To Beat the Recession, Open Your Books

Revealing company finances to employees may seem scary, but CEOs who practice open book management swear by its ability to lower costs and boost profits

By John Tozzi

Commercial aircraft supplier Tracer was in trouble last November. The 27-employee Milwaukee company, founded in 1993, saw sales fall 20% below already lowered projections. With inventory stuck in the warehouse, Tracer's entire staff knew exactly how much they needed to drive sales to hit their monthly target. Founder and CEO Bill Morales, 52, was on the road, but in his absence his team negotiated a deal that would move some 747 parts out of inventory at a deep discount. Morales approved the price, and his staff did the rest. It was the kind of ground-up effort that has helped Tracer avoid any layoffs, even though 2009 sales are still down 30% from last year.

Most entrepreneurs keep the inner workings of company finances hidden from employees, especially when their businesses are struggling. But executives like Morales have embraced open book management, an approach based on transparency and accountability. They train their employees to understand key financial measurements and show workers how their actions affect profits. More than 10,000 companies practice some form of this philosophy, estimates Jack Stack, CEO of Springfield ReManufacturing, who pioneered the technique in the 1980s. Many executives fear that competitors will learn sensitive information if they open their books to employees, and some think their workers have little to offer. But proponents say open book management makes healthy companies more efficient—and can save a company in distress.

Open book management was born as a turnaround strategy. "I did it in 1983 to save 300 jobs," says Stack, 60. He spun out SRC, then a struggling engine division of farm-equipment maker International Harvester in Springfield, Mo., into a separate company owned by employees. Stack, who reviewed SRC's income statement with the staff on a daily basis, used the philosophy to take the company from the edge of bankruptcy back to profitability.

Stack also created SRC subsidiary the Great Game of Business, a conference and consulting group that does over $1.5 million in annual sales, to spread the idea of open book management. He says open book management holds added currency today because of the recession, when countless entrepreneurs are struggling. "The real tragedy is that we have for some reason created an image and an impression that the CEO is to have all the answers, in good times or bad," he says.

awareness and accountability

At Tracer, Morales began looking to his staff for answers two years ago, after the aviation-supply business had been battered by years of airline bankruptcies and rising fuel prices that followed the September 11 attacks. Putting more power in his workers' hands helped reduce costs. For example, when workers learned that it cost $5,000 a month to heat the warehouse, they found ways to lower the bill to $900 by changing the heating system and wearing coats. "We've cut our overhead significantly just because of awareness and accountability. Now we're in a downturn, and you don't have to sell as many parts to make money," says Morales.

Top managers have to accept transparency for the system to work, and some resist giving up control. And while many open book companies have some form of employee ownership or profit-sharing, not all employees want roles in managing the company. Morales says some workers told him: "Bill, if there's problems with the cash flow, if there's problems with the company making money, I really want you to deal with it. I just want to do my job."

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