Yesterday, I learned from a professional practitioner (I’m not going to share any details which could identify the individual, practice or even the specific profession) of the perils of Open Book Management gone wild.
In this case, the practice broke one of the rules that even Jack Stack would consider vital in Open Book Management. While employees are supposed to see and understand the corporate books, they aren’t supposed to know or discuss individuals’ personal compensation. (They have a general idea of how much they should be able to earn, of course, and can see their performance in light of the overall practice numbers and costs, which are shared).
In this practice, everyone could see how much everyone else earned and (worse) the details of how they actually earned their fees.
Not surprisingly, the practitioner told me, this resulted in strange competitive games, especially by individuals at the top of the pecking order. One practitioner each month after receiving his report, developed a analysis of who had risen and who had fallen, and assessed in great detail the consequences.
Practitioners, he said, were gaming the system and knew they had to “protect” their own interests, so always were on the lookout for sharks ready to claim credit for their work/responsibility to add to their status (and compensation) in the practice’s systems.
Recently, a competing practice offered this successful and competent professional an offer he couldn’t refuse. I assume he received a better compensation package, but the practitioner told me the real reason he is happy he left for the alternative career is that his practice simply “puts the client first”.
“We obviously see our own numbers and how they compare to overall targets, but the only people who see the actual compensation figures overall are the executive committee and no one is to discuss or even question how much anyone else is earning,” he said. “The consequence is that, for example, when another practitioner was preparing to go on a vacation and we were jointly working with a file, my colleague said: ‘You should be able to take care of this in my absence’, and then took her too weeks off, confident the client would be well-served by me.”
“This would never have happened at the old practice,” he said. “the practitioner would have delayed the vacation or, perhaps worse, found some way for the file to sit for the couple of weeks of absence.”
A couple of years ago, I learned another peril of open book management — the danger of sharing faulty books with your employees.
As the recession of 2008/2009 hit, suddenly, our business encountered severe losses and an incredible cash flow crisis. Many of these problems arose from my overconfidence during the previous good months, and the unfortunate consequences of starting an expansion and hiring strategy just as a recession appeared. But I had another problem. Our then-bookkeeper had miscalculated some important numbers, which fed into inaccurate annual projections/review at our planning meeting and disguised how seriously wrong things were about to go. Wham. When things went bad, they cascaded downwards so fast that our employees, who had seen the weekly financial reports, were flabbergasted. Simple remedial measures would not solve the problem; wholesale cuts and painful staff reductions were in order. The mess lasted several months, and I never knew when another skeleton would emerge from the closet. The data proved to so demoralizing that some employees, whose careers were never in jeopardy, decided to leave and others spent most of their time covering their tracks rather than working on real solutions.
Thankfully, we weathered the storm. Our new bookkeeper/accounting contractor is competent but I haven’t pressed her to produce the former weekly reports (which proved to be of little ultimate planning value) as long as I can see the overall picture and get enough detailed financial data to “see” forward. Now, at the weekly meetings, I summarize my perspective and the available reports and give employees a general sense of the business health and progress but no one sees the books (they can of course communicate with me privately for additional insights if they wish.)
I expect in the future, once the embedded equity in our business is at the level it should be, we will return to the Open Book Management advocated by Jack Stack, ultimately leading to an employee-buy in program (where employees can purchase equity in and ultimately own the business). But you can’t do this sort of thing carelessly. You need to find a way to separate the Open Book Management from individual compensation information, and of course your books that are open should be accurate.