Episode: 422 |
Bill Fotsch:
Open-Book Management:


Bill Fotsch

Open-Book Management

Show Notes


Bill Fotsch has a 20-year track record of improving company sales and profits in an array of industries. He holds a Bachelor of Science in Mechanical Engineering and an MBA from Harvard Business School, where he graduated as a Baker Scholar. He has co-authored several published articles and serves on the board of several companies that practice Open-Book Management. You can learn more about his company at https://openbookcoaching.com, or email Bill at Bill.Fotsch@openbookcoaching.com or reach out on LinkedIn at linkedin.com/in/billfotsch.

Key points include:

  • 05:07: Where to start with open-book management
  • 08:57: Examples of companies switching to open-book management
  • 17:04: Big changes in operations
  • 28:03: How Bill launched his writing career

One weekly email with bonus materials and summaries of each new episode:

Will Bachman 00:01
Hello, and welcome to Unleashed the show that explores how to thrive as an independent professional. I’m your host Will Bachman. And I’m so excited to be here today with Bill Flosch, who is a Bain alum, he has over 100 articles in Forbes 16 an Inc is five articles that he’s authored or co authored in the Harvard Business Review. So excited to be with him. Bill, welcome to the show.

Bill Fotsch 00:29
How a real pleasure to be joining it well.

Will Bachman 00:32
So Bill, I know that you’ve done a lot of work around open book management, and how that area is changing and evolving. And I thought we could spend some time around that. So I approached this with beginner’s mind, I know I’ve heard of it, I know a little bit about it, that the idea is that you kind of share your financials with your employees, and therefore they, you know, they’re more motivated. But that’s about the extent of it. Give me the basic overview of what traditionally, open book management was all about little history behind it. And then we can talk about how it’s, you know, how it’s evolving?

Bill Fotsch 01:12
Yeah, well, your your, the way you framed it, I think is good, but I’d actually change it to talk about what the objective is. That is the objective of what we used to call open book management is to improve business results, and improve the lives of the employees the drive those results. And you read about in a way, pretty simple if you’ve got one company, who the employees are just hired hands like most companies have, frankly. And they’re competing with an identical company identical in every other way. They serve the same customers, same technology, same products, everything is the same, except for the employees and the second company, our trusted partners that truly understand the economics of their business. I mean, which company would you invest in, which company is going to be more successful, which company is going to give better customer service? It’s kind of all of those things. The original framing, though, of open book management really stems from my editor, john case, who wrote on Inc article and coined the phrase open book management some years ago. And that’s, that’s frankly, where I started as a thing that drove me over time. And pretty slowly. I’m an I’m an engineer. So I really like to understand how things work. And I linked my compensation, right to the results of the companies that I was working with. So I was not a purist. Some people, for instance, say open book management, you got to publish everybody’s salaries, I never found that to be useful. So I didn’t do that. But the upshot, though, was what I found is in working with all kinds of crazy companies, I mean, from many, many small to medium sized companies, to some really large companies. The first really large when I worked with was the Zambian consolidated copper mine in Zambia, Africa, I assure you, our business plan didn’t say, focus on Zambia. But that opportunity presented itself, one of the things that I learned in that environment is, first of all, we never shared financials with anybody. We were just focused on improving the business results and the lives of the employees. And the other thing I learned is until you break a really large company like that down into all the smaller units, the concentrator, the mind, the transportation, division, all of the various units that make up the entirety of the company, you don’t actually get started. Because engaging people around the economics or open book management as we used to refer to it doesn’t happen across 50,000 employees. It happens much more locally. So the upshot is that I became really focused on just what works and that was really natural, again, given my compensation was tied to the results of the companies I was working with. So that’s that’s sort of where it started. Interestingly enough, my guess, is that the same individual john case, who coined the phrase open book management, because I’ve written countless articles on the topic, two books. He and I penned a article some years ago in Forbes, which the title was interested in open book management. Don’t start by opening the books, which you know sounds rather counter intuitive, but it’s kind of reflects what we learned over time.

Will Bachman 05:03
And what were where should you start?

