Open Book Management

A value-added service CPAs can provide to clients or implement in their own organizations.

In Brief

Share, Train, Empower, and Reward

Open-book management is a simple yet powerful approach to managing a business whereby a firm--

* shares a broad array of financial and other information with employees,

* trains employees to become more business literate,

* empowers them to use the information in their work, treating them as partners, and

* rewards them when the company is successful.

CPAs should have a competitive advantage in advising clients on open-book management, and such consulting could be a pathfinding service as envisioned in the CPA Vision Project.

The authors report the experiences of several CPAs and other professionals who have successfully consulted on open-book management, including some who have adopted open-book management in their own practices.

CPAs outside of public practice should take a look at the concepts for their own employers and organizations with which they are involved. The CPA Vision Project brought together some 3,000 rank-and-file CPAs to participate in 177 regional future forums held in 1997 and a national future forum held in 1998. The project, a joint effort between the AICPA, state CPA societies, and the accounting profession, sought to articulate a common vision of the 21st century CPA. Of the five consensus issues that have surfaced in the project, two of the most provocative are, first, that "the market demands less auditing and accounting and more value-added consulting services" and, second, that CPAs must become more market driven and less dependent upon regulatory requirements to grow their practices.

To some extent, the profession already has begun to reposition itself to meet these challenges. As recently reported, the revenue structure of CPA firms has begun to shift significantly. Over the past five years, auditing and accounting revenues have decreased from 52.26% to 36.33% and tax revenues have decreased from 24.17% to 20.01%, while consulting revenues have increased from 22.92% to 27.73%. Services identified as "other" have increased from 0.65% to 15.93% in revenues. These statistics suggest that some CPAs have already become pathfinders, providing new and innovative value-added consulting services to their clients. As noted in the CPA Vision Project, a pathfinder "develops and champions a successful new service" and "plays a key role" in ensuring that the service is successful.

Open-book management is a pathfinding consulting service that is especially suited to the talents and skills of the CPA. There are a number of types of consulting opportunities open-book management can offer to the CPA, and the relevant consulting services can be marketed quite effectively. By noting the experiences of the early pathfinders, other CPAs might be stimulated to consider open-book management for their own practices. Open-book management is also an approach that CPAs in business, industry, not-for-profits, government, and education can employ to help accomplish the objectives of their organizations.

What Is Open-Book Management?

Open-book management has been widely publicized and discussed in recent years. It has been the topic of several books and numerous articles in leading business periodicals. Extravagant claims have been made about its potential to transform businesses, and many of these claims have been met with skepticism. But evidence suggests that open-book management, when implemented properly, can yield enormous benefits. Even with all the discussion of open-book management, many misconceptions still exist about it, and some reject it out-of-hand without really understanding it.

In actuality, open-book management is a simple yet very powerful approach to managing a business. It means a firm--

* shares a broad array of financial and other information with employees;

* trains employees to become more business literate;

* empowers them to use the information in their work, trusting them as partners; and

* rewards them when the company is successful.

The relationship between these four essential elements of open-book management is shown in the Exhibit . All four elements must be present to achieve the necessary alignment of employee and company goals upon which open-book management is based.

Because of its emphasis on financial information, open-book management appears to be primarily an accounting phenomenon. Although accounting plays a major role, open-book management is much more. It represents a fundamental change in the traditional way most managers operate their businesses. Open-book management requires that business leaders be committed to teaching their employees to think and act like owners.

Employees are likely to share company goals when they--

* understand how the business makes money,

* possess a basic understanding of critical information about the business,

* regularly receive reports and explanations of company operations,

* use their knowledge about the company in their jobs to improve operations,

* celebrate exceptional performance together, and

* receive benefits when the company does well.

Open-book management is not a quick fix for a business facing a major challenge such as financial problems, declining markets, or increasing competition. Since it requires a sustained commitment to training employees about business operations and financial statements, a company's leadership should decide to create an open-book culture only if it is committed for the long term.

Open-book management does provoke some controversy. Sharing sensitive financial information with employees is risky because such information might fall into competitors' hands. However, companies that have implemented open-book management have concluded that the benefits of harmonizing employee and organizational goals exceeded the costs (or risks) of competitors obtaining sensitive information.

Another controversial issue centers on a company's financial executives, who may be reluctant to open company books to employees and explain the intricacies of accounting and finance. Financial executives who believe the typical employee dislikes work, avoids responsibility, rejects organizational values, works only for pay and security, and needs to be closely monitored and controlled are probably not going to embrace open-book management. Also, financial executives who have risen through the ranks of command-and-control organizations may have a difficult time accepting an open-book management system.

There are those who question the belief that employees can and must learn how the business makes money. To do that, they must understand financial information. Most businesses are complex, and financial statements are difficult to understand, particularly for people with no prior training in accounting and finance. Accordingly, some view open-book management as an extreme and naive method. It is unrealistic and idealistic, skeptics say, to believe a few training courses will enable employees not previously schooled in accounting and finance to become knowledgeable about business and financial issues. Nonetheless, a number of companies have successfully established formal and informal training to accomplish just this goal. Effective training is absolutely essential to open-book management; otherwise, employees will not understand the numbers and--even more important--will not know how to affect the numbers.

