumps all the others: hiding data and holding information close to the vest takes no minor amount of energy. Finally, in addition to the company-related benefits, there is a personal benefit that trumps all the others: hiding data and holding information close to the vest takes no minor amount of energy.

42. 42 Open-book management is a system some companies use to help employees really understand the business — where it stands now and where it ’ s going — by sharing the firm ’ s financial info. Open-book management is a system some companies use to help employees really understand the business — where it stands now and where it ’ s going — by sharing the firm ’ s financial info. Advocates of open-book management swear the system helps to foster unique employee ideas and makes companies more cost-effective and easier to manage. Advocates of open-book management swear the system helps to foster unique employee ideas and makes companies more cost-effective and easier to manage. But there are certain aspects many firms have trouble with, namely: But there are certain aspects many firms have trouble with, namely: how much info to share with employees, and how to make that info easily understandable. how much info to share with employees, and how to make that info easily understandable.

43. 43 Thank you