Open Up

As varied as remodeling company owners are, they share several personality traits. Most are independent-minded and strong-willed, and they tend to keep their cards very close to their vests. When it comes to management styles, “my way or the highway” is the prevailing theory.

So it comes as no surprise to learn that few management styles meet with the kind of gut-wrenching negative reaction reserved for open-book management. “I don't want anyone to know how much I make” is among the tamer of the typical responses from company owners who believe that what employees don't know won't hurt them.

Boise, Idaho, remodeler Jim Strite has been running an open-book company for 20 years. He believes in the management style enough to advocate it during industry seminars.

Photo Credit: Glenn Oakley/WpN

Such fears are unfounded. Practicing open-book management doesn't obligate you to tell your employees how much money you make. Of the 10 open-book-company owners interviewed for this article, just 2 said they share information about their salaries with all of their employees.

Nor should you be afraid that you'll be revealing the salaries of your employees. “The point isn't to get down to what individual people make,” says Charlie Gindele, president of Santa Ana, Calif., replacement contractor Dial One/Renewal by Andersen. “It's to get everyone to understand the costs of running the business, and to get them to identify areas where expenses can be cut.” As a management strategy, open book not only helps a company function more efficiently and reduce overhead, it encourages all employees to think more like owners, a boon to any company's bottom line.

But enough about what open-book management is not; what, exactly, does it entail? At the most basic level, being an open-book manager means sharing your company's income statement — or profit and loss statement (P&L) — with your employees on a regular basis. This typically occurs in companywide meetings held at regular intervals, generally no less frequently than monthly or quarterly.

While some companies reveal more than others, open-book remodelers often show only a condensed version of the P&L. “We show them a very abbreviated income statement,” Gindele says, “with seven or eight total line items.” Gindele's direct costs are lumped into one line, while overhead is broken into three; one each for field, sales and marketing, and general administrative expenses.

Many open-book remodelers who choose to share just a summarized P&L with their entire staff supplement companywide meetings with follow-up sessions for managers and other key employees. In those smaller meetings, the income statement is typically expanded so it can be dissected line by line.

Project managers at Olson & Jones Construction, in Portland, Ore., for example, know the exact revenue and gross profit margins on their individual jobs, according to company president Greg Olson. He adds that his PMs see one another's revenues and margins in aggregate on each monthly report.

Other owners choose to share a more detailed statement with the entire team. “All players in our company have access to anything they want, except what others are paid,” says Jim Strite, president of Strite Design + Remodel, in Boise, Idaho. At Strite's company, as at several others that take this approach, individual jobs are compared with the budget. “That way, we can brainstorm as to how we can make corrections before it's too late,” Strite says.

By and large, remodelers who have made the decision to become open-book companies are extremely pleased with the results. That doesn't mean, however, that they don't have concerns. “Every time we have one of these meetings, we print out the profit and loss statement and make copies of it,” says John Hanson, “and then our guys walk off with it.” Hanson, co-owner, with brother Chris, of Hanson General Contracting in Philadelphia, says that while he can't think of anything particularly harmful that would happen if one of his guys accidentally left the P&L lying around a jobsite and the homeowner got hold of it, he still makes sure to put “confidential” on it.

Hanson also worries a little bit about what would happen if he had a falling out with an employee, who then went to a competitor. Chris Ettel, partner at VB Homes, in Virginia Beach, Va., shares these concerns, and has hit upon a solution. “We don't give out too many handouts,” he says. “We do most of it through a PowerPoint presentation.” Hanson says he's considering switching his method to use a projection screen in the meeting room.

Open-book management begins, however, long before any sharing of the company P&L. You can't simply show a group of employees an income statement and expect them to understand it without any education. You have to teach them, and that, according to Strite, is another big reason why more remodelers don't become open-book managers.

“Most [owners] are technicians who have become managers and entrepreneurs,” Strite says, and he doesn't intend that comment to be derogatory. “They're doing the best they can with the knowledge they have,” he says. Gindele, a facilitator for industry consultant Certified Contractors Network (CCN), puts it bluntly: “Most of the [company owners] I work with don't know how to read their financial statements.”

"People are more tuned in to the company's performance. The word 'slippage' has entered the lexicon of our employees." -- John Hanson, Hanson General Contracting

Photo Credit: Bill Cramer/Wonderful Machine

If you're one of the majority who fall into that category, you will need to get yourself up to speed with your company's financials before opening your books to employees. Strite advises retaining the services of an accountant, and not just any old bookkeeper, either, but a professional who knows the ins and outs of the remodeling business. “Owners should find someone who has quite a few clients in construction, preferably in remodeling,” he says. “I'm amazed at the number of accountants who aren't that knowledgeable about job costing and over- and under-billing.”

Having a firm grasp on your numbers — what they are, how they relate to each other, etc. — will eliminate another hurdle that typically arises when company owners are considering open-book management: embarrassment. “If you don't have a strong understanding of your numbers, that'll be pretty well-displayed when you open up your books,” Strite says. He adds that this has the domino effect of demoralizing employees, who suddenly get the feeling that they're entrusting their livelihoods to someone who appears to be shooting from the hip.

