HR learns how to open the books - human resources management

The techniques of open-book management demonstrate how to work on all fronts in pursuit of a common goal.

Asked to describe the challenges facing an HR manager in an open-book company, Eric Bergstrom pauses. Then he grins. We're talking by phone, but you can still hear the grin.

"Where do you want me to start?" he asks. Then he begins ticking off the particulars. Recruitment. Training. Compensation. Managing change or, as he puts it, "facilitating the transition in the workforce from observer to participant."

Surely these aren't so different from the challenges facing HR people anywhere? No, they aren't, agrees Bergstrom, manager of organization development for the Northeastern Division of Donnelley & Sons, the big commercial printer. But open-book management, he adds, forces HR people to deal with issues in these areas that most companies are only beginning to contemplate. As a result, open-book companies are analogous to an advance guard, a harbinger of the future. Their problems will soon be common problems, if they aren't already. The solutions they're developing are solutions that HR people can learn from, regardless of how "closed" or "open" their current employer might be.

The logic is compelling. Even as companies today expect more specific knowledge from HR professionals about benefits, liability and other issues, they're also expecting a broad, holistic approach to HR issues. "HR people in recent years have become strategic business partners with top management," says Terry Lauter, SPHR, a principal with the HR consulting firm Humanomics of Granada Hills, Calif. "They have to make sure that HR activities are aligned with the business goals of the company."

At the same time, the HR department often is asked to oversee the change initiatives designed to get other managers and employees aligned with those business goals. "An HR executive's main job? To be change-management director of the organization," says Lauter.

CREATING COMPANIES OF BUSINESS PEOPLE

In open-book companies every employee is trained, empowered and incentivized to understand and pursue the company's business goals. The movement started about 15 years ago, led by a handful of pioneers such as Springfield ReManufacturing Corp. (SRC), Physician Sales & Service (PSS, now PSS/World Medical) and AES Corp., a worldwide operator of power-generating plants. Today, hundreds of companies in virtually every industry practice open-book management in one form or another. The majority are small to mid-size. But several larger organizations, such as Donnelley, have been dipping their toes in the open-book waters.

In effect, open-book management takes several themes in contemporary management to their logical conclusion. Do we think training is important? It certainly is, say open-book companies, but let's train people not just in job-related skills, let's train them in business basics. Let's help them understand what all those numbers on their company's financial statements mean. Do we want empowered employees? Sure, but let's empower them to work toward business and financial objectives, not just operational goals. Variable compensation? By all means, but let's do it right. In open-book companies, bonuses and profit sharing typically amount to a significant percentage of total pay, and everyone knows exactly what must happen before the extra money can be paid out.

The open-book environment, in short, is designed to create companies of business people, companies in which the walls that separate Engineering from Marketing or hourly workers from salaried workers begin to break down. Open-book companies involve employees in the discussion of the organization's strategic goals and the creation of the annual plan. They help employees determine the "critical numbers" that must move in the right direction if the company is to achieve its goals. They put up scoreboards to track their progress, and they ensure that everyone has a financial stake in success.

A company attempting to organize itself along these lines can't succeed unless the HR function takes on new importance and unless HR managers are willing to consider bold innovations in how they go about their business. Hiring and performance evaluations present new challenges. Training must be revamped. In nine cases out of 10, a new variable-comp system must be devised. And someone, of course, has to take responsibility for managing the process of change.

CONFRONTING THE CHALLENGES

Let's look at how some open-book companies manage these interrelated challenges.

* Hiring. "Hire for attitude, not aptitude" is a buzzword these days. Even so, it represents an inescapable truth: Companies need people who want to pitch in, learn new things, take on new challenges. And no company needs such people more than an open-book company. "You have to have the right people," says Carol Carroll, president of Grafton Staffing & Technology Services, a recruitment and temporary-help firm headquartered in Overland Park, Kan. If "you get people who are doubters, people with low trust factors, it just won't work."

Preston McMurry, chief executive officer of McMurry Publishing in Phoenix, argues that you can't assess intangibles such as a person's "trust factor" from interviews alone. The company's hiring process includes an 88-question personality profile designed to measure levels of trust, sensitivity and willingness to take responsibility.

