Saturday, May 27, 2006

Opening the Books to Your Employees

A few years back I was asked to take over management of a troubled division within our organization. It was racking up huge losses and upper management was considering disbanding it. When I first met with the staff, I discovered that only two people in the organization knew about the situation. The entire rest of the team had no idea that there were problems at all. Furthermore, they knew nothing about how the organization functioned financially. They just did their jobs and figured everything else was being taken care of.

The view from the outside did not match the reality I discovered on the inside, either. There had been very little transparency to upper management. It is possible through accounting chicanery to conceal the mechanisms of financial loss. The bottom line had become obvious, but the details were murky.

The losses were due to several factors. There were bad debts on the books as accounts receivable. We had excess office and lab space and we had purchased several items on credit whose payments didn’t match their productivity. What I did not find was any indication that the organization needed to be dismantled. In fact, the employees had tremendous esprit de corps and well-deserved pride in what they did. They had a great reputation with their customers, too.

To make a long story short, we went from loss to profitability in 9 months. The thing that had the biggest impact was presenting the financial situation and mechanisms to everyone in the division. Once they understood the situation, they pitched in with glad hearts and made the sacrifices that were necessary. Important staff members gave up individual offices to save space costs. Technical gurus pitched in to clean out underused facilities so we could divest ourselves of them. A team within the division whose customers had not paid their debts, but whose product was legendary, voluntarily disbanded themselves and moved on to other jobs within the organization. No one wanted to let their fellows down and see the division divided up and cast to the four winds.

I spoke with the owner of one of San Diego’s largest brokerage firms recently and he told me a similar story. As the sole owner of the company he decided to open his books to his employees. His CFO counseled against it. He was warned that doing so would cause jealousies among the staff when they found out what each other were paid. He did it anyway, incrementally over time. The result was a team that worked even harder. They could see the exact relationship between their efforts and the success of the company. They also had a direct interest in success as they saw how pay was linked to achievement. The result was a more motivated workforce and growing profits.

We routinely ask our coworkers and employees for added effort. When we do that, do we also show them the precise linkages between cause and effect?

More busienss and financial posts can be found at the Carnival of Business and On the Moneyed Midways.

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1 comment:

Anonymous said...

I work for a privately held company and each month the CEO goes over the numbers for each area. I think it's a great way to give the employees an understanding of the numbers and to see, sometimes, how a very little change in savings or revenue can affect the bottom line.