What is open book management?

Management theories can amuse or irritate as often as they inspire. Most are undermined by two problems: every business is unique, so no approach is universally effective; and every business relies, above all, on its people – the true source of its success. So, perhaps you should look for theories that aim to unleash the intelligence and creativity of people working for your company. With that in mind, one approach that might be helpful is open-book management (OBM).

The term first appeared in an article in Inc. magazine in 1993, written by US journalist John Case. However, the origins of OBM actually go back to 1983, when Jack Stack and his colleagues took over Springfield Remanufacturing Corporation (SRC), based in Springfield, Missouri. SRC, an agricultural equipment and vehicle manufacturer, was on the verge of bankruptcy before Stack and his co-owners rescued the business, taught themselves how to understand the financials and developed their own business approach, which they called the Great Game of Business (GGoB).

Stack wrote a book about it and SRC created a spin-off business with the same name, which is still helping businesses around the world to play the game and use OBM.

OBM effectively empowers employees to shape the future direction and performance of the business, rewarding them financially when things go well. First, companies open up financial information to employees, giving them the education and information that they need to understand the numbers.

“It’s not that when you share the financials some sort of magic is going to happen,” says Bill Fotsch, who was Head Coach at the Great Game of Business for almost 20 years until setting up his own company, Open-Book Coaching, in 2013. “But you can talk about the underlying economics driving the business.”

OBM is less jargon-heavy than some business approaches, but one term it uses is the Critical Number (a GGoB trademark), which is an overall target a business needs to hit in order to grow. Progress towards this and other targets can be tracked via a scoreboard of some kind, such as a page on the company intranet or maybe whiteboards hung around the workplace.

This allows employees to track the company’s progress as the financials change and see how their own efforts affect the numbers. Employees and management then discuss progress and set targets in weekly meetings, called huddles.

Over time, more employees are given responsibility for forecasting performance and generating ideas to drive improvement. They can also share in the success of the business through bonus schemes linked directly to the achievements of the company and their own performance.

UK businesses using OBM include Dyer Engineering, a County Durham-based SME that designs and builds specialised metal structures and components for clients in sectors including transport, energy and defence. It worked with Arend Welmers, CEO of UK-based management consultancy Ninety Days, to implement the management style.

Dyer’s Managing Director Graeme Parkins thinks that employees’ involvement in forecasting and target-setting is key to the successful use of OBM. Before the pandemic, each team within the business was allocated active improvement projects, which progressed at impressive speed. In 2019, a 12-month target for finding £200,000 of efficiency savings was met within three months, so it was upgraded to £500,000.

“The pros are that lots of people get involved and, from that, you can drive real cost benefits,” says Parkins. “But it is a leap of faith. It can sometimes feel counterintuitive to be open and to share things.”

ICAEW Head of Corporate Governance Elizabeth Richards sees the OBM model as a starting point for greater transparency between companies, their employees and other stakeholders. ICAEW promotes a ‘Connect and Reflect’ framework for corporate governance, encouraging employee and stakeholder engagement through improved communications around governance and strategy.

Thought leadership White Papers linked to Connect and Reflect advocate measures including company directors making greater use of social media to engage with employees and other stakeholders, and more companies appointing employee directors to improve engagement and governance, in part by boosting diversity and social mobility.

“Open-book management is going along the right lines, but it’s limited,” says Richards. “While all transparency is good, I question whether placing sole focus on financial information goes far enough.” She suggests that a focus on how employees can help make companies more sustainable may attract more interest, but she adds that employers investing in the financial literacy of their employees is a useful benefit.

Over the course of 40 years, different forms of OBM have evolved. In the past two years, Fotsch and Case have developed a new version they call Economic Engagement, which places a greater emphasis on the underlying economics driving the business and on input from customers to inform planning and strategy.

They have also collaborated with several US industry associations to create a research tool that measures economic engagement within companies, via CEO surveys. Its results show that the top quartile of companies in terms of economic engagement consistently enjoy much higher profit growth – roughly double – than the average, while the least economically engaged companies deliver the worst business results.

What this tells us, Fotsch suggests, is that it doesn’t matter which tool you use to improve economic engagement, whether it is OBM or anything else – any business that does this will benefit. “You will grow substantially faster and be more profitable than your competitors,” he says.

Of course, he would say that. But while it will not work for every business, in some cases it will. And when it does, perhaps the reason is that placing more trust in employees can make a very positive difference.

As Suranga Herath, CEO at English Tea Shop, says: “You don’t realise the impact people make until you give them a chance to understand and design their work. It’s a people-powered concept.”

Originally established in 2001, English Tea Shop is actually based in Sri Lanka and sells tea all over the world. It aims to practise ethical capitalism, particularly in the way it treats its employees and the independent tea growers at the start of its supply chain.

CEO Suranga Herath was first attracted to the OBM model as a means of implementing a shared-value approach across the business. Niluza Badurdeen, now a director at the company, was one of the first employees to work with the system in 2015. She and her colleagues were surprised by how much they enjoyed the OBM games that helped to explain how financial management works. “If you did a survey, I am sure you would see a happy set of people in our company,” she says. “This transparency and empowerment have been very helpful.”

Tying the bonus scheme into OBM has also been effective, with employees now always aware of how their efforts will translate into extra financial rewards when things go well. In 2019, the company moved into a new phase by running a share options scheme. The English Tea Shop Employee Trust owns 15% of the business’s common stocks, with shares issued at zero cost to employees, meaning more than 80 employees now also have a financial stake in the company.

Herath claims that implementing OBM has led to a 31% increase in productivity. He also believes that the system made a huge difference in helping the business cope with disruption caused by the COVID-19 pandemic.

Badurdeen says employees used the games system to devise practical solutions to the operational and financial problems caused by the crisis. “This approach was much more effective than if senior managers were trying to solve these problems alone,” she says. “When everyone can look at those numbers, you have the power to make changes.”

The ICAEW Library & Information Service provides full text access to leading business, finance and management journals. Further reading on open-book management (OBM) is available through the articles below.