Chapter 5 – Open-Book Management
The more people know about a company, the better that company will perform. This is an iron-clad rule. You will alwaysbe more successful in business by sharing information with the people you work with than by keeping them in the dark. … Don’t use information to intimidate, control, or manipulate people. Use it to teach people how to work together to achieve common goals and thereby gain control over their lives.
The Language Cure: how open-book management works
When I talk about open-book management, I’m referring to the practice of communicating with people via the numbers. This is a cornerstone of the Great Game of Business as we play it at SRC. I’m not saying … it’s a cure-all … people aren’t going to believethe numbers if you haven’t established some credibility and begun to foster a sense of mutual respect and trust. And people aren’t going to act onthe numbers if they’ve never had the experience of winning, if they think of themselves as losers, if they walk around with sand in their eyes. And people aren’t going to care about the number if you haven’t given them a sense of the Big Picture by educating them about how the company works, where they fit in, and why it all matters.
Start with the basics. Once you’ve laid the right foundation, then it’s essential to teach peope the numbers, because numbers are the language of business, and you can’t understand business, let alone play the Game, if you don’t speak the language.
Take the Emotions Out of the Business
I am second to none in believing that business ought to be people oriented. But no company serves its people well be elevating emotions over numbers. That’s one of the things I like most about open-book management: it takes the emotions out of the business, or at least out of the decision-making process.
Let people evaluate the situation for themselves. Don’t do it for them with rah-rah squads. You can communicate more clearly with numbers. If I tell people one plus one is two, that message gets through without distortion. The challenge is to get people to appreciate what I really mean by one plus one is two.
And when you have bad news to deliver, the numbers are crucial. It’s hard to share bad news. … So the person who is supposed to deliver the news tends to put it in the best possible light, which often undercuts the message. … So somehow you want to send the message clearly without getting people down. You can do that with numbers.
Magic Number: why open-book management works
There are only two ways to make money in business. One is to be the least-cost producer; the other is to have something nobody else has. … If you have the lowest costs in the market, you can undersell the competition and still earn a profit. By the same token, you don’t have to worry too much about losing business to competitors who charge less. If your costsare lower, a price war is going to hurt them more than you.
On the other hand, it’s always nice to have to come up with an edge that customers can’t get anywhere else. Maybe it’s quality, maybe it’s a particular service, maybe it’s a unique product, maybe it’s a brand name. As long as you’re the only one who has it – and customers want it – you can charge a premium for it.
The best way to control costs is to enlist everyone in the effort. That means providing people with the tools that allow them to make the right decisions. … Those tools are our magic numbers. Every business has them. Specifically, they are the numbers that tell you whether or not your costs are lower than your competitors’. To know what your costs should be, you have to find out what your competitors’ costs are – what their labor rates are, how fast they make their product, what fringe benefits they offer, what other incentives they provide, what they pay for material, what their debt levels are, and so on. Only then can you determine what you must do to be the least-cost producer.
Of course, when you’re striving for lower costs, you can also try to come up with additional services – services that nobody else has. … The idea is to offer something that allows you to charge a little more. In most businesses, however, you’re not going to be able to charge a lot more. So you can never stop trying to be the least-cost producer.
Improvements Come in Fractions; Only Surprises Come in Whole Percentages
The best argument for open-book management is this: the more educated your workforce is about the company, the more capable it is of doing the little things required to get better.
Business is a game of fractions. If you look at the income statements of corporations today, you’ll see that very few of them have pretax margins above 5 percent. So a 1 percent improvement in profitability is very, very significant, but it takes time to achieve it. Surprises, on the other hand, pack a bigger punch. … nobody hates surprises more than the manipulative control freaks who practice old-fashioned, secretive, need-to-know management. That way of operating virtually guarantees a steady stream of surprises, because people don’t have the tools they need to forecast and project, to live up to their commitments.
The Sixth Higher Law Is: You Can Sometimes Fool the Fans, But You Can Never Fool the Players.