A management philosophy for surviving the global economy
March 11, 2004
Today global competitors are literally willing to work for food. U.S. workers want a car, a home, and a college education for their kids in addition to their meals. Reducing pay and eliminating benefits is not an answer for anything but a lower standard of living. The challenge is not reducing compensation but rather dramatically improving productivity. Making owners out of employees is the ticket to that productivity. Open Book Management is a philosophy—a value system.
Editor's Note: This article is adapted from Larry Dunville's workshop presented at the STAMPING Journal® Forum: Strategies for Stamping Success, Feb. 5-7, 2003, Orlando, Fla.
U.S. manufacturing is experiencing the most significant threats in its history. Since World War II, U.S. manufacturing has been battling one economic threat after another. Automobiles, textiles, computers—every segment of every market is under unrelenting competitive pressures. A decade ago Japan seemed impossible to beat, but now China is pummeling Japanese manufacturing.
In response, businesses have implemented total quality management (TQM), ISO 9000, quality circles, benchmarking, and other programs to try to beat the competition.
The life cycle of these programs sometimes is much like the life cycle of fashions for high school students. Nobody would be caught dead in last year's blue jeans, everybody who is anybody has the new blue jeans, and nobody would consider wearing this year's blue jeans next year! Is it any wonder workers think, "Just wait a little and this program of the month will pass too"?
So what is open-book management (OBM), and how is it different from other programs? While TQM, ISO, and the rest are tools or programs, OBM is a philosophy—a value system—rather than a program.
In the 1950s Douglas McGregor made popular a management theory of two polar positions, Theory X and Theory Y. Theory X states people dislike work and have to be told what to do. Theory Y states people like work and are more productive when given responsibility. OBM is a corollary to Theory Y: It says that to pay for workers' hands without engaging their heads and especially their hearts is a terrible waste we can no longer afford.
Today employees of global competitors are literally willing to work for food. U.S. workers want a car, a home, and a college education for their kids in addition to their meals. Reducing pay and eliminating benefits is not an answer to anything except a lower standard of living. The challenge is not reducing pay, but dramatically lowering labor cost. The only way to maintain or increase pay while lowering labor costs is to increase productivity. Making owners out of employees is the ticket to that productivity.
Our society encourages home ownership over renting because we know that people who invest themselves in their community will do more to contribute to the lives of their neighbors and themselves. A business is no different. Owners give their hands, head, and, most important, their heart. But how do you make owners out of workers, and how do you convince owners that giving up some of the unilateral rights of management will result in better performance?
Most employees do not have the wherewithal to buy in. And most managers are scared to give up an ounce of their hard-earned power. If there were some way to transfer some of the right and responsibilities of ownership, the results would be breathtaking.
Dearborn Crane & Engineering, Mishawaka, Ind., practices OBM, making owners out of employees. It follows the five necessary components of a successful OBM philosophy:
I first realized something was wrong during my first summer working for my father. I was introduced to the strangest concept.
In the process of building a crane, a mistake was made. Because the problem was discovered late Friday and we had to ship on Monday, the shop foreman posted that we had to work a half-day on Saturday. After reading the posting, one of the men heard me grumbling about working Saturday. He turned to me and said, "Are you nuts? Don't you realize we get time and a half on Saturday?"
That cause-and-effect relationship has haunted me to this day. Make a mistake on Friday and get paid time and a half to fix it on Saturday. I don't mean to imply anything was purposefully ruined. My point is that if everyone worked effectively, there was no overtime, but if performance was haphazard, everyone got a weekend bonus. What's wrong with this picture?
I knew there had to be a better way, and I've spent much of the last 35 years trying to figure out what it is. Now and then owners have to ask themselves, "What is the message I'm sending here, or more important, what message am I not sending?" In effect, my company paid a bonus for bad performance, with no hope of a bonus for good performance. Since then we have tried a year-end bonus, gain sharing, sales commissions, and just about every other pay scheme imaginable. Most caused more problems than they cured. OBM was not our first try at finding an answer to this problem, but it was the first one that worked in both a boom economy and a bust economy.
Occasionally I see articles in The Wall Street Journal, USA Today, and other periodicals lamenting the average person's lack of economic knowledge. One article said many people believe the average business makes a 300 percent profit margin.
One of a company's biggest battles is to convince its employees how low the margins really are. Employees see a wage of $15 per hour and a charge-out rate of $50 per hour. Without seeing all the numbers, what else are they supposed to think?