Think of it as though you were hosting a dinner party. Most people wouldn't let their friends into their house without straightening up a bit first. Similarly, don't let employees look into your financials until they're correct and logically arranged.

But correct, up-to-date numbers don't always paint a pretty picture. Can a company that's losing money still be open book?

Gindele argues that it's at least as important for a struggling company to open its books as it is for a more prosperous outfit to do so. “Employees can't be expected to fix that which they don't know is a problem,” he says. “People operate under the assumption that if there was a problem, someone would tell them about it.”

This point — that employees need to know when things are going badly — really gets to the heart of why proponents of open-book management advocate it. “Ideally, I would like a whole company of individuals who think like business owners,” Olson says.

As mentioned earlier, becoming an open-book company is a gradual process. When Strite instituted his open-book policy, he first made sure that he could explain his company's numbers. His next task was to get his managers to a similar level of comfort. That accomplished, it was then time to roll it out to the rest of the team.

But not all at once. “You have to give it to them in bite-size pieces,” he says. Strite recommends starting with job costs, a category of expenses with which field employees are somewhat familiar. Once they understand the direct costs of everything that goes into a project, you can delve into concepts such as overhead, net profit, and gross profit margin. It takes several months to introduce everything, and the educational process never really stops. “If there isn't repetition, it'll get pushed to the side,” Strite says.

Tim Frost, president of Peregrine Design Build, in South Burlington, Vt., structured his introduction of open-book management much like an academic course. He started by explaining revenue to his employees and moved on from there, eventually covering cost of goods, gross profit and how gross profit relates to revenue, as well as markup, margin, overhead, net profit, and the work-in-progress (WIP) statement. In the beginning, he was the teacher, but eventually he turned those duties over to his controller.

Frost's company began the process of becoming open book with mandatory meetings every two weeks in an intensive education process — what he calls “Chapter One.” His company now meets monthly to review financials.

If successfully implemented, “open book” is more than just a management style; it becomes a company culture. In fact, many remodelers say they made their companies open book to create more consistency with some of their other policies. Most notably, remodelers say that open-book management is an indispensable accompaniment to a profit-sharing program.

"I would like a whole company of individuals who think like business owners." -- Greg Olson, Olson & Jones Construction

Photo Credit: Brian Lee/WpN

Hanson says that he had been distributing part of the company's profits to employees in an “ad hoc fashion” for about three years. Recently, he established a more formal profit-sharing program as part of the new open-book system. Now, he says, rather than feeling entitled to a bonus, employees understand that how they and the company perform affects the size of their bonus check. “How else would you establish metrics,” Hanson asks, if not by explaining to employees what they must do to reach the goals you set for them?

Hanson isn't alone in thinking that it isn't fair to expect employees to reach certain milestones without educating them and giving them periodic updates on their progress. “How else can people feel comfortable that I'm giving them a fair bonus?” says Jerry Burdi, president of DJ's Home Improvement, in Franklin Square, N.Y. “If you're going to have a bonus program, there has to be legitimacy to it.”

Burdi has yet to make the switch to open-book management, but is considering it for this reason, among others. Having a bonus or profit-sharing program plays a big part in getting employees to buy in to becoming a more profitable company, which is ultimately why you become an open-book company.

Many remodelers have found that not only is it unfair to keep employees in the dark about bonus programs, it isn't a smart business move. One of the major selling points of both open-book management and profit-sharing programs is that the more informed the employee, the more of an asset he or she is to the company. Remodelers who have switched their management style with that expectation haven't been disappointed.

Gindele recalls an incident where a relatively new employee filled a diesel truck's gas tank with unleaded fuel. The estimated bill to rebuild the truck's engine was $6,200. Before the company practiced open-book management, the response to this situation would have been what is typical at most remodeling companies: The employee or his supervisor would have explained the situation to Gindele, who would have been left to figure out how to find the money to pay for the repair.

In this case, however, the involved employees put their heads together and went to Gindele with the problem and a solution, suggesting ways to cut costs to save the needed amount.

Strite, who has had his books open for 20 years now, says his first attempt at managing this way actually failed. “I didn't hire for culture at that time,” he says, noting that he had a key manager who didn't buy into the process. Since then, he says, “I'm very cognizant of disclosing how we work and what the expectations are during the hiring process.”

Having employees who work well together is particularly important at an open-book company, when it will often be apparent whose performance and whose mistakes are costing the company money. When those situations occur, it's imperative to have a team that is interested in solving the problem, not pointing fingers.

Olson has only been running his company under true open-book principles for the past year or so. He hasn't yet gotten to where he wants to be, but he has a clear endpoint in mind: “Eventually, I want everybody in the company to see the bottom line, and to say they have a stake in it,” he says. “I want them to be concerned about the bottom line because of that stake.”