October 23, 2017


















Article 5.11

CLOSED-BOOK MANAGEMENT EQUALS DEATH

Closed-book management is the practice of not sharing all of the general financial numbers with all of the employees on a regular basis. It is the overwhelming, often inherited choice of small business owners Ė especially those who are in mature industries and over 45 years of age. The practice, unfortunately, is now significantly stunting both organizational growth and adaptively to environmental change Ė a slow death sentence.

In fact, some are already dead Ė like the frog in the gradually heated beaker of water Ė they just donít know it.

Without sharing numbers and teaching all employees to be responsible for the continuous improvement of value for customers and profits for reinvestment, no significant changes can happen! At best, we might practice - top-down, financial incrementalism; try harder in the same way for bonus bucks which works for two to four weeks; and look for quick fix efficiencies for our 50 to 80 year old business model.

But, we canít make the big changes work. Ninety-five percent of the formal Total Quality Management (TQM) programs that wholesale distributors (WDs) have attempted since 1980 have achieved no sustainable, improved results. If we canít do the basics - zero errors and on-time delivery guaranteed - why should we presume that we could successfully tackle any of todayís, big challenges. Namely - vendor managed inventory; low-cost, fulfillment contracting to bigger accounts; activity based costing for unbundled service selling; re-inventing our sales force; and, smart web site migration plans towards an appropriate vision.

STEPS TO OUR DEMISE:

  1. By not sharing the numbers, we tell the employees that: profits are huge and worth hiding, so donít worry about bottom-up thrift efforts to make the boss even richer. Instead, feel under-appreciated and exploited.
  2. By not sharing the numbers, we also suggest to the employees that they arenít trusted or competent. So, some will probably act like passive-aggressive, dependent children; others just wonít trust managementís promises that this "new program will be good for all of us" and wonít commit to it.
  3. If the bottom 80% of the payroll continues to tell management what they want to hear, but doesnít invest the extra effort necessary for significant change programs to work, then success canít happen - especially in a service business.
  4. If imperfect service levels continue and one open-book competitor achieves distinctive and niche-targeted services, then the slow death begins. The closed-book player has higher operational costs and lower service value, margin rates and morale. Gradually both the best employees and customers start to defect - often to the better competitor.
  5. The closed-book player may still have some sales growth, but it will lag the industryís best performers and perhaps the general average. Profit growth will be even lower if not sinking. Incremental working capital growth must then be financed with increasing debt levels.
  6. The firm will eventually have no surplus - talent, cash, confidence or partnering credibility with best suppliers and customers - which are all pre-requisites for pursuing important changes. How can we be proactive if we are swamped by yesterdayís problems?
  7. If the company canít grow profitably, it canít keep good, younger talent who are more mobile and opportunistic than ever. The best just want an employer who can grow their responsibility and wage potential. Finding and keeping good new employees has become the number one problem
  8. for all wholesale distributors, but it isnít the true problem. It is, instead, a symptom of obsolete management practices that canít compete with an increasing number of open-book, high participation, higher growth companies.
  9. As the Internet accelerates the pace of change in the business environment, especially for intermediary businesses like wholesaling, those firms that canít keep pace will simply die.

THIS ISNíT NEWS, IS IT?

In raise-your-hand polls of audiences of WDs on the question - "how many of you share all the general numbers with all of the employees?" Ė 0 to 10% of the hands have gone up for years. Is it surprising that the death and consolidation rates in many channels of distribution have been significant to breath-takingly fast over the last five years, in spite of a good US economy. The rate will only accelerate during the next 3 years thanks to the additional challenge of electronic commerce.

It may be too late for the bottom 30% to 50% of all wholesalers to change. They should try to sell out to whomever they can the sooner the better, taking whatever price is possible. The rest of the closed-bookers still have a chance, but only if they take the open-book plunge. Sure it will be unsettling for everyone at first, but that is how learning and change always begins. If we are going to die for sure with our current management practices, then why not try something else?

THE OPEN-BOOK PRESCRIPTION

There is no exact recipe for how to implement open-book management, because sharing the numbers is only the tip of the high-performance, management iceberg. "What do I do after sharing the numbers?" is a scary prospect for most top-down, control-freak managers. We might think of this journey as a drive down a country road at night. We canít see very far with our headlights, but as long as we are on a promising road and we go at a reasonable speed, we can do the entire trip.

Here are some key sub-components to open-book management to be aware of:

  1. Think through and rehearse a first general presentation on the numbers. After the first and every subsequent session, survey different folks at different pay levels to see what their thoughts and suggestions are for improving the process. Trust the team to work out a good process.
  2. Service quality and employee productivity numbers will have to be added to the regular, financial numbers. We have to manage and measure the root cause factors that eventually lead to better financial numbers as a happy by-product.
  3. We will have to explicitly state our strategic assumptions and team values for everyone to understand and perhaps challenge and debate. If everyone doesnít know and buy into where we are going, our group values, our pace of effort, and the personal benefits for doing all of this then nothing is going to happen. This also will better expose the coasters who, heretofore, have been cross-subsidized by the great majority. They will either have to sign up and perform or leave Ė a win, win scenario.
  4. Employees will need some education on - the ABCís of financial statements; where wages for each job niche come from; and what it takes in gross margin (value-added) per employee for those wages to be at premium, but affordable levels.
  5. How can we revive commitment to and achieve perfect service at the distribution center level. After all, basics have to come first. The TQM stuff that lots of firms failed with was far too complicated and non-customer focused to work at a distribution center. We need to try again with some to-scale tactics and bottom-up commitment.
  6. All of our change and learning efforts should be guided by what our target niche(s) of customers want. Everyone should know Ė What is our number one niche of customer? Who are our 10 most profitable customers in that niche? Who are the key, target, growth accounts in that niche? Which customers are A, B, C and D status; Ė so that we can all know spontaneously how to service and price them differently, fairly and profitably.
  7. We need to raise wages, expectations and economic performance systematically for all employees. Sure they want more money, recognition, job pride, security and growth prospects, but what are the proportional responsibilities that they must take on to afford the privileges? How will we systematically measure and expect that employees either hold up their end of the contract or leave. Once we start to pay premium wages for each job niche, there will be no shortage of prospective employees who would like our jobs. But, what is our formal screening system that we will use to insure that we pick those few that are worthy of our employment opportunity?
  8. This list could go on, but lets finish with the biggest challenge of all - getting managers to stop needing and stimulating the parent-child, emperor-serf, boss-subordinate relationship. If managers shoot messengers who bring bad news, than informational obeisance and suck-up politics will be back in a flash. If managers have to be experts and canít say to a question, "Gee, I donít know; what do you think; can you help me on this?" Then, folks wonít. We need systems in place that will keep management ego-needs and weaknesses in check if not psychologically improving. We also need systems that make all employees be part of the solution as opposed to whining, passive dependent victims who are part of the problem.

CONCLUSIONS

Top-down, financial management has had a great run since the days of Frederick Taylorís stop watch efficiency approach in the 1900ís, but now it is obsolete. We need bottom-up - hobby energy, home economic thriftiness and personal learning commitment. If we can induce this behavior, then we can become excellent in a traditional sense. But more importantly, we will have the surplus resources Ė profits, can-do spirit and credibility with our best business partners Ė to keep pace with the changes in our environment. We will be able to secure a place in the new electronic commerce order that will appear too quickly for most WDs over the next few years. It is time to sell, close down or take the open-book plunge for small business America!

©Merrifield Consulting Group, Inc. Article 5.11