Bill Fotsch 05:07
Oh, it’s a great question, Bill. Well, the upshot is real simple. And that is, you have to make sure it’s like any team, you have to make sure you understand what winning means. What defines winning? Okay, Southwest Airlines, its cost per seat mile. Okay, if you’re at a really large mine, it’s cost per ton. The the economic in an engineering firm, its revenue per paid employee. But it’s not only just establishing that metric, but how you do it makes a difference. Because if you just come up with maybe a group of the management team come up and say, This is the metric that we want to go after. The problem that you’re going to find is even if you’re right, you’re going to be dead, right? Because it’s not the employees Mac, right, they had nothing to do with it. So the process by which you develop, that performance metric makes a difference. But once you figured out what that performance metric is, then then things flow relatively naturally, from there, let’s get a scoreboard up, let’s make sure everybody can see how we’re doing an important facet of it is getting people to forecast what the numbers are going to be on some regular basis. So they’re thinking cause and effect, and therefore thinking about the things that they can do to drive those numbers, put put an incentive plan in place, such that if you’re able to improve those numbers, and therefore create additional value, that a portion of that funds and incentive is broadly shared by the employees, and then roll it out. And this becomes typically, especially for small to mid medium sized companies, becomes just part of the way in which they’re managing with companies part of their weekly staff meeting.

Will Bachman 07:00
Okay. So what I’m getting so far is that, you know, open book management, it’s the current sort of thinking around it from the people that know it the best, it’s not about just opening the books entirely and letting people see all the financials and everybody’s pay and everything. But it’s more around helping your employees understand what are the economic drivers of the business, and picking one metric that’s easy for people to understand, that’s really, if you win on that metric, you’re probably going to do well. So for Southwest Airlines, they focused on cost per seat mile. And then making sure that everybody understands that metric, publishing it, communicating it all the time having some incentives, you know, getting people focused around it. My caps, yeah, well,

Bill Fotsch 07:53
I was gonna say that spot on, you’re right on. The only other thing that I’d add to that, is that it’s useful to revisit that typically annually as part of your planning. Because the performance metric, you know, the economics can change, and what you should focus on, can change also. And then you just embedded in the managerial processes that most companies already have been blessed.

Will Bachman 08:20
All right. Maybe I always love kind of case examples and stories. Can you tell us an example of a company you’ve worked with, where they started out, maybe with a more traditional approach, and you help them convert over to this more of this open book, or, you know, metric focused approach helped employees understand the economic drivers, and just gonna walk us through that case? example? How did you select the metric? What was the impact on employees? What was the change in performance of the company?

Bill Fotsch 08:57
Yeah, sure. There are a lot of different examples. Would you have a preference to a manufacturing or service technology? Do I do care? What type of there it’s easy?

Will Bachman 09:08
There’s examples across the board. Oh, fantastic. Well, we can do a couple but why don’t we start with the service business?

Bill Fotsch 09:14
Great. Okay. service business. I’m gonna go to my engineering buddies. Engineering buddies. The company’s name is fairborn. Engineering. They’re located in Idaho. The, the folks had heard about open book management, but didn’t know exactly what that really meant. They got in touch with me because they heard me at a conference. They were this was kind of early on in there, they had just sort of spun off as a separate unit. So it was relatively early on in their evolution as a company. The, the process that we use in this process is identical across the board. It doesn’t vary by My nature of company is there are the following data, you could call it almost diagnostic, that gets done in the front end. One is customer input. There’s, there’s a customer script, if you’re familiar with Fred reichheld. Net Promoter Score is the kind of the whys behind that the number itself isn’t so important, but the Y is what customers really value. So there’s four questions script that we have them use and get from their customers.

Will Bachman 10:33
What are their I gotta ask, what are the questions?

