Communication: Open-Book Management 101
Like all CEOs, Jay Goltz was painfully aware of how expenses can whittle away profits. "I'd spend all day looking at bills and think, 'If my employees only knew what it takes to keep this place going," says the president of $7-million Artists ' Frame, in Chicago. Meanwhile, he suspected his employees were studying invoices of pricey framing jobs and wondering, "Why aren't we making more money?" Goltz decided that a meeting of minds was in order. "It occurred to me that employees had no idea what workers' compensation costs or what I spend on advertising or rent." So he decided to show them -- in a way that they all would be able to understand.
Last January, Goltz gathered his 110 employees for a role-playing session, during which vice-president of operations Mitch Gabel posed as a customer with a $100 framing job and Goltz represented "the company." Using a fistful of oversize dollar bills, Gabel handed over his "cash" as Goltz itemized the expenses that went into attracting the customer and completing the job. "What do you think our ads in the yellow pages cost?" Goltz asked the employees. "It's $50,000 a year, or about 5% of each job ." Gabel relinquished $5, and then watched his stack of money shrink as Goltz continued collecting for health insurance, maintenance, rent, materials, labor, the telephone, and so on. When he was finished, Gabel was left with a paltry $5. "It was easy for employees to see that the difference between making money and losing money is sliver thin," says Goltz. "I wanted them to get perspective on the expenses that aren't obvious to them and to use that information to make better decisions."
Did he make his point successfully? "It got me thinking about how much the company spends on inventory," says Victor Torres, who is in charge of ordering supplies. He says he now orders materials in bulk to save money on freight and takes care to use whatever inventory is in-house before reordering. And Henryka Kowalska, a supervisor in the mat department, says the presentation "changed the way I process paperwork." She now makes sure the right material is in stock and in perfect condition before she passes the order on to production. "We save time and material," she says.
"For an hour's worth of time, I couldn't ask for a better payoff," says Goltz, who will now begin a series of smaller, more focused meetings. "We'll teach the production people the cost of a redo and show the salespeople how much it costs to lose a customer," he says. "That kind of presentation brings everything down to the level of their own pocketbooks, and it doesn't require a lot of heavy-duty financial analysis."
DONNA FENN | Inc.com Contributing Editor
Donna Fenn is the author of Upstarts! How GenY Entrepreneurs Are Rocking the World of Business and 8 Ways You Can Profit From Their Success, an exploration of the ways Gen Y is changing the entrepreneurial landscape.