Open Book Management System

[KimH]

As some of you may know I am in the process of completing a micro mba course, one of my assignments is regarding the open book management system - basically business owners 'open' their financial statements to their employees and consult with them on business decisions.

Apparently this system is popular in the UK and EU and has been for at least 15 years.
A number of Japanese companies - Sanyo, Sony, Nissan, Sharp have been doing this for ages as well, with a fair amount of success.

Have any of you heard of, or even practiced this - and if so, what are your views (negative or positive).

Much obliged for any feedback.

Kim.

[Martinco]

My immediate reaction to this would be that if I had to open my books to the factory staff, I would have serious problems because many of the office staff do not understand what is going on in say, a balance sheet, so how must those guys understand it. All they will see is the vast amounts of money coming in and question the amounts going out. ( Why is my wage so small ? )
No, not for me thanks !

[KimH]

Martin, that is the very same gut response I had. You are required to provide basic financial education to the staff to enable them to 'read' the statements - and I think we all know that if we had to do that here, the staff would immediately assume that we were lying or omitting certain information. Don't think the Prof. is going to like my analysis on this, and my marks will probably reflect 'his disapproval'. Tough! He will get my opinion all the same.

[IanF]

This would depend on how this is presented. You should put in a charge for cost of capital to be earned by the business and explain it is like paying the bank interest.

[BusFact]

I partially do that with my one company, but I do have to simplify and summarise the format of the accounts. If I presented my accounts with all the auditor IFRS gunk, they would be even more confused. You can't compare Japanese and European education levels with some of the staff I would guess you mostly find in small business industrial SA.

Instead I present internal accounts in income statement format for each section of the factory. Some guesswork has gone into allocating overhead costs to each section, but I think the result is pretty reasonable. There is not much detail in the overheads, but enough for them to get an idea on the rising cost of running the company. The crucial bit is for them to be able to see Sales Income and Direct Cost of Sales. They eventually learn that this Gross Profit is a more important figure than sales (especially the sales guys who keep trying to cut prices to get orders).

They also get a good idea of how much it costs to run the company and that not every sale is pure profit. By lumping certain overheads together, you can conceal individual salaries and wages, as this could obviously be contentious.

I run a profit sharing scheme off these internal accounts.

The benefits I think I get:
- Sales staff are more realistic with their pricing.
- Production staff better understand the effect of returned faulty goods and so don't run machines too fast just to meet targets, they rather try get it right the first time.
- Getting regular monthly feedback on progress seems to make them more interested in the performance of the company and not just in being there.
- Possibly some motivation as they try to improve company performance each month.

Some reality though is that the bulk of my staff fall asleep when I try explain the accounts, but over the years more and more seem to be taking an interest in the results. And don't get me wrong, its had its problems too, not to mention extra effort to draw up. However I still think there is some value in it.

[Dave A]

I do profit share and have a graph that shows the progress of the pool, complete with previous year comparisons, so the staff know when the company is doing well and when it isn't. From team leaders upward also have a good idea of the overhead cost per team and what sort of numbers they need to do each month to produce a reasonable return.

My opinion is that staff having access to this sort of information isn't necessarily going to be productive on its own. I'm pretty sure it takes leadership to make this level of disclosure work to the company's (and the employee's) advantage.

Without leadership, people could apply some pretty harmful logic to the knowledge.

• They could get depressed or negative (and potentially less productive) in hard times, or even see this as a sign to jump ship rather than trying harder.
• They could get complacent (and potentially less productive) in good times, or even see this as an opportunity to make pay demands that aren't sustainable over the medium and long term. We all know how hard it is to get pay reductions through (even in the hardest of times) in this country.

In rough times you need people to feel motivated to be more efficient and work towards nurturing the vessel that pays their salaries. In good times you want people to maximise the advantage, really drive it on to greater heights, re-invest the windfall profits and understand just how fragile and temporary those great runs can be.

Yep - I think leadership is the key to this because to be bluntly honest, without guidance most people don't automatically see things that way.

[Upstairs]

Agree

[Justloadit]

I think this may be a mine field, especially when you have staff, who unfortunately never had the means to get educated.

Let me site a situation that happened with me and a customer recently, and for the record, a Union steward.

I have a business to sell prepaid airtime, customers deposit cash into our account, and the bank charges a cash deposit fee, which I subtract from the original amount deposited.

All good.

However a customer came to my office, and asked whether he can give us the money for his float. We duly accepted, and charged him the cash deposit fee. We have a number of customers who do this, as it saves them time standing in the line at the bank. Later in the day, my driver would have to go to the bank and deposit the money on their behalf.

This customer, would not accept the fact that I took the cash deposit fee, and no matter how much I explained, in his mind, I was stealing his R10 cash deposit fee, irrespective that my driver would still deposit the money in the bank on his behalf.

In his mind I was charging him R10 for this service, and that I return his money, which I duly did, and that he would prefer to give the bank the R10 rather than to me.

