Consider Open Book Management

Guest post by Richard H. Tyson, CEObuilder

Guest blogger Tyson is starting a series here about open book management. Make sure you check back for additional articles!

If you are a CEO or business owner, you are probably familiar with the phrase, “It’s lonely at the top.” While there is some truth to that notion, I believe it is often lonelier than it needs to be, especially in regard to the financial affairs of the business.

The problem is that most owners and CEOs hold their financial information very close to the vest. They—and their accounting personnel—share it with only a few top company officers, whom they hold accountable for results. While this serves to keep the numbers confidential, it fails on two important accounts.

First, it reinforces the misperception of many employees that business owners are awash in wealth. This reflects the tendency to view them based on the revenue their companies generate rather than their profitability. Even profitability generally doesn’t give the true picture, since it takes real cash to pay the bills—and net profits only reflect cash when accounting is done on a “cash basis.” Accrual accounting often shows a profit even when there is inadequate cash to cover obligations. When this happens, business owners don’t feel affluent; they feel stressed out as they scramble for sources of cash!

The second problem with owners and executives keeping all financial data confidential is that frontline operating folks are kept in the dark regarding the essential information they need to succeed. For these frontliners, this is like driving a car without a dashboard; they are blind as to how fast they are going, how much fuel is being consumed, and whether they are likely to arrive at their destination safely and on time.

It makes sense, then, to share key performance indicators with those who do the work that creates desired outcomes. The question, of course, is what exactly to share with them. The answer requires a bit of analysis, but generally isn’t too tough. In any business, you need to understand both leading and lagging performance indicators. Lagging indicators are things like profitability or cash flow. They are the results of leading indicators like sales, cost control, or how fast you collect receivables.

Real financial literacy, whether at the executive level—or on the frontline is a function of understanding both leading and lagging indicators. Even more important, it is the recognition of all employees of how to positively impact the leading indicators, so that lagging indicators ultimately deliver a message of success. What this amounts to is a general prescription for open book management, a process whereby every employee uses company financial data to help create the financial outcomes desired in their business.Image of a man working on his laptop.

The costs of doing this, while generally not exorbitant, are nonetheless an important consideration. The first and most critical cost is your willingness to share company data and the level of your trust in your team. Are you willing to share the good, bad, and ugly data that defines your business—and do you trust your people to use it for the benefit of the enterprise and not divulge it outside the company? These questions must be answered in the affirmative if you are to move forward with open book management. To answer them honestly often requires considerable discussion among managerial and frontline employees.

The second major cost is that of deciding where to focus—and educating each employee to understand key indicators and their relationship to each other. It is not enough to share the data; every employee must understand why each indicator is important, what drives it, and how they can personally impact it. This requires training time as you initiate open book management—and consistent sustaining efforts by company leaders thereafter.

The third and final major cost is deciding on how and when to publish or present dashboard data. It should be presented in a manner that is easily understood and appreciated by all employees—and must be regularly updated and posted on a timely basis. Presentation needn’t be high-tech, but it must communicate essential information that can be acted upon!

Done right, open book management can be an incredible tool in making it “less lonely at the top.” In many companies, it has been an essential element in bringing about success. Indeed, a recent study by the Denison Consulting Group revealed that companies that use open book management consistently rank in the top 10% of all companies surveyed. Open book management won’t eliminate the ultimate responsibility of leadership, but done right, it can definitely serve to distribute the load!

Richard Tyson is the founder, principal owner and president of CEObuilder, which provides forums for consulting and coaching to executives in small businesses. For 22 years, CEObuilder has successfully brought about an outstanding financial return for CEO and executive clients through providing leading-edge content in the areas of strategizing, team-building, problem-solving and managing for results, as well as the use of proprietary learning and coaching models.

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