Why Open Book Management is an excellent way to run a business!
5 Reasons Our Dishwashers Know Our Net Operating Profit
It’s been nearly a decade now since we at Zingerman’s made the move to open book management. If you’re not familiar with the term “open book,” it means that we actively share all the financial information about our business with everyone who works within our organization. And that everyone in our organization, from dishwashers on down the line to owners and accountants, is responsible for the financial performance of the organization. Ten years on, I can say that we’re most definitely still learning about this relatively modern approach to money and organizational life. But given that it’s a work in progress I can tell you that I believe more strongly than ever that open book finance has been, and will continue to be, the right way for us to go.
I know it’s not the norm to have dishwashers doing anything that has to with accounting, but I’ll state straight up that having them do so here has been one of the most successful changes we’ve ever made. Here are five reasons it’s proven to be such a great thing.
1. Better Results
I can tell you with confidence that where we’re doing a good job of using open book finance in our organization we’re getting good, often great, results. Not always as good as we’d like–open book finance isn’t perfect nor does it lead to perfection. But without question, it’s a tool that has improved performance where we’ve used it effectively, whether that be sales, margin, profit, service scores, cash flow, food quality, sanitation or safety. Ultimately we’ve found it’s not just good for financial results, but also for enhancing service, produce quality and staff morale.
It’s really just common sense I guess. Because the reality is that, despite good efforts and training, people at the top of organizations are rarely able to provide solutions to every problem. Our experience is that the folks out there on the front line–the ones doing the day-to-day work of the organization–have insights and ideas that are of great value. They see things leaders don’t see from the top (just as we see things that they don’t). So the more people we involve in the financial operation of the organization, the more likely we are to attain the success we’re looking for. And, as one member of our staff told me, having it all in the open all the way along, “It’s not just being told we had a great year. We all know it. And that’s a lot more fun.”
2. It’s in line with our values
Our guiding principles (or you might call them “values” or “ethics”) were authored back in the early ’90s. Sixty or seventy staff members participated in writing them, they belong to everyone in the organization, and each of us is obligated to live by them. Our principles define the ways in which we are committed to working with each other and with the community around us.
One of the key elements of our principles is that: “We involve as many people as possible in the running of the business.” And, they go on, “In so doing, Zingerman’s runs more effectively, benefiting from everyone’s abilities, creativity, experience and intelligence.” We work to live this principle in every area of our organizational activity. All of our meetings are open. We involve front-line staff in interviewing and hiring. Our HR folks learn about merchandising. And our dishwashers learn about finance.
We first began to learn about open book finance in the early ’90s, when I read Jack Stack and Bo Burlingham’s The Great Game of Business (which I still consider to be the single most insightful book on the subject.) Then I read Ricardo Semler’s Maverick and John Case’s Open-Book Management. As I read it hit me pretty hard that while we were doing a good job of living our principles in so many other parts of our work, it was increasingly clear to me that we’d been falling short in the area of finance.
We were paying bonuses and had profit sharing, but we weren’t really sharing the financial information with our staff. While our intentions were good, in practice we were putting ourselves as owners between the staff and the financial operation of the business. As a result, pretty much the entire financial load fell on us and at the same time we were asking people to operate in the dark. Open book creates the opposite experience. As one of our staff said, “When things aren’t going right it spreads the stress to everyone about where we stand.”
From a broader ethical standpoint, I will tell you that, quite simply, it would be almost impossible for things like Enron and World Com to have happened in organizations run according to open book finance principles. Because all the borderline unethical shenanigans that were rationalized away behind closed doors in high level private office suites would never, ever have stood up in front of even a handful of trained front line staff. The staff-possibly even a dishwasher or the Enron-equivalent thereof-would have simply asked way to many questions. Red flags would have been going up as soon as some high level exec tried to explain away the improprieties. In that sense, I think open book finance helps us all to safeguard the values and principles we hold dear.
3. It builds commitment
When we teach our ZingTrain management seminars, attendees regularly ask what we do to motivate our staff. We always give the same answer: we don’t motivate them; they motivate themselves. Our responsibility is to provide an environment in which they are likely to motivate themselves to high levels.
Over the years, it’s become clear as clear can be that that means creating a setting in which people really can make a positive difference, for themselves, for their peers, for the organization, for the community. Open book finance allows that opportunity, because no matter one’s seniority, position in the org chart, or pay rate, if you’re working in a well-run open book company, you have the chance to influence things and you can see that influence at work every day. The commitment that comes from that level of involvement and influence is very, very high. People feel themselves a meaningful part of something special regardless of seniority, title, age or experience level. Dishwashers really do get involved. When it’s working well, it’s a pretty amazing thing to see.
