Transparent Economics: The Key to Profitable Growth
By Bill Fotsch and John Case
Somewhere along the line, most young people learn a little about the economics of business.
Maybe a unit at school describes how a lemonade stand or a pizza shop operates. The students learn about revenue, costs, and profit. Properly taught, business can sound interesting, even fun. Imagine figuring out something you can sell for more than it costs. You’d be making money!
But then these young people grow up and get a job. And what happens? The economics of business vanish. Disappear. Now their task is to do as they’re told and collect a check at the end of the week. Making money is for the owners or executives to think about.
Where’s the fun in that? Little wonder that the vast majority of employees report that they aren’t engaged with their work. In the US the figure is 70%. Worldwide it’s 87%. What a massive failure on the part of companies everywhere.
But there’s a simple solution. Make the economics of the business come alive—for everybody. Make them transparent. Let employees see whether they are winning or losing the business game. If they win—if they improve results—provide them with a reward.
The transparent-economics approach is often known as open-book management. We have coached or written about hundreds of companies that practice open-book methods, from small and medium-sized privately held companies to large publicly traded companies. But in some ways “open book” is a misnomer. Most open-book companies don’t suddenly expect employees to understand the business’s financial statements. And publicly traded companies, of course, are not allowed to share overall financial results with most employees until they release those results to the public.
What transparent companies do instead is focus on just one or two key numbers that are directly connected to financial results. In a small company, the number might be something as simple as gross revenue, billable hours, or units shipped. In a larger one, it’s usually a local indicator. When jet fuel prices were going through the roof, for example, Southwest Airlines pilots began tracking their fuel usage. When customer demand and prices were high, BHP Billiton rail operations focused on safe tonnes shipped.
The number has to be something people can understand—EBITDA is probably a bad choice—and it has to matter. If the number moves in the right direction, financial performance improves. Moreover, it’s best to involve the team in selecting the number. It gives them some insight into what it means, and it makes for widespread buy-in.
Once you have the number, people begin to ask questions. Why does it matter? If we ship 10% more product, what effect will it have on our profits? Transparent companies generally put up a scoreboard—on the wall or on people’s computers—so that everyone can track the key number. Employees watch how it behaves over time. And they usually come up with ideas to improve it.
In an online Harvard Business Review article, for instance, we described a project at a worldwide travel company. At each of three pilot branches, a team identified a key number—in this case, site revenue minus direct site costs, known as direct profitability. Branch employees began meeting every week to review these results and brainstorm ideas for improvement.
In the past, the company’s front-line travel counselors had behaved pretty much like employees everywhere. They did a competent job, but they didn’t worry about the financial implications of a changed itinerary or a new hotel pricing policy. Now—engaged in the business of improving their branch’s numbers—they began spotting opportunities an owner might think of. A customer-relations rep in St. Louis, for instance, contacted vendors to recover money lost due to hotel no-shows and canceled flights. Over the first few months she collected $189,093—a significant savings for the company.
Those three branches exceeded their budget targets while other branches failed to make theirs. But there was something else as well. The atmosphere at the pilot branches was different. People were smiling, having fun. They felt engaged in their work, maybe for the first time in their lives.
It’s really not hard to create that kind of engagement once you make the economics transparent. Get people together and decide on a key number, along with a target for the year. Put up that scoreboard. Track results from week to week. You can even begin forecasting future results. And you’ll probably want to create a bonus plan tied to performance. After all, if employees help your company hit or exceed the target, shouldn’t they have a reward? Just figure out the incremental value created and share a portion of that. Simple.
We think business really can be engaging and fun. Transparent economics help make it engaging and fun—not to mention more profitable—for everyone.
About the Authors: Bill Fotsch, founder of Open-Book Coaching, has helped more than 300 companies around the world learn the principles and practices of open-book management. John Case, author of several books on business and management, is editor of the new online publication RetoolingCapitalism.com.