An open-book management style might help motivate employees to work more efficiently because they can readily see how their performance affects the company’s bottom line.

Columns From: 3/1/2016 Modern Machine Shop, Derek Korn ,

Reid Leland previously worked for a company that practiced open-book management (OBM), in which the business’ financials were shared with all employees. Today, Mr. Leland leverages OBM at LeanWerks, a contract shop he started in 2003. In fact, OBM represents the cornerstone of the Ogden, Utah, company’s culture, he says.

OBM as it is applied at LeanWerks has three primary elements. The first is financial training. New employees go through four one-hour courses covering topics including the time value of money; project management; income statement, balance sheet and cash flow; and ratios such as debt to equity and gross profit to operating expenses (GP/OE). Mr. Leland says it is important that employees have a basic understanding of these concepts, especially as they are applied to his business, for the OBM model to work properly.

The second element is feedback, especially with regard to GP/OE, which is an easily understood profitability metric. When Mr. Leland became a manager for his previous employer, he created a large board listing key company financial information that was updated weekly. He did the same when he started LeanWerks, establishing a GP/OE board located in a prominent area of the shop that was updated daily. That board was recently replaced with a large monitor showing a simple spreadsheet containing GP/OE information.

All shop machine tools are listed across the top of this spreadsheet. The rows below that include the gross profit that individual machines produced each day of the month. An overall GP/OE ratio is calculated for each day by taking the sum of the gross profits of all machines that ran that day and dividing it by the daily operating expenses (including expendable tooling). The shop makes money on days in which the GP/OE ratio is higher than 1, loses money when the ratio is less than 1 and breaks even when it is 1.

This feeds the third element of OBM at LeanWerks: profit sharing. The spreadsheet includes a column with a running, month-to-date GP/OE ratio. If at the end of the month the GP/OE is 1.2 or higher, then part of the monthly profits is shared with the employees. Specifically, each 0.01 increment higher than the 1.2 value is multiplied by $400 to determine the total amount of monthly profit that will be shared with hourly employees.

Mr. Leland says sharing this type of information enables LeanWerks to be a transparent, more “flattened” organization. Even though there is a company hierarchy, accountability flows up as well as down, with OBM creating a sense of “psychological ownership” that leads to a more equitable distribution of stress. As president, Mr. Leland still feels the most stress, but now others also worry when the GP/OE ratio looks bad, and that’s a good thing. In addition, OBM provides a clearer sense of how an employee’s performance, as well as his/her suggestions for improving shop processes, impacts the bottom line. Conversely, there is no place for non-performers to hide.

OBM is not a panacea, however. Mr. Leland has had employees move on when business financials weren’t terribly strong. Similarly, while morale is high when the company experiences a profitable run, it sometimes slumps when the numbers look bad. Mr. Leland says he is often humbled by his employees’ effort and loyalty when morale is low, however, as was the case during difficult business conditions in 2009. In fact, he’s not sure the company would have made it through that tough stretch without OBM.