I’ll add here that this sort of open book environment also helps us to attract people who are interested in being involved, in learning how business works, and how they can contribute positively to group success. And those are the sorts of people we want to work with!
4. It leads to better decisions
The bottom line on decision-making is that no one can consistently make good decisions when they don’t have good information. Although every business asks its front-line staff to manage customers and product and make decisions about quality and complaint handling few organizations give those same staff members any of the information they really need to make sound decisions.
Different information leads to different levels of stress that, in turn, lead people to make very different decisions. The front-line staff member takes heat from a customer over prices being high. If that’s the only pressure they feel, then they’re at best apologetic, at worst, they agree with the customer that prices are too high-not a great way to build long-term trust with your customers. Instead by giving them more in-depth information they’re able to handle this sort of situation far more gracefully and effectively.
One staff member at our Mail Order business told me, “It’s definitely had a strong impact on my daily performance. I do things differently because I’m armed with more information.” Or check out this true story of one of our catering staff. As she tells it, before she understood the numbers, when a customer would call to complain she immediately would start to refund money to make them happy. But after she learned more about finance and saw how much it really cost the business when she refunded money she quickly realized that there were often more effective, less costly, ways to make things right. She still refunds money when needed. But, as she tells it, more often than not she’s discovered that sincere apologies, a follow up letter, a comped coffee cake, etc. are often equally effective and less expensive options.
Carrying this all through to the dish line, you can be sure that in most moderately busy restaurants the dishwashers are sure that the business is making millions. All they really see are mountains of dirty dishes, high prices on the menu, and a relatively low hourly wage. The truth could easily be that the restaurant was losing money left and right. But if the disher thinks the business is profitable, he’s hardly going to be worrying a whole lot about keeping costs down in the way he uses cleaning supplies, etc. By contrast a dishwasher who knows the financial “score” might be more judicious in their use of supplies, which by the end of the year can translate into thousands of dollars.
5. It teaches everyone-dishwashers included-to think like an owner
In general, I think it’s safe to say that front-line staff in most businesses, faced with any given situation, would make very different decisions about how to handle most difficult situations than the owners probably would. In our organization, by contrast, I think that the decisions most front-line folks would make are far more likely to be very similar to what any of the partners would do. As one hourly staff member said, “Being involved in the financials gives us all a sense of ownership in the company.”
By teaching everyone in the organization about finance, how business works, how to impact the bottom lines in the same way that an owner does, everyone has the critical ability to make sound business decisions. In an open book setting the front line staff knows the costs of the items they’re selling. They know what the overall margins are. Their bonuses may be tied to those numbers. So although I’m sure the staff person here still hates to hear a customer complain about prices, it’s a lot easier for them to weather the storm. Like the owner they know that although it’s legitimate for the customer to feel that prices may be high, they also know that margins in the food world are generally fairly thin. To quote one relatively new employee here, “Everyone in the business knows the stressors, not just the owners.” Which means that everyone at every level is better able to take the heat on something as uncomfortable as prices and still give an effective great service-oriented response. They know what the financials look like and they know there’s never a huge amount of slack to be lowering prices and still pay the bills.
What does it look like when it works?
Here’s a real life example : French Fries at Zingerman’s Roadhouse
As is so often the case in newly opened restaurants, the food cost at the Roadhouse was way too high in our first few months of operation. The issues in these sorts of situations are almost always the same-food cost is too high because of poor pricing, poor purchasing, poor portioning, excessive waste, or theft. But finding out exactly where those issues are manifesting themselves isn’t ever that easy.
In looking to identify areas of excessive waste we actually asked one of the dishwashers to report at the weekly huddle on the top five areas of waste that he’d noticed. Why the dishwasher? Who else sees all the plates that come back to the kitchen? Within a matter of weeks, he identified that the most oft-thrown item was French Fries. Where they no good? No. People loved them. But he’d identified that the problem was that the portion was simply bigger than it needed to be. The solution? Cut the portion in half and offer free refills! Simple to implement, saved us thousands of dollars a year and actually increased our guests’ sense of value since they know they can get extra fries free for the asking. At the most a dozen people a week actually ask for them. But the perceived value of being able to get them at no added cost is huge! All thanks to a dishwasher who was getting involved in the finances of a three-month old, three million dollar business.