A Pathfinding Opportunity for CPAs

Clients are constantly looking for breakthrough techniques that can increase profits through greater employee productivity. CPAs are in an excellent position to advise clients on the core elements of open-book management. Simply put, open-book management is not just another passing fad that CPAs can afford to ignore. Instead, it is a growing movement that presents both a major challenge and a business opportunity for CPAs.

In actuality, "opening the books"
is only part of an open-book management system. It must also include the following:

* Skills training in basic business literacy,

* Group bonuses,

* Other incentives, such as stock ownership plans, and

* Regular, open communication of favorable and unfavorable financial results.

Practicing CPAs have the potential to add value in each of these areas; but so do other professionals, such as organizational psychologists, general management consultants, and human resource managers. Developing these areas first is the best way to maintain the CPA's traditional domain. As noted earlier, CPAs working in business and industry, not-for-profits, education, and government may have success applying these principles in their own organizations.

Nevertheless, because open-book management is a new concept, a CPA must proceed cautiously in how he or she introduces prospective users to it.

Some CPA firms have already taken up this challenge and begun advising clients on various aspects of open-book management. The comments that follow are based on telephone interviews with individuals from several of those firms, as well as with other professionals such as actuaries and management consultants.

Crabtree, Snellgrove & Rowe, P.C., is a nine-person Huntsville, Ala., firm. Greg Crabtree, CPA, one of the firm's principals, reports that open-book management has played a central role in one of his firm's major growth sectors, providing part-time controllership services to small businesses. Many of Crabtree's clients are not large enough to employ a full-time controller, but they have reached the stage where the owner has given certain key employees access to financial data. Crabtree takes it upon himself to educate anyone who has access to financial data in the fundamentals of accounting and finance. He believes that once employees are given accounting responsibilities, it is incumbent upon the business owner to demystify the process and eliminate the perceived black hole of an accounting system. That is where opening the books and providing basic business literacy training comes in.

Crabtree uses Intuit's QuickBooks Pro to lay out his clients' current and prior period financial statements and job cost data. One of the program's advantages is its ability to be queried and provide an ongoing, real-time picture of financial performance. Each month, Crabtree asks clients to freeze their data for a half-day, during which time he downloads their files by modem, performs accuracy checks, provides a bank reconciliation, makes required adjustments, and issues a compilation report. Twice a year he presents the client's financial results in a meeting of its owner-investors. Crabtree indicated that many owners are nonparticipatory, do not understand capital formation, and mistakenly believe that a dollar of profit equates to a dollar of capital. During the meetings, Crabtree spends considerable time explaining the client's financial statements and educating owner-investors about the interrelationships of the financial statements. In Crabtree's opinion, the combination of obtaining real-time data on a client's financial performance and using open-book management practices to educate owner-investors is a great opportunity to expand a small CPA practice.

Educational Discoveries, Inc. A second example is the professional service firm of Educational Discoveries, Inc., (EDI) of Boulder, Colo., famous for accelerative learning courses such as "The Accounting Game." Chuck Kremer, senior business literacy consultant, was controller at the Rocky Mountain Banknote Company until 1982 and now develops financial training materials for use by other EDI consultants. According to Kremer, open-book management is one of many tools used by companies to effect an internal cultural transformation. Kremer coined the term "three bottom lines" to represent net income, operating cash flow, and return on assets (terminology that he and many other open-book consultants emphasize in their business literacy programs).

While no longer a practicing CPA, Kremer feels strongly about what CPAs need to accomplish to become successful open-book management consultants. In Kremer's view, CPAs tend to fall into one of two competing mindsets:

* Compliance, which encompasses tax and audit work, or

* Consulting and coaching, which is a natural fit for open-book management.

The CPA's role in the latter activity, Kremer suggests, is to help companies implement practices that enable employees to think and act like owners, rather than just hired hands. This role can include providing business literacy training, or it can involve eliminating confusing jargon through a "sacred financial glossary" for each company. In Kremer's sacred financial glossary concept, the company chooses which technical accounting terms to use when several alternatives are available and standardizes usage throughout the organization. The rigid standardization makes the glossary sacred. Often, the CPA's role includes providing the financial content that helps the client's staff develop effective business literacy training.

CPAs can also assist by developing incentive compensation systems that support open-book management's core philosophy and are designed for the client's entire workforce rather than just its owners or key executives. Kremer believes executive incentive plans tied exclusively to the stock market price of a company's shares tend to work against the open-book philosophy by rewarding just a few individuals. Kremer notes that open-book management consulting may not be that attractive to some CPAs who might demand engagements with larger and faster consulting payoffs, such as designing activity-based costing systems. Open-book management involves a real culture change that requires time to become effective and is internally driven by the client's own personnel.

Accounting for Success. Libby Smith, marketing director of Accounting for Success of Englewood, Colo., characterizes the firm as a group of seven "forward-looking, proactive, and creative CPAs." The professional staff is divided into two nearly equal teams--tax professionals and part-time CFOs, with the latter group providing on-call financial leadership. This group focuses on businesses whose sales fall between $1 million and $5 million.

