The 3 Key Components of Open Book Management
In prior installments in The Guide to Open Book Management posts, you learned what Open Book Management is, The Case for Open Book Management, and if Open Book is right for your business.
Next up, an overview of the key components of Open Book Management…
Open Book Management is a system used to run the business. Simple, right? Well, yes and no. The basis for Open Book is the following three steps:
- Know and Teach the Rules
- Keep Score
- Share the Success
However, each step involves a lot more information!
Step One: Know and Teach the Rules (of Zingerman’s Community of Businesses Finance)
This step is based on the premise that not everyone in the workforce gets a business degree, meaning that they’re playing the “game of business” by rules they don’t know. A real-life example of this is the employee who doesn’t understand why the manager is upset with them for breaking multiple glasses on a shift. They think, “I don’t see what the big deal is, there are more glasses in the back room!” because they don’t connect the broken glasses to the replacement cost, or waste, or the amount more we’ll need to sell to recoup that breakage.
Zingerman’s has 10 Rules that we teach in a 2-Hour class called Finance 101. We’re not going to teach you the rules here (see below for a list of the rules) – what’s important about the rules is that a) they exist and b) we’re actively teaching them to our employees.
Here are the 10 Rules of Zingerman’s Community of Businesses Finance:
- 1. Begin with a Plan
- 2. Profit is Good
- 3. Cash is King
- 4. Building Value is Essential
- 5. The DOR is the ZCoB Scoreboard
- 6. It’s Gotta Tie Out
- 7. A Dollar Today is Worth More Than a Dollar Tomorrow
- 8. Follow the 80/20 Rule
- 9. We Speak the Same Language
- 10. Success Starts With Each of Us
As you learned in the What is Open Book Management article, Open Book doesn’t mean we simply open our books and share the traditional financial statements – the Profit & Loss statement, the Cash Flow statement, and the Balance Sheet – with them. To be clear, anyone is always welcome to take a look at them – but without any education on WHAT those statements are, and the role they play in the business, it’s often the equivalent of showing them a page of hieroglyphs. So instead teach the P&L exists, how to do the important calculations for above the line items (not to mention what ‘above the line’ means!), and precisely why profit is good. It may be obvious to you, but it’s almost certainly not obvious to the folks who work with you.
When employees learn the rules of finance in your organization, they will start to better understand the impact of their own actions every day, and be able to make better decisions on behalf of the business.
Step Two: Keep Score
To continue with the P&L example – it’s a historical document, produced on a monthly basis, usually after final invoices are paid and receipts tallied – typically about 2 weeks into the next fiscal month. Can you imagine keeping score that way in any kind of sporting event?? That you’d only know the results hours or even days after the players have left the field? Absolutely not!
In order to effectively use Open Book Management, we need to keep score as we go along, looking less into the past than we do to the future, which requires different tools than traditional business and finances provides. Keeping score in Open Book consists of two key components: the scoreboard and the huddle. The two are inextricably linked – the huddle is the meeting where the scoreboard is reviewed.
To start with the scoreboard, it’s where all of the key measures of a business are posted for multiple weeks and months into the future, updated once a week before the huddle. The content of the scoreboard, the key measures, are usually 10-15 different items (or lines) that will tell you whether or not the business is “winning”. Absolutely financials will be represented – typically sales and above-the-line expenses, Gross Margin for restaurants/retail, and some financial bottom-line such as Net Operating Profit. For many mission-driven businesses, there are also measures related to customer experience, product quality, the impact of their work, etc. These key measures are reviewed once a year as a part of the planning process – and each one is “owned” by an employee who can directly impact the success of that line.
While many businesses are using electronic scoreboards currently, whiteboards are the standard for a few reasons. One, it gets everyone in the huddle’s attention focused on the same thing at the same time. Two, it helps people understand the relationship between the different key measures – when a sales line changes, for example, then what else also needs to change? (Likely total sales, labor as a percent of sales, gross margin – you see the picture …) Three, the scoreboard lives in a common area, all the time! It can spark conversation and questions, and if someone misses the huddle, they can take a look at the scoreboard and quickly see how the business or department is doing.
Most businesses and departments huddle once a week, for an hour. Before you cast up your hands at the idea of carving out more time for more meetings – the huddle often replaces other meetings! And because it’s highly structured and centered around sharing the key information everyone needs to know, it can streamline your systems and get rid of a lot of the “Well, you never told me …” kind of conversations. Ideally, the time in the huddle is spent reviewing the scoreboard, with time for discussion, idea generation, and education, and there’s time for other important discussions as well. While everyone is welcome at the huddle – and paid to be there – not everyone attends, especially when the huddle is held during business hours. Really good notes are always shared after a huddle, and it’s expected that team members read the huddle notes to learn what they missed.
A word of caution – it can be really tempting to say “We’re too busy to huddle” when there is a lot going on or in the heat of your busy season. That’s when you need to huddle the most!! To take time to get heads together, to review what’s going on, and game-plan future success.
Step Three: Share the Success
While there are essentially no bad reasons for wanting to share the success, the main driver of this step is that if everyone who works in a business has an impact on the bottom lines, then everyone should share when the business is successful. That being said, sharing the success will certainly help you get buy-in for OBM, not to mention motivating and encouraging staff to make good decisions! There are two primary ways that success is shared in an Open Book business – gainshare and mini-games.
Gainshare is big-picture and long-term in scope, and typically inclusive of the entire team. It can be done annually, quarterly – at a scale that works for the business. Most commonly, gainshare is based on Net Operating Profit (NOP) and is paid out on a percentage of the gain above the targeted NOP. For example, if a business plans to have a NOP of 5%, and achieves a NOP of 10%, then that’s a gain of 5%, which would be split between an amount reinvested/retained in the business and a gainshare pool, to be shared among the employees. This can be as simple and straightforward or as complicated as you want to make it! What is critically important is to build success into the gainshare plan, along with the ability to pay it out. Most businesses include conditions on the level of cash necessary before gainshare is paid.
Mini-games are smaller in scope, often a department subset of a larger team, and much shorter term than gainsharing. They are a great way to increase the focus of a team on a particular issue or to boost sales. The best mini-games are team games, not fostering competitiveness among a team, rather getting folks working together to benefit the department or business. Ideally, mini-games are self-funding, where the increase in sales or savings from waste is what is used to fund the reward. And they can be fun!! Creativity comes into play with the naming of the game – the punnier the better – and the scoreboard, which can take many different forms, like the outline of a bottle of olive oil that fills up as sales increase or repurposing a board game to track progress towards the goal.
Like most recipes, the 3 Steps for Open Book Management work best when they’re followed! Skipping any of the steps will lead to uncertain results, and not deliver on the best of what Open Book can offer. That’s not to say that any business executes Open Book perfectly, regardless of how much practice they have or how diligently they apply these steps. Open Book is like any other system in a business, which benefits from periodic review! In a learning culture, as the people in an organization grow and change, there are many opportunities to reevaluate and improve how we’re practicing Open Book Management.
Where to learn more: