Opening up the books to your employees
The underlying idea is simple enough: How can you expect your organization to provide peak performance if your employees don't know what they have done and what they need to accomplish in the future from a financial standpoint? Direct communication and intellectual honesty are leadership traits practiced by high performing businesspeople. Financial communication, with proper analytical insight on what really counts, continually focuses the organization on reality. Employees, both blue collar and white collar, need not be patronized but treated as the business partners they are for building greater economic value - however, that 'value' needs to be properly defined and communicated to them on a regular basis.
Each business is different, and certainly it must be argued that accounting and financial information is only a fraction of the overall information needed to make decisions that create economic value. For example, a company may have 30 percent sales growth on the income statement but also a 50 percent customer defection rate, which is not directly captured by financial statements.
The double-entry book keeping system was invented in late 15th century Italy and is certainly showing its age in terms of economic value capture. A Balanced Scorecard approach with financial, customer, internal process and innovation ratios may be a more appropriate broader measurement tool to communicate with teams regularly. Still, real profit and, of course, cash flow results are fundamental, direct measurements of corporate success. Other stakeholders do not benefit for long if the company does not make money.
Here are a few basic steps in the OBM process:
Teaching the Accounting/Finance Basics
OBM requires an investment in training employees in basic accounting and financial principals. Special areas for training include basic accounting principles (matching principal, accrual principal, historical cost, etc,); revenue recognition; gross profit and operating profit; cost behavior changes over a given sales volume range; contribution margin and operating leverage; and profit margin calculations. It is best to have several training sessions a few times a year with practical 'case studies' taught by a financial analyst who understands your business and can explain how underlying principals relate back to the financial information presented. If you want to make it fun (yes, it is possible!) there are a number of business scenario games on the market that can also help with the learning process.
Communicate the Business Model
What are the basic assumptions of your profit model and strategy? What is your customer segmentation and why? How do your profit centers obtain operating leverage (for example, the rate of gross profit increase over the rate of indirect cost increases)? How fast are your assets converting to cash within your specific customer segmentation? How are you increasing the lifetime value for each customer, and what are the net present values per customer? How are changing customer needs making it necessary to adjust the model? How do all of the elements of your business model work together and how are the financial results of your business relating back to the model?
These are key areas that need to be explained in an operational and financial context to employees so they know where they can have the most impact. Clear articulation of the business model (how the company makes a profit) within the context of an overall strategy needs to be shown in relation to the financial context. Straight talk is needed here. Without oversimplification, there are a lot of concepts that can be delivered in very clean, precise language that everybody understands.
Continuous Communication
Managers need to be consistent in the delivery of financial information to employees. If it is being started, then it should be provided on a regular basis. A 'stop start again' approach will not give the consistent effect. Managers, especially senior managers, very often removed from the 'front-line,' also would greatly benefit by regular face to face meetings with all of their team members and use the financial results as a basis of discussion on overall results.
When communicating financial analysis information, managers need not make the mistake of 'ladder analysis.' This occurs when a manager focuses on the results by making statements such as "sales went up 15 percent and costs went down six percent, etc." - like a ladder - without focusing on the real reasons behind why the financial change is taking place. The focus should be on causes of why a financial movement occurred, not just the effect.
Also it is important not to overwhelm employees with numbers. Very often, there are only a few major financial value drivers that need to be articulated consistently to get the point across: sales growth, gross profit margin, receivable to cash conversion in days, operating profit and margin. If it is possible to keep the main elements to between five to eight areas, it will give a better insight.
Graphics are also an easier way for employees without a financial background to see the position of their team and that of the company as a whole. Linear graphs against last year and budget can be used by team leaders to better communicate where the team is and where they are in relation to where they should be each month. It may also be good to show the team financial results and their relation to the overall company financial results so that teams and individuals can see how they contribute to the total company results.
Incentivization
Opening the financial results also leads directly to incentivization. The OBM process can be used to directly connect to operating profit sharing, phantom share or share option/vesting plans. It may make sense for financial analysts or managers to sit down with team members and show them exactly how they can earn more bonus money by building further long-term earning streams through their profit models. One mistake many compensation strategies have is the lack of continually communicating this last 'hand holding' step to employees. Money, many studies have shown, is not the most motivational aspect when maintaining employee loyalty, but it is a mistake not to continually address it.
Risks in Open Book
What if the competition gets hold of the information? Industry business networks, especially in Poland, are sometimes very small, and employees may seek to work with the competition. It is a legitimate concern, and leaders need to understand how far down they are willing to 'drill down' into distributed financial information (for example, individual customer profitability information). However, most businesses have resources, strategies, organization cultures, service delivery expertize, patents, R&D, etc. that make it far more protected than simply suffering some information loss. Obviously, it takes balance and judgment on management's part on what information to distribute and to whom.
Poor financial results can be de-motivating to employees without a focus on solutions. If there are bad results, then the information needs to be presented in a way that has a solution already imbedded in the communication. "We had a poor quarter, but these are the clear steps we need to take for improvement." Just dumping complaints with bad results gets nowhere.
Normally, individual salaries should remain confidential for each member of the company. This should be protected as a point of privacy. Income statement information should simply bundle salaries into one cost account.
Leverage Information
OBM shows employees that management has a high level of trust and respect for them. Real information gives them direction on how to first define value and then how to create more of it. If value is properly defined, there is less organizational ambiguity in what constitutes 'success.' OBM reduces unproductive gossip and focuses teams on the key indicators that represent real results. It can also be the foundation for productive incentivization programs. Large investments in financial reporting systems are geared toward senior managers, the head office, shareholders and regulators, but often too little thought seems to be given on how to continually communicate the created information to further incentivize people who daily contribute to building economic value for the company. Done correctly, this can have a strong impact on better financial results for the future.
Peter Strupp is Chief Executive Officer of Intersource Holding, a human capital services group based in Warsaw
Each business is different, and certainly it must be argued that accounting and financial information is only a fraction of the overall information needed to make decisions that create economic value. For example, a company may have 30 percent sales growth on the income statement but also a 50 percent customer defection rate, which is not directly captured by financial statements.
The double-entry book keeping system was invented in late 15th century Italy and is certainly showing its age in terms of economic value capture. A Balanced Scorecard approach with financial, customer, internal process and innovation ratios may be a more appropriate broader measurement tool to communicate with teams regularly. Still, real profit and, of course, cash flow results are fundamental, direct measurements of corporate success. Other stakeholders do not benefit for long if the company does not make money.
Here are a few basic steps in the OBM process:
Teaching the Accounting/Finance Basics
OBM requires an investment in training employees in basic accounting and financial principals. Special areas for training include basic accounting principles (matching principal, accrual principal, historical cost, etc,); revenue recognition; gross profit and operating profit; cost behavior changes over a given sales volume range; contribution margin and operating leverage; and profit margin calculations. It is best to have several training sessions a few times a year with practical 'case studies' taught by a financial analyst who understands your business and can explain how underlying principals relate back to the financial information presented. If you want to make it fun (yes, it is possible!) there are a number of business scenario games on the market that can also help with the learning process.
Communicate the Business Model
What are the basic assumptions of your profit model and strategy? What is your customer segmentation and why? How do your profit centers obtain operating leverage (for example, the rate of gross profit increase over the rate of indirect cost increases)? How fast are your assets converting to cash within your specific customer segmentation? How are you increasing the lifetime value for each customer, and what are the net present values per customer? How are changing customer needs making it necessary to adjust the model? How do all of the elements of your business model work together and how are the financial results of your business relating back to the model?
These are key areas that need to be explained in an operational and financial context to employees so they know where they can have the most impact. Clear articulation of the business model (how the company makes a profit) within the context of an overall strategy needs to be shown in relation to the financial context. Straight talk is needed here. Without oversimplification, there are a lot of concepts that can be delivered in very clean, precise language that everybody understands.
Continuous Communication
Managers need to be consistent in the delivery of financial information to employees. If it is being started, then it should be provided on a regular basis. A 'stop start again' approach will not give the consistent effect. Managers, especially senior managers, very often removed from the 'front-line,' also would greatly benefit by regular face to face meetings with all of their team members and use the financial results as a basis of discussion on overall results.
When communicating financial analysis information, managers need not make the mistake of 'ladder analysis.' This occurs when a manager focuses on the results by making statements such as "sales went up 15 percent and costs went down six percent, etc." - like a ladder - without focusing on the real reasons behind why the financial change is taking place. The focus should be on causes of why a financial movement occurred, not just the effect.
Also it is important not to overwhelm employees with numbers. Very often, there are only a few major financial value drivers that need to be articulated consistently to get the point across: sales growth, gross profit margin, receivable to cash conversion in days, operating profit and margin. If it is possible to keep the main elements to between five to eight areas, it will give a better insight.
Graphics are also an easier way for employees without a financial background to see the position of their team and that of the company as a whole. Linear graphs against last year and budget can be used by team leaders to better communicate where the team is and where they are in relation to where they should be each month. It may also be good to show the team financial results and their relation to the overall company financial results so that teams and individuals can see how they contribute to the total company results.
Incentivization
Opening the financial results also leads directly to incentivization. The OBM process can be used to directly connect to operating profit sharing, phantom share or share option/vesting plans. It may make sense for financial analysts or managers to sit down with team members and show them exactly how they can earn more bonus money by building further long-term earning streams through their profit models. One mistake many compensation strategies have is the lack of continually communicating this last 'hand holding' step to employees. Money, many studies have shown, is not the most motivational aspect when maintaining employee loyalty, but it is a mistake not to continually address it.
Risks in Open Book
What if the competition gets hold of the information? Industry business networks, especially in Poland, are sometimes very small, and employees may seek to work with the competition. It is a legitimate concern, and leaders need to understand how far down they are willing to 'drill down' into distributed financial information (for example, individual customer profitability information). However, most businesses have resources, strategies, organization cultures, service delivery expertize, patents, R&D, etc. that make it far more protected than simply suffering some information loss. Obviously, it takes balance and judgment on management's part on what information to distribute and to whom.
Poor financial results can be de-motivating to employees without a focus on solutions. If there are bad results, then the information needs to be presented in a way that has a solution already imbedded in the communication. "We had a poor quarter, but these are the clear steps we need to take for improvement." Just dumping complaints with bad results gets nowhere.
Normally, individual salaries should remain confidential for each member of the company. This should be protected as a point of privacy. Income statement information should simply bundle salaries into one cost account.
Leverage Information
OBM shows employees that management has a high level of trust and respect for them. Real information gives them direction on how to first define value and then how to create more of it. If value is properly defined, there is less organizational ambiguity in what constitutes 'success.' OBM reduces unproductive gossip and focuses teams on the key indicators that represent real results. It can also be the foundation for productive incentivization programs. Large investments in financial reporting systems are geared toward senior managers, the head office, shareholders and regulators, but often too little thought seems to be given on how to continually communicate the created information to further incentivize people who daily contribute to building economic value for the company. Done correctly, this can have a strong impact on better financial results for the future.
Peter Strupp is Chief Executive Officer of Intersource Holding, a human capital services group based in Warsaw