This kind of logic, can really upset the proverbial apple cart. All you need is a person like this to influence his colleagues, that you are pulling the wool over their eyes and that you are making plenty money, and not sharing with them.

Hmmm this open book thing really only works when staff has a basic understanding of business, and understand the nature of costs and expenses.

Have you noticed that delivery notes never have the goods value marked on it? This is so that staff do not skew the idea of what the company is making lots of money on sales with out understanding the costs of creating goods.

[KimH]

Thanks a mill for your posts.
In my experience as an employee in the telecoms, motor industry & transport industries over the last 24 years - I can honestly say a fully open book system within any one of these industries would have created a host of problems between staff and management. A large number of employees are not interested unless there is a direct benefit to themselves and no amount of 'financial education' would have made an iota of difference to changing this way of thinking. There are possibly industries where this system would fare better, banks, audit firms, investment and insurance companies perhaps?

Happy Easter everyone, be safe!

[sterne.law@gmail.com]

I think the education level or intelelctual maturity level is key. A successful businessman I know summed it up as follwos -
'The employees see me come to work with a brief case, and they think it has my sandwiches in. They think I eat the sandwiches and when i go home my brief case is filled with money" - reasoning being that they see the invoices for deliveries and compare it to their wages. Obviously they do not take into account the rent, vehicels, lawyers, accountants and the abundance of other expenses.

It boils down to taking what is in principle a good concept and altering it or finding the medium that can produce the same results.
A good example - One restaurant had quite a good incentive type scheme for kitchen staff, relating mainly to wastage. Developed by an overseas company with more vice presidents than staff. Was not overly complicated but required understanding cost of sales calculations ( fairly basic accounting and maths) hence no one understood and the element of trust was a factor. Result - DISMAL FAILURE!!!
Changed it - Put up a white board - Wrote R3000 at the top. Every time their was a complaint, return or wastage, the equivalent value was written under the R3000 and the new reduced total shown.
Result - Successful. It was simple and transparent!!!

[KimH]

I love the analogy of the businessman and the briefcase.

South Africa is considered a new and emerging market, twenty years ago majority of business in SA was white owned and were mostly managed in a very formal manner, since the downfall of apartheid and the introduction of democracy business has become more informal, business owners are becoming younger and new styles of business management are emerging. We are however still in the embryonic stages of this metamorphosis and have a long road to travel yet.
In many instances there are concerns in certain areas that the percentage of white owned business is too high and there is still some distrust between owner and employees at floor level. Lack of proper education and a suspicious mind set could be a deterrent in implementing a fully open book system in many industries in SA.

Do you think that if we as business owners make an effort to be a little more transparent to our staff that we could eventually break this barrier of distrust?

[Dave A]

Do you think that if we as business owners make an effort to be a little more transparent to our staff that we could eventually break this barrier of distrust?

IMO, not while employers and employees are constantly put in an adversarial position via the central bargaining provisions of the LRA.

As long as these provisions stay in place, you will have vested interests who rely on breaking down trust between employer and employee, not building it.

[Blurock]

The answer may lie in ongoing training and sharing of information. We live in a country where 1st and 3rd world meet. Unfortunately our education system is so backward that even the matriculated can still be illiterate. We also have social problems where we still have unions that will break a company and put employees out of work "for the cause".

I may not have the perfect solution, but I believe that employers can make a positive contribution by having the right attitude towards staff. Keep them informed and communicate at their level.

I learnt this from a client in the transport industry about 10 years ago. They had workshops where they informed their staff of the company's position in the market. What the opposition was doing, what trucks they were using etc. They had one-on-one workshops where they did business simulations with drivers so that they could understand the economics of buying a truck and running it profitably. I do not think the financials was ever disclosed to the staff, but the information given, together with bonuses and other incentives, made this a world class organisation which then merged with a listed company. Needless to say, the shareholders got paid a packet with the merger.

Sometimes we need to swallow our pride, throw away the box and start thinking of new ways to do business.

[Justloadit]

I do not need to substantiate my every move in my company with my staff!

How are you going to successfully justify buying a new automated machine to improve production, and lower labour costs?

Right now business in RSA is at a stage of restructuring, which is going to include automation to the detriment of employment. Being transparent in this case will probably destroy the company before it even has a change to get out of the hole that it finds itself in.

I think we are not ready for this transparency for another good number of years.

[wynn]

Justloadit said 'Have you noticed that delivery notes never have the goods value marked on it? This is so that staff do not skew the idea of what the company is making lots of money on sales with out understanding the costs of creating goods.'

The reason mosd DN's have no prices on is so that third parties, such as clients the goods are being delivered to, don't get to see your prices.

Also 'How are you going to successfully justify buying a new automated machine to improve production, and lower labour costs?'

You do it as you show them the door when the machine has taken over the production.

(Had to get that one in, I realise that there are a lot of hoops to jump through before you lay staff off)