The Numbers on Open-book Management

Inc.'s editor looks at the effects open-book management can have on a company's bottom line; the mutual benefits of mentoring; and a photo lab that offers business workshops for photographers.

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It's been fascinating to watch the business phenomenon known as open-book management as it has spread in less than a decade from a handful of companies to thousands of businesses both in this country and abroad. That growth is particularly striking when you consider that, until recently, there has been only anecdotal evidence that open-book management really works.

I say "until recently" because the results are just in from a study that, for the first time, statistically evaluates and quantifies the effectiveness of open-book management. Conducted by the National Center for Employee Ownership (NCEO) and funded in part by a grant from Inc., the study looked at 50 companies for a period of time both before and after they began practicing their open-book disciplines and then compared their performance with that of a group of competitors. The conclusion: revenues of open-book companies grew, on average, 1.66% faster than those of their competitors, and 2.2% faster if the open-book company also had an employee stock ownership plan.

That may not sound like much, but academics will tell you that in the world of economic data, even a 1% difference is significant. I prefer to illustrate the effect using my own method: a story.

George and Bo are identical twins, except that George is handsomer and smarter. On their 20th birthday, they start identical software companies. After 10 years, they're both doing $10 million in sales, with after-tax earnings of 10%. At that point George starts wondering why, if he's smarter and handsomer than his brother, his company isn't performing any better. He decides to implement open-book management and install an ESOP. To no one's surprise, Bo does not.

Based on the NCEO's research, here's what's likely to happen: Ten years later George's company is doing $20 million in sales, with Bo's lagging behind at just over $16 million. They both decide to sell their companies to boyhood friend Bill, who has an even bigger software company based in the Pacific Northwest. He agrees to pay them each 30 times earnings. If we assume that their after-tax margins haven't changed, Bill cuts Bo a check for $48 million and George a check for $60 million.

Of course, the assumption about margins is a rather big one. Most open-book CEOs we know say their management approach has a greater effect on profits than on sales. If that were true in this case, George would have sold his company for even more money, demonstrating that open-book CEOs really are smarter (if not better looking) than their closed-book counterparts. For definitive proof on that score, however, we'll have to wait for the next study.

Exercising your, uh, ESOPs
These days everybody seems to be confused about the difference between ESOPs and stock options--even the big accounting firms. A recent issue of Growing Your Business, a newsletter published by Coopers & Lybrand, incorrectly defines an ESOP as an employee stock option plan. In fact, the letters stand for employee stock ownership plan, which has nothing to do with stock options. Hoping to relieve the confusion, the National Center for Employee Ownership has posted an essay on its Web site titled "An 'Employee Stock Option Plan' Is Not an ESOP." If you aren't sure of the difference, you might want to check it out.

Two-way streets
Mentoring, the subject of this month's cover package, is undergoing tremendous change. "Twenty years ago we defined mentoring as supporting the junior person's learning and development," says Kathy Kram, faculty director of the executive M.B.A. program at Boston University School of Management. "Today we know it's really colearning. That's important. Someone might assume he or she doesn't have time for mentoring, but in fact most mentors find these relationships to be critical to their own survival and growth." No wonder the smartest businesspeople we know are also mentors.

'If you don't know who the fool is in a deal, it's you.'
-- Journalist and entrepreneur Michael Wolff quoting anonymous bankers in Burn Rate: How I Survived the Gold Rush Years on the Internet (Simon & Schuster, 1998, $24), in which he recounts his experiences as the founder of an early digital-publishing company

Build it and they will come
You probably know about the dark side of Volkswagen's history--how Hitler built the original VW factory in the late 1930s to make Kraft-durch-Freude Wagens, "strength-through-joy cars," to be driven on Germany's new autobahns. But only 210 such volkswagens were produced before the factory was converted to wartime production. After the war, the plant was slated for dismantling by the Allies.

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