One of the real challenges was establishing a common vocabulary so we could communicate effectively. For instance, to most employees, "gross profit," "net profit," and "profit after taxes" all mean just "profit." In their eyes, if their take-home pay is around $15 per hour and they know the charge-out rate is $45, they reason that the company profit margin is an obvious $2 for each $1 of cost, or a 200 percent markup. Furthermore, with 200 percent profit on annual sales of, say, $10 million, the company must be making a $6.7 million profit!
When faced with this logic, we came to two quick conclusions: Show employees the financials so they can see the real challenge we're facing every day and outlaw the word profit. Instead, make sure all conversation uses the terms "gross profit," "net profit," "profit before taxes," and "profit after taxes" properly. Obviously, we then had to couple this with mini finance classes on the differences among the types of profit.
Education was the first hurdle that I was not prepared to jump. Once we established the OBM system, everyone wanted to know just the bottom line. Few wanted to spend the time to understand how we got there. My challenge became how to make everyone live the numbers. It is critical to understand that this has nothing to do with the education level of the work force—engineers, salespeople, welders, and even bookkeepers often know little about finance.
Our controller developed a program that described how to read a profit and loss statement, the balance sheet, and the cash flow statement. The course consisted of four one-hour sessions, and we limited the class to about four people at a time. Not only did the economic education work, but perceptive questions actually led to changes in our accounting system.
The next step is to get the information out there. We call this our "chalk talk." On the last Friday of each month, we have a two-hour meeting (yes, two hours of lost time for everyone).
During this meeting we talk about all the issues that we consider to be our economic vital signs—dollars quoted, new work, safety, the U.S. and world economies, and so forth.
We then break for a group lunch, provided by the company. Sometimes lunches are a chili cook-off, sometimes just a pizza. These lunches give the shop, office, and field people a chance to talk and mingle.
After lunch comes the money part of the meeting. The previous month's financials are put on an overhead projector and reviewed, as well as individual job performance, both good and bad. All questions are fair game, except individual salaries, which are confidential. And I can assure you, everything under the sun has been asked.
Initially getting questions was like pulling teeth. I even used tricks like handing out Indiana lottery tickets to everyone who asked a question! It worked, but it continues to be a constant battle.
I chose the word dividend carefully, rather than reward. A reward is for someone who finds something out of luck. A dividend is a benefit of ownership that results from muscle and brain power—from engaging the head and heart.
Most people who are treated like owners will act like owners. And if they act like owners and you want them to continue to act like owners, they need to reap the benefits of ownership. A foundation of trust is a prerequisite to OBM's success, and a direct relationship between pay and performance is at the foundation of this. It should also be recognized that some years owners work harder than ever but there are no profits to distribute. This is part of being an owner and part of the game. The biggest mistake owners can ever make is to pay out when the company is not making money.
Remembering that we are a union plant but this was not part of our union negotiations, I announced at our first meeting that we would establish a profit-sharing pool, based on 10 percent of the previous month's net profits (before taxes) and distribute the money equally to all full-time employees. This 10 percent number was an arbitrary number I decided on at the inception of the plan. At the end of the first year we would jointly, review the 10 percent number and possibly revise it up or down, depending on what was fair to both them and the company. We distributed only 5 percent at the meeting and retained the other 5 percent until year's end. On one hand, I felt there had to be immediate cause and effect between the employees' effort and its results, so a quick payout was essential. On the other hand, I felt the payout had to be big enough to get their attention to really have an effect. With a half payout in the following month and the year-end payout (the total amount retained during the previous 12 months), they received a check for several thousand dollars at year-end. Needless to say, this really got their attention.
The OBM process is hard to get started, and it's even harder to maintain the enthusiasm needed to keep it going. It's costly to implement and even more costly to continue, especially when each person loses two hours a month for chalk talk alone.
So what is the payback? I'll tell you, but I have room only to describe the tip of the iceberg.
During our first five years, combined shop and office productivity increased 532 percent. Most investments in machinery yield productivity increases just for the operator and the machine. By comparison, our 532 percent is across every employee in the company.
Besides the productivity increases, our recruiting has become much easier, and our employee retention has vastly improved. During the peak of the '90s boom, when other companies were advertising for employees and giving signing bonuses, we had people lined up at our door. One of our competitor's best salesmen said to me during a tradeshow, "I'm tired of getting beat by you guys. Do you have any openings?" He's now our leading salesman.
If you're still wondering why you should implement OBM, consider this: Do you know anyone who has ever given a rental car a car wash? Start leading the "renters" in your organization toward becoming "owners"—before your competition figures it out.