Until recently, Steve Smith headed up the part-time CFOs group. He had been involved in financial literacy training since the early 1990s. Initially, he provided generic training on open-book management at the company's office for anyone who was interested. Attendance waned, in part because open-book management turned off as many clients as it excited. The firm now makes a point of describing open-book management to every new client, but does not push it unless the owner is ready for it. A number of clients have been receptive to the idea. In response to that interest, the firm has formed a group of six open-book CFOs who meet once a month at different company offices to talk about designing team bonuses, evaluating employees, valuing an existing business, and any other open-book management concepts that may arise.

Open-Book Management in a Professional Service Firm

CPAs who advise clients on open-book management should consider walking the talk by practicing it in their firm before consulting on the subject. These two professional service firms have done just that. They believe using open-book management internally not only has benefited the operation of their practices immensely but also provides a showcase for interested clients.

Jannsen & Co. Terry Jannsen, CPA, is one of three partners in a 20-employee Waukesha, Wis., practice that offers compliance work, software development, and network consulting. Jannsen opened the books to his own employees before marketing open-book management consulting services to clients. He believes this helped his credibility with clients that might be interested in open-book management. Specifically, each of the seven CPAs in Jannsen's firm helps set revenue targets and evaluates the actual-to-budgeted monthly income statement, and they all have billing responsibility. They all have a portion of their pay, typically in the 8­10% range, but up to 20%, tied to a formula-driven bonus based upon the firm's profitability. Jannsen believes open-book management will always be a tough sell, especially to older CPAs. However, he feels open-book management will gain in popularity because it seems to appeal to younger CPAs--they want to feel that they are a part of things and making a contribution.

Actuarial Consultants Inc. (ACI) is a highly specialized Torrance, Calif., firm that designs and administers employee benefit and retirement plans. Clients range from Smart Professional Photocopy Corporation, with 4,800 employees, to single-doctor medical practices. Although most of its 37 professional employees are pension administrators and enrolled actuaries rather than CPAs, ACI functions like a typical regional CPA practice, since revenues are entirely generated through hourly billings. ACI initially implemented open-book management internally as a strategy to remain successful in the highly competitive actuarial consulting market.

According to Angela Grieser, vice president of finance, open-book management has been essential to the firm's growth and profitability since its implementation in 1995. At that time, the firm's president decided to educate employees about what it meant to run a business and how their area of work impacted the bottom line. Clearly, most of ACI's employees are highly skilled professionals who understand the criteria for a successful business, but the firm also employs support staff who have only high school degrees or a few years of college. Although these employees took longer to bring on board, Grieser is pleased they have taken line-item responsibility for portions of the income statement.

Every Monday morning, ACI's president leads a half-hour, companywide meeting. Cash inflows are discussed weekly and actual-to-budget comparisons are discussed once a month after billings are finalized. While open-book management began as an internal project, several of ACI's clients expressed an interest in developing similar systems that would duplicate the firm's stellar performance. Grieser now leads ACI's compensation business unit. The lessons she learned while implementing open-book management at ACI are now applied to the firm's clients.

The Time Is Right

The arrival of open-book management seems especially timely as more companies are challenged to empower employees to take an active interest in the success of the business, to create incentives that reward high achievement, and to retain their best workers. Open-book management helps meet all of these challenges, which may account for the growing interest in this unconventional management philosophy.

As more and more companies implement variable compensation plans, profit sharing, and stock ownership plans, they recognize the need to educate employees and keep them informed about the company's short-term and long-term financial performance. Currently, around 10,000 companies have an ESOP, up from 9,000 in 1990, and the net increase of about 600 programs in the past year is three times the recent annual increase. Once a company implements these programs and attempts to explain its performance, financial executives learn that most employees are woefully lacking in understanding of basic accounting concepts such as the difference between revenues and profits.

Clearly, the market for financial literacy training is one of the major opportunities for greater CPA involvement. Training Magazine reported that the amount budgeted for training in 1997 by U.S. organizations was $58.6 billion, and 40% of the surveyed companies indicated they expect to conduct training in financial and business literacy. In addition, as more companies transform themselves into employee-owned enterprises, CPAs will need to customize financial information in ways that make it more useful to nonfinancial personnel. For all of these reasons, open-book management may well develop into the business revolution that some predict. With their understanding of financial information, CPAs should have a competitive advantage in advising clients on open-book management. The question is whether CPAs will be active in this market niche or whether other professionals will seize the opportunity. *

Thomas L. Barton, PhD, CPA, is the Kathryn and Richard Kip Professor of Accounting at the University of North Florida. William G. Shenkir, PhD, CPA, is the William Stamps Farish Professor of Free Enterprise at the University of Virginia's McIntire School of Commerce. Thomas N. Tyson, PhD, CMA, is a professor of accounting at St. John Fisher College in Rochester, N.Y.

Professor Shenkir wishes to recognize the summer research grant received for his work on this article from funds provided to the McIntire School by Edwin F. Legard, Jr.

By Thomas L. Barton, William G. Shenkir, and Thomas N. Tyson