Bill Fotsch 10:35
Oh, okay. So the first question is, is absolutely stolen from Fred, Fred reichheld, who I knew at Bain and company, and I’m pleased to say I still refer to him as good friend. The first question is, given the work we’ve done for you in the past? Would you be willing to refer us to a friend or a colleague? The only thing that Bain and company or net promoter score, folks would say that what you do there is do a one to 10 rating? We found that’s just kind of a setup question. So some folks like to do one to 10. That’s fine. We oftentimes just do yes, no, most companies that are anywhere near successful, a lot of their customers are going to say yes to that question. The second question is the key question. The second question is why? What do you really value that we do. And part of what happens there is that you get a really rich understanding of exactly what the customers value, which is really important as you’re trying to figure out what the performance metric is. The other thing that happens from that, by the way, his customers, turns out, customers love getting listened to, and you really actively pursue it. Well, everything’s on time, and you come up with great ideas of customer response. And the interviewer responds, well, being on time, I get that when you say great ideas, give me an example of some of the great ideas that you’ve really valued. Part of what we’ve seen consistently is repeat referral revenue rise, just from doing this. So that’s kind of a side benefit. So there’s the customer input, there are a employee and manager questionnaires. It’s an online survey, anonymous. And these are not the Gallup 12. This is not a satisfaction survey. These are questions like, what’s the biggest opportunity for improvement in the company? What should the company do to build this relationship with our customers and increase sales? What’s the single thing the company should do to increase profits? Because part of what we found is if you want the rank and file employees to start thinking, like really partners in the company, is really useable to treat them like partners. And the questions for the managers are basically identical. So you can see are the managers and the rank and file boys on the same page, we do just a little more focus on competition, and customers, which means, you know, two additional questions. The third thing is looking at financial trends. And in effect, what are the financials telling us or if you’re part of a like, was the case with Capital One, you’re part of a much larger organization, it’s the trends in whatever economics, you track. So armed with those three components, the customer surveys, the input from the managers and the employees, and the financial or economic trends, then we meet with the company, as a group, typically, in a working group of like, small would be for large would be 10. And we’re going to go through all of that stuff to figure out what really are the issues that we face, not for all time, but for like the next six to 12 months? Once we’ve nailed what those issues are? We say, Okay, if those are the issues that we’re confronted with in the next six to 12 months, what is it? What single objective measure that would define winning against those issues. And typically, that falls out pretty readily in the case of my engineering buddies. It became revenue per hour. Now, one of the things that we then did was we looked at their history in revenue per hour by month and then we look at what profits were by month. And not surprisingly, this typically happens, the correlation between revenue per hour and profitability was really high. So effectively, what the company was doing was driving profits it was using, though revenue per hour as the metric to do. So. Once that’s established, then we established a scoreboard, where we’re looking at what last year is by month, revenue and hours were what the budget for revenue and ours were. And then we start forecasting, what are the numbers going to be? simultaneously, we develop an incentive plan that says, if they started at $43 per hour, that’s where they started in 2013. If we’re able to improve that, to say, 50, what is that worth in terms of increased profits, and some portion of that goes to a very defined incentive plan. And then, the only other thing we’ve learned to do that tends to be pretty smart is, once you’ve got the performance metric defined, scoreboard defined incentive plan defined, it’s really good to have a rollout meeting, where you just explain, here’s the input you gave us. Here’s how we used it. Here’s what the result is, here’s in particular the scoreboard the incentive plan that you’re going to see on a regular basis. And what we’d like you to do is real time at the meeting, jot down on like the three by five cards, we give everyone at the meeting, what’s one thing you can individually do in the next 30 to 60 days to improve in the case, the engineering from revenue per hour, and therefore improve your and everybody else’s prospects for a bonus? And then you just keep rolling. So every week you’re updating that.

Will Bachman 16:55
Yeah. So at the engineering firm, what was the like, what were some of the main big changes in how the company operated? That came in?

Bill Fotsch 17:04
You know, it’s, it’s, it’s amazing how retro it’s like Steve Jobs, comments, it’s really easy to connect the dots. Going back, it’s it’s a little less clear going forward. Looking at it now, one of the things that we found was the revenue per hour on jobs, where we’re using a scanning technology that they had, was really high. And the customer and the customer inputs, talked about how they really appreciate it, the company scanning technology, think of it this way, the scanning technology allowed them to create a 3d version of a plant that was within an inch or two of reality, and do that in like, an afternoon versus days and days of trying to figure out what’s the as his condition. So part of what started to happen was we started to promote that a lot more. And that helped drive additional revenue. I think there were some other things too, I mean, frankly, because it was revenue per paid hour. Part of what I think started happening, and we heard this from a number of employees is every hour they were spending, they were asking themselves, what am I doing to improve the company’s revenue? How am I spending that hour. So there are variety of I call it efficiency things that happen. And it’s it’s evolved, I mean, frankly, was written a couple of ink articles on on fairborn. So any or any of your listeners who would like to get more details on that, they’re welcome to do that. I’ll tell you that. There’s still a client, and I still get paid as a function of their results. So I kind of keep an eye on those things to say the least. The matter of fact, today is Wednesday. So our weekly meeting is today. In any event, the 43 revenue per hour is now what eight years later, it’s 71 in the first quarter. They’ve grown in size from about 10 engineers to about 40. And their profitability has grown even faster than their revenue. So they’ve had a lot of success. And I think they are convinced there’s a lot more to be had. That’s fantastic. But that would be that would be a reasonable kind of service example.

Will Bachman 19:55
Yeah. You want to walk through more of a manufacturing kind of example. I’m

Bill Fotsch 20:00
sure there’s there’s a really big one called BHP Billiton in Australia. But I think I’m gonna take you through Boardman which is only 100 person, company, they’re they’re located in Oklahoma. And the reason I say that is with BHP Billiton, they too are a mining company. But it was, it was breaking them down. Originally, we focused on the port operations, because that was where the backlog was. The detailed process that we use, once you break the company down, the detailed process we use is identical big company to small company. So if I flip over to a more smaller mid sized company, Boardman, everything I told you about fairborn engineering are starting to replace everything identical. Okay. The the issues that came out, were very different capacities efficiencies, these kinds of things were really important for them. In their particular case, the performance metric that evolved was gross margin dollars per job. So they tend to work on really large weldments. And so each large weldment was part of a customer request or an individual job. And so what we tracked was, what was the gross margin dollars that were generated for all the jobs that were completed each month. So went away, it’s real simple, one of two ways to increase the gross margin dollars per month, you got to either increase the number of jobs, or you got to increase the number amount of gross margin per job that fit really well, because they were at that particular time, they were behind on customer requests, really capacity constraints, so anything that they could do to get more jobs out, absolutely worked in their, their situation, and most of the costs outside of the job specific costs. So their, their overhead costs were really very fixed. The upshot was that they went at this, and I still remember really well, the kind of fairly old school, kind of the CEO, the CFO got us involved. And Roger, who was the CEO, he sort of tolerated this, but he he really, he was at best mixed in terms of his thoughts about the employees getting involved and driving the economics. I can still remember, Roger giving me a call, which you’ll like in and of itself, that just didn’t happen. And we’re, I don’t know, six months into the process. And it was first call I ever got from Roger. And he said, Bill, I was just out in the shop. I’ve come to the conclusion, I don’t have employees anymore. I was thinking, Oh, god, what did you do, Roger. He said, I’ve got entrepreneurs, everybody’s out there trying to figure out how to make more money. I said, Roger, that doesn’t sound bad to me. And he said, doesn’t sound bad to me either. He became a very good friend through this, but it really the notion that there is alignment between owners, managers, and employees. Seems like such an obvious thing yet. So often, that’s simply not the case. And I think that’s one of the reasons that we’ve enjoyed so much success over the years.

Will Bachman 24:03
Now, if you’re focusing on one metric, you know, a concern that some people might have is that you sort of think there’s some rule around this where if you’re going to view, you know, any metric that you focus on ends up, no longer being a useful metric, right? So that if you say, well, it’s gonna be gross margin dollars per job, then you may be, you know, you could end up doing larger jobs that with larger gross margins, but if the job is larger, you might actually be less profitable because maybe it’s a lower profit margin in terms of percentage wise, as an example, or right. Or if you’re looking at the earlier one of going to revenue per hour for the engineers, then that would maybe drive you against hiring new people. Be Because you’d say, Well, if we add a new person, we’re not going to be able to get them fully utilized right away. And that’s going to drive down our metric. So

Bill Fotsch 25:08
well, it’s a very legitimate concern. And that’s why two things, one, revisiting the performance metric annually is just a smart thing to do. Because things do change. But the other thing that’s true is the, you know, it’s amazing how smart employees are, especially if you assume they’re smart. So the most obvious example that you talked about, we wouldn’t want to hire any additional engineers, because that’ll increase hours. When what we’re going to do is, so in your terminal, it’ll affect a decrease in revenue per hour. It means that people are taking the notion of who we hire very seriously, and do we need them. But if we had as the case of furball, and if we’ve got some significant customer revenue opportunities, we can see it and and it’s not just it’s not retrospective, think of it very importantly as prospective meaning that right now, when I have my meeting with fairborn, later today, we will be talking about the forecasted revenue per hour for the second quarter and a window on what the third quarter looks like. And we’ve been doing this right along. Okay, so this is ongoing forward view of that. So it’s not a retrospective, that’s one of the problems with financials financials are by definition, history. This is much more a prospective kind of view. But the other thing that’s true is you want to be really smart about how you select the performance metric. So what you were talking about before in Boardman and the gross margin dollars per month, you have large projects, and a few of them, generate more gross margin dollars per month, then lots of smaller projects, or vice versa. And we don’t really care, it’s going to push us to the projects that are most profitable for us. Given you know, the resources we have to put to it, that’s a pretty healthy thing to do.

Will Bachman 27:40
Let’s talk a little bit about it. I’d love to hear a little bit about your, your writing career. So like I mentioned earlier, you’ve written 100 articles in Forbes and 16 for Anke and five for Harvard Business Review. How did you get started doing this writing for kind of these Top Tier Business business? periodicals?

Bill Fotsch 28:03
It’s interesting, I got to give a lot of credit to my editor john case. And that is, it was about eight years ago, that john said, if we want to take this to where it should really go, Bill, we have to be the authority. We’ve got to be the thought leaders on the subject. And part of what you do to be a thought leader is you write articles you share with a lot. I tell you in a way. The other thing that’s true by just going through maybe more so with the the HBr articles, but to some extent is with each of the articles. When you write some article, it pushes you to think especially if you’ve got a great editor, like john case. And so you’re trying to understand the implicit what’s, what is it? What’s the message? What are we trying to understand here? I’m an engineer by background. It’s the notion of what works, or how do things work. And so part of what part of this is been thought leadership, we want to be the thought leaders because frankly, one of the problems with open book management, it’s one of the reasons that we’re moving towards economic engagement. Is there a lot of folks that are called experts on open book management and there is no vetting of that? Because open book management is in the public domain. So anybody’s an open book management expert for having said so there are folks sadly out there that you know, talk about and do coaching or consulting work on Oakland. With management that, you know, frankly don’t really know what they’re talking about. So we’re trying to share what we’ve learned. I don’t know if you’ve had this experience, I’m guessing that you have will that when you like when you’re interviewing me, which is just a verbal kind of writing, you tend to learn it during the process. Do you know what I mean? Well, I do. Yeah. And and the same is true. That’s what eventually took us to this notion of, I’ll call it changing from open book management, to call it open book management version to what we call economic engagement. And that is much more focus on the customers. And primarily focusing on the underlying economic drivers of a business, not the financials. Because it tends to be much more straightforward and those kinds of things. So that’s, that’s what led to writing the the articles, it’s kind of an internal discipline, ourselves of just honing what we’re learning. And you and then, you know, again, we think that we’re still in, you know, say the second inning of a nine inning game,

Will Bachman 31:31
and had you writing, you know, before that, just like on a blog, or for, you know, less well known publications, or did you sort of show up one day at Forbes and say, Hey, I wrote something on open book management, like, would you want to publish it? or How did you kind of get first get it? Yeah,

Bill Fotsch 31:47
it’s a great question. The, and I got to go right back to john case. I mean, john case, literally, wrote the book on open book management and countless Inc articles. So there it was through that, and then we worked together at Capital One and Southwest Airlines. And those are individual stories in and of themselves. So I’ve had a long standing working relationship with john and john, I oftentimes would contribute to articles that john was writing in various forums, there was the open book management bulletin, which he had written for years, and in various articles in, I guess, was about eight years ago, that, again, john just said, Bill, if we’re gonna get serious about this, we need to have thought leadership. I said, Okay, I get it after he explained what he meant by that. And from that, he said, let me see if I can get in touch with some folks, he happened to know some folks at Forbes. And they really liked what we were writing. So 400 articles later, about one every other week, we were reading Forbes articles. During this time, we wrote a number of HBr article that I’ve got a long standing relationship with, with Harvard Business School. And, and more recently, in the last, I guess, year, we’ve done writing articles for ink magazine, the intent of the articles has remained the same, which is to continue to advance our own thinking, and share that thinking with others as to what we’re seeing works as it relates to formerly open book management. Now, economic engagement.