PSS/World Medical employs a structured interview aimed at eliciting many of the same traits. The company also relies on a technique one wag has dubbed, "Call us because we won't call you." After an interview at PSS, a candidate for a sales job is likely to hear nothing at all from the company, even if the interviewer desperately wants to hire the applicant. The reason? It's a test of attitude, of desire. "We want the kind of candidate who will call us back and say, 'Hey, how about that job? Can I come back for another interview?'" writes CEO Patrick Kelly in his new book, Faster Company (John Wiley & Sons, 1998).

* Performance evaluation. Not surprisingly, peer and 360-degree review procedures are popular at open-book companies. TriNet Employer Group, for example, a professional employer organization in San Leandro, Calif., asks employees to rate team members on 20 different behaviors from "Work product is complete and accurate" to "Radiates a positive attitude toward change and challenge." The software used by the company compares each employee's score with a company average; managers discuss the results with individual employees, teams or both.

But open-book companies also have devised tools of their own to give the kind of feedback employees need in this kind of environment. Managers at McMurry Publishing, for instance, are expected to spend four or five hours preparing an annual review for each employee. Step 1: Gather information from several people who work with the individual under review. "I encourage managers to ask two simple questions," says McMurry, who oversees the review process. "One is, 'What does this person do best?' and the other is, 'What would you like to see him or her improve on most?' It makes the review easier to conduct."

McMurry's managers may welcome the help because Step 2 involves preparing a review that can run as many as 10 single-spaced pages. Using a five-point scale, the review rates employees on how well they live up to the company's eight core values, such as "Deliver raving customer service" and "Produce quality always." It also assesses how employees have furthered key operational strategies, such as "Hire attitude first, talent second" and "Promote teamwork." Discussions with employees about these reviews may last a couple of hours each. Why so elaborate a process? "It sends an unmistakable message," says Chris McMurry, chief operating officer. "First about what we consider important and, second, about how seriously we take people's career development. Without that kind of attention the open-book system can't work."

* Training. Training budgets have expanded in recent years, and many companies have even begun to train their employees in basic business literacy. A testament to this trend is the growing popularity of seminars such as "The Accounting Game," produced by Educational Discoveries Inc., and board games such as Profit & Cash, developed by Capital Connections. When Shrock Cabinet Co., based in Dublin, Ohio, played Profit & Cash with 40 managers, "People came away with a much better feel for the intricacies of making money," says HR Director Mark Stewart.

Open-book companies use such tools or develop their own. PSS/World Medical and several other companies have developed home-grown versions of TV shows such as Family Feud and Jeopardy for teams of employees competing to answer questions about business and finance (see "Fun Ways to Learn about P&L," HRMagazine, February 1996). But they also take business literacy a couple of steps beyond the basics. For one, they make a point of teaching not just business but their business. Donnelley financed the development of an elaborate computer-based business-simulation game, which allows players to manage a company in a mythical industry that happens to be very much like commercial printing. AES Corp. teaches finance to its power-plant technicians; class exercises might include calculating a net-present-value analysis of a new bulldozer the plant is about to purchase.

Then, too, open-book companies make sure that the training doesn't stop at the classroom. A class might focus on the importance of key numbers such as gross margin or selling expense, and a scoreboard erected in the lunchroom will display gross margin and selling expense, both on a month-to-date and a year-to-date basis. A class might teach the relationship between labor productivity and profits and then ask work teams to calculate and chart their labor productivity each week. As any educator will tell you, there's nothing like repetition and use to make sure that learning sinks in.

* Compensation. It's no news that variable-comp plans have spread like wildfire recently. More and more companies are paying bonuses, sharing profits and distributing stock (or stock options) well beyond the executive suites. What's less clear is whether these plans are achieving the desired effect, which is (in one CEO's words) "to help our people think like owners" and focus attention on business performance. Some bonuses and profit-sharing plans are discretionary. Others are paid out according to formulas that no one understands. After a few good years, the variable portion of an employee's pay is likely to be considered an entitlement - which is exactly the opposite of what was intended.

