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Wayne Baker
  Wayne Baker
 

Implementing Open-Book Finance

10/19/2010 --

Case study shows how firms can improve performance by giving employees ownership of financials.

Ann Arbor, Mich. — Open-book finance is a management philosophy often lauded for empowering employees and creating nimble organizations. Knowledge is power after all. But open-book finance involves more than merely posting a company's numbers for employees to see, says Wayne Baker, the Robert P.Thome Professor of Management and Organizations at Ross.

Baker went inside Ann Arbor's famed specialty foods company Zingerman's Community of Businesses to write a case study on the implementation of open-book finance, widely misunderstood since its introduction in the early '80s. The practice originally was developed by Jack Stack, CEO of Springfield Remanufacturing Corp., and is used by about 10,000 organizations. When it works, open-book finance should help all employees think like owners: It's based on the idea that business is a game and the staff needs information in order to know the rules, keep score, exercise the ability to affect a desired outcome, and share in wins and losses.

The case, titled Open-Book Finance (click on Inspection Copy for free download), details how deli/restaurant/catering company Zingerman's experienced fits and starts with the practice, but over time put all the pieces in place — training, whiteboards with metrics, weekly huddles, and mini-games to address specific issues. The result, Baker says, has been a more agile organization and a more engaged, informed, and productive workforce. In the following Q&A he talks about using the principles in business and in his class.

How widely is open-book finance used?

Baker: No one has real data on how much it's spreading. The companies that use it tend to be small- to medium-sized operations. That said, Alcoa also uses it as does Whole Foods. They all do their own versions.

Has anybody done a study to show objective benefits for companies that use it?

Baker: Yes. There are some statistics on financial performance that show companies using open-book outperform companies that don't. Denison Consulting has done an analysis of the culture of open-book companies versus non-open-book companies to show they have more productive and positive cultures.

Is open-book a practice you can implement in pieces without adopting the whole program?

Baker: Advocates suggest starting small. To do it in a big way right off the bat is too overwhelming and too difficult. Usually companies start small, with a mini-game to exploit a particular opportunity or correct a problem. Almost anywhere you start is okay. When we look at these full-fledged systems like Zingerman's it took years for them to get to that point.

Talk about the mini-games, because that seems to be the easiest practice to start with. Zingerman's used mini-games to solve problems with on-time catering delivery and restaurant greeting times. In both cases, the employees set goals and shared in rewards.

Baker: Everyone has to know and agree on the rules, such as how long the mini-game is going to run and who's on the team. Second, you have to keep score with some sort of metric to track progress and know if you've won the game or not. And then there has to be some sort of collective reward everyone shares. The traditional game among salespeople, where only the top seller gets the reward, doesn't work. It has to be where everyone wins or loses. It could be just a celebration, a lunch, or pizza party. Some argue you should not make the collective reward financial, but some places, like Zingerman's, do.

What are the big reasons people might have for not adopting open-book? I see Zingerman's initially resisted the "huddles" because they didn't want to add another meeting to the staff schedule.

Baker: Keep in mind the huddles are voluntary. Sometimes in the beginning nobody comes to the huddle but the management. You can make a line item on the whiteboard for that. If attendance is poor or dropping in a huddle, you can make a line for huddle attendance and somebody will be responsible to recruit people to come to the huddle. It's one way for people to demonstrate leadership. People involved with it are much more engaged. They get to participate in decisions about weekly business matters. They can also put into place things they've decided and see results week to week, and that's pretty rewarding.

Even though open-book appears to bring benefits, the practice brings some risks. If everybody sees the numbers and things aren't going well, morale can decline. It also can create friction between separate parts of the business.

Baker: It can get people down, but as Jack Stack says, there's no job security in ignorance. How many times have you seen people not know the state of the business and suddenly the company is downsizing by 20 percent and nobody saw it coming? I think the downside of not sharing the numbers is even greater.

It seems that what's really important is that everybody knows the real-time financial state of the company, understands the numbers, and knows what they can do to drive them.

Baker: It's that third one that's really important. Everyone throughout the organization can be shown how to read the financial statements. But the financial statements don't contain information in a way or form that is actionable, so that's why the whiteboards exist. You have to translate from those financials all the way down to near-term objectives and to specific lines you're going to manage. To be able to connect them to behaviors on a weekly basis is a critical step. Just sharing the financials is not enough. Zingerman's started by just sharing their financials but it wasn't helpful to them. There's always this implicit assumption that finance exists "out there somewhere" disconnected from operations and disconnected from sales and marketing. An interesting question to ask is: Who creates the financial numbers in your organization? The answer usually is the CFO or the accountants. The truth is everyone is creating the numbers. Everyone is taking action that affects those numbers.

It kind of puts to rest the old adage that if everyone does their job, the numbers will take care of themselves.

Baker: That's like saying at the Michigan-Michigan State game they're not going to keep score. Everyone will do their job, but we're not going to keep score. Then how will anyone know who wins? Often four out of 10 people in an organization don't know what the goals of the company are. That's like saying if you have 11 people on a football team four of them don't even know which goal is theirs. That would be bad.

What are some things to keep in mind if I'm running a company and thinking of implementing open-book finance?

Baker: You can't just read about it and learn to do it. You need to actually see it in action someplace. It's also not something the leader puts together him or herself. It has to be participatory. Whatever group is involved works on creating it because they own it. And start small.

How did you find out about it?

Back in 2005 an MBA student and I wrote a case about Zingerman's Community of Businesses. They have their triple bottom line, which is great food, great service, and great finance. Great finance was open-book. I always thought it was just sharing financials, and that turns out to be the most common misconception. It is that, but it's much more than that. It actually was my Evening MBA students who said they'd like to know more about open-book. So Ryan Smerek, the research assistant who wrote the case with me, and I took the Zingerman's two-day training course on open-book called Fun Flavorful Finance. It really blew away a lot of misconceptions I had and gave me a good idea of what it was about. I started spending time in some of their huddles to see what happened. I decided I was going to teach about this in the beginning of the semester and actually run a management and organizations class using open-book principles.

In one of my Evening MBA courses, we came up with five to six proposals, voted on them, and created our department operating report. It's interesting because the students have to make a forecast. We huddle for the first 15 minutes of every class. In my class that runs til 9:50 pm, we did a line on energy levels in class. What is your energy level on a five-point scale at the end of class? Well, it kind of depends on what we're doing in class. Students realize they have to ask me what we'll be doing in class next time so they can get a better forecast. That's like Zingerman's saying, "We have nice weather coming up for a football Saturday. Gelato sales are going to be up so we have to make sure we staff for that." I did this for two reasons. One, to manage the class and optimize the classroom experience. Second, to have students experience how it works and to understand the challenges and hopefully the success of doing it.

In my undergrad class, Managing Professional Relationships, we're doing a mini-game. I talk about the four components of high-quality relationships. Playfulness is one of them. So I gave the students some standard illustrations of playfulness, like the flight attendant who raps the pre-flight announcements. We talked about how that might drive business results. So the mini-game we have running is classroom participation. They decided learning would be optimized if they participate in class. I don't mark for class participation, so this has to be voluntary. They decided the target would be 75 percent class participation over the course of the week, and we're finding it's hard. So they have to take ownership of figuring out what's happening and what we can do to get to 75 percent. Especially if they want their collective reward, which they decided would be a party at my house.

—Terry Kosdrosky

For more information, contact:
Terry Kosdrosky, (734) 936-2502, terrykos@umich.edu