Will Bachman 33:42
Before we started recording, you were telling me that you’re doing some research and one to invite listeners to participate? would tell us about that a little bit.

Bill Fotsch 33:51
Oh, thank you for asking that. Well, I’ve had the good fortune of working with dennis campbell, from Harvard Business School. He’s a pretty prominent, you know, one of like seven direct reports, the dean. And that started about five or six years ago, where I had Dennis out to a number of companies because he was very interested in what we’re doing it fit with what he was kind of academically focused on. I had a very telling conversation with him three years ago, and the conversation went something like this. He asked me bill, what what is your long term goal with what you’re doing here? To which I said, I want to change the world. He said, okay, but by that time, we had a pretty good report. So he knew I said, stuff like that. I said, Well, he asked me what I mean by that, which I said, Dennis, I’m sick and tired of hearing about businesses, the problem. Business is one of the few solutions that we have, and the people that are uttering these things. It’s not that they’re bad people, they just don’t know what they’re talking about. Because they don’t understand business just like, far too many of the employees in companies that I work with, to which he said, Bill, if that’s the goal, we need to go from stories about Southwest or capital Juan or bhp or whoever. And they’re all great stories. But we need to go and do research, to really show that the data shows this. That started about three years ago, we’re, I guess, seven waves and CEO research in, and especially given your audience. One of the things the that the Inc article that I think I shared with you will, has an example of this where we wrote an article that is explaining economic engagement, explains the research that we’ve done, and in inviting Inc, readers to participate in the research at no charge, so they can see exactly where they stand, versus other companies. And the research thus far, has consistently shown including most recently, research with Swiss companies with the st. gallon Business School in Switzerland, that if you’re in the top quartile of economic engagement, and we define exactly what that means and how the tool works, and Graham, the upshot is, you’re going to have about double the profit growth of the average. And and I was thinking for an audience like yours. Let’s say that I’m a, you know, any one of your members. And I’ve got, I don’t know, five or 10 or 20 clients, and let’s say another 20 prospects, if you had them fill out the survey, and being able to see not only overall how they stood in economic engagement, but in each of the five components of customer engagement, economic understanding, transparency, economic compensation, and worker participation. And that’s all defined, there’s total 15 questions three each mean, it creates quite an agenda for a subsequent consulting work to help move those things along. So if, if your members were interested in that, behalf happy to give you the the URL, or we frankly, we could create a URL specific to your organization will like we’re doing for Inc. So it’d be it would be kind of evergreen, so you could not only see individual consultant Well, well, but you can see across your organization, how various things stood. And right now, we’re still on the product development side. So there’s no cost to them? Great. Well, let’s

Will Bachman 38:11
include a link that link in the show notes. So listeners look for the link in the show notes to participate in that research. So, Bill, and that point. Thanks so much for your time today, where should people go to find you online, if they want to find out more about your writing and follow up on this topic.

Bill Fotsch 38:35
But most current writings that we’re doing is ink magazine. So just go to ink and search on fotf ch that gets you there. If you wanted to be in our get our nominally monthly newsletter. Just send an email expressing an interest in that

Will Bachman 38:59
and what email should include.

Bill Fotsch 39:02
And then all the other likely places, you know, Link down

Will Bachman 39:04
and in what email Do you want include your email in the show notes? Oh, sure.

Bill Fotsch 39:09
The the the work email, by the way, this will be changing where we’re currently currently still at build period five fotf ch at open book coaching.com. Where if it’s more convenient, just bill at five fotf ch comm Okay, either one of those words define? Great. Fantastic, and it will be probably two weeks from now, maybe a month from now. It will be built period five at economic engagement.com. We’re just in that transition. All right.

Will Bachman 39:49
Great. Well, we will include those links in the show notes. Bill, thank you so much for joining today. This is great discussion about open book management.

Bill Fotsch 39:58
A real pleasure Well my compliments on you and your organization. Thank you

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