In the typical open-book company, the system is quite different. First, bonuses are pegged to the attainment of clear performance goals. These are spelled out in the company's annual plan and may indeed change from year to year as the company pursues different strategic priorities. Second, education about the bonus-the numbers that determine it, when and how it will be paid out-is an intrinsic part of the company's business-training program. Third, progress toward the bonus is tracked on highly visible week-to-week or month-to-month scoreboards. The goal is simple: Employees should know exactly what has to happen for them to earn a bonus and exactly what they will get if they do earn it.

At TriNet Employer Group, the numbers determining the bonus appear on the company's monthly scoreboard, which is distributed to all employees. When TriNet pays its quarterly bonus, people get separate checks dubbed "Reality Checks." Instead of the usual year-to-date payroll information for each individual, the stub contains the company's income statement and balance sheet, along with three concise lines showing the bonus calculation. Says CEO Martin Babinec: "If you lump a bonus in with regular pay, it loses its meaning. These Reality Checks are a very powerful tool for reminding people that the bonus isn't an entitlement."

* Change management, Of all the tasks facing HR people in the new environment, managing change is surely the most important and the most difficult. Without astute change management, companies' efforts to improve performance fall flat. For the past few years, however, Dilbert-jaded employees have been rolling their eyes at any new change initiative. "The frontline workforce isn't sprinkled with a handful of cynics," wrote T.J. Larkin and Sandar Larkin in the Harvard Business Review. "It is cynical through and through."

How do you break through that cynicism? One sure route to failure is to launch a change initiative with a huge amount of fanfare, implement it from the top down and expect behavior to change instantly. Most open-book companies (not all!) have learned how to stay off this path and instead pursue a step-by-step approach that emphasizes small changes building on each other.

For starters, companies rarely implement open-book management all at once. In fact, they may start without "opening the books" at all. Instead, they identify a number such as inventory accuracy or cycle time that would have a beneficial effect on the financials. They help employees understand what the number means and engage them in brainstorming about how to improve it. They might establish a three-month improvement goal, set up a scoreboard to track progress and promise a pizza lunch if the goal is reached.

"Games" like these teach people to watch key numbers and learn how to improve. They are also a ready-made vehicle for employee involvement, which explains why even companies with well-developed open-book programs sponsor and encourage "side games" that focus on operational weaknesses or challenges. Donnelley's Northeastern Division has even established a Small Games Council to oversee employee game playing. And the games continue. At the moment, for instance, pressmen in one of the company's modules have devised an auto-race format pegged to press performance. If a press crew beats its production goals for the month, its car moves around the track so many laps. Cars lose laps for certain levels of spoilage. "The machinists and electricians in a press's support group are like its pit crew," says Eric Bergstrom. "They all know which press is their press and some even know how many laps ahead or behind their press is."

REINFORCING THE PARTS

The essential lesson of open-book management, however, isn't just in the step-by-step approach. It is in the fact that its parts reinforce one another. Business-literacy training is reinforced by scoreboards. The importance of numbers on the scoreboards is reinforced by a bonus system. Understanding the bonus is one goal of the training. And so on. Ideally, the system becomes a mutually reinforcing system of change.

To be sure, it isn't simple. Open-book management involves HR people on a dozen different fronts and expects them to manage a thoroughgoing change in the organization. On the other hand, HR people these days are used to challenges. What they can learn from open-book companies is how to work on all these fronts in pursuit of a common goal, rather than forever working at cross purposes.

For links to resources on the World Wide Web concerning open-book management, see the HRMagazine section of SHRM Online (http://www.shrm.org).

John Case is the author of The Open-Book Experience: Lessons from Over 100 Companies That Successfully Transformed Themselves (Addison-Wesley, 1998) and editor of the monthly newsletter Open-Book Management: Bulletin. For a free list of resources and sample of the newsletter, fax a request to (617) 499-2996.

COPYRIGHT 1998 Society for Human Resource Management
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