Management by open book Under supervision of Dr. Ahmed Fahmy Prepared by Salma Dawood

History of management by open book  Open-book management is a management technique pioneered by Michael Phillips in San Francisco in the late '60's and early '70s.  The concept's most visible success was by Jack Stack and his team at SRC Holdings and popularized in 1995 by John Case. The technique is to give employees all relevant financial information about the company so they can make better decisions as workers.  In 1980, Jack Stack and twelve managers purchased a virtually bankrupt division of International Harvestor. Using what is now known as open-book management, they have achieved 99,000% return on shareholder funds invested in 21 years.

Management by open book Definition :  Open book management (OBM) means opening a company's financial statements to all employees and providing the education that enables them to understand how the firm makes money and how their actions affect the bottom line.  This information includes, but is not limited to, revenue profit,cost of goods, cash flow and expenses.  It is a method of managing without concealment that involves all employees in focusing on how to grow the business profitably.

Definition cont,  Employees know whether the business is making money. They know how much. They know why. They have a good idea of what the future holds – all because they see the numbers that most companies show only to top management.  If the business is profitable, they get a cut of the action – incentives that are directly tied to the overall company profit. If the business is not profitable, they don ’ t get a cut. OBM therefore teaches employees to think and act like owners and quit thinking and acting like hired hands.

The basic rules for Open-Book Management are as follows: 1.Give employees training to understand the financial information. 2.Give employees all relevant financial information. 3.Give employees responsibility for the numbers under their control. 4.Give employees a financial stake in how the company performs.

The basic rules cont, 5. Trains employees to become more business literate. 6. Empowers them to use the information in their work, trusting them as partners. 7. rewards them when the company is successful.

Important note :  However it is important to note that 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.

Controversy/difficulties for OBM :  Sharing sensitive financial information with employees is risky because such information might fall into competitors' hands.  Financial Executives 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.  Most businesses are complex, and financial statements are difficult to understand, particularly for people with no prior training in accounting and finance.

Controversy/difficulties for OBM cont, :  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 is not a right concept.  Nonetheless, a number of companies have successfully established formal and informal training to accomplish for just this goal.

How it works  In a company fully employing Open-Book Management employees at all levels are very knowledgeable about how their job fits into the financial plan for the company.  However taking a company from "normal" to open is not as easy as just starting training classes on income statements and balance sheets employees rarely find it compelling to understand these numbers.  In order to overcome this problem Open-Book Management focuses on a "Critical Number". The number is different for every company but it is a number that represents a prime indicator of profitability or break-even point.

How it works cont,  Discovering this Critical Number is a key component of creating an open-book company. Once discovered then a "Scoreboard" is developed that brings together all the numbers needed to calculate the critical number.  The Scoreboard is open for all to see and meetings take place to discuss how individuals can influence the direction of the "Score" and therefore, ultimately, the direction of the Critical Number.  Finally a Stake in the Outcome is provided which can be a bonus plan that is tied to Critical Number performance or it can include Equity sharing or both.

Example of a score board

Example of a forecasted scoreboard

A plan to implement the OBM 1. Choose the Game – The Right Drivers 2. Define the Target (Stretch Goal) 3. Estimate the Benefit 4. Identify the players 5. Determine the timeframe 6. Develop a theme 7. Design the scoreboard 8. Choose the reward 9. Play the Game 10.Celebrate the Win

How it works cont, The great game of business Think (Educate) Act (Enable) Feel (Engage) Principles

How it works cont, The great game of business H.I.P. STRATEGIC H.I.P. FINANCIAL BUSINESS LIT. SCOREBOARDS FORECASTING HUDDLES INCENTIVESOWNERSHIPRECOGNITION Practices

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