Last month in this space, I reviewed a series of market projections for 2014 from Harvard University as well as the industry’s leading associations.
Since hanging out his shingle 25 years ago, Strite has been a business pioneer, but business took a turn when his company adopted open-book management.
|To make company financials clear, Strite (in red) often compares the numbers to an employee’s personal financial tools, such as checkbook and household budget. "For some people, we go to the bank and withdraw their monthly take-home dollars," he says. "We use this cash to explain the income and expense reconciliation process. Then we take out our company budget in percentages and reduce the income by direct cost followed by overhead. From starting with $100, we end up with $3 after retirement is paid. This process seems to bring home the importance of staying within budget on all items, and how easy it is to spend more than we make," says Strite.
Not long ago, a group of seasoned remodelers from around the country visited Jim Strite’s company, Strite Design + Remodel, in Boise, Idaho. They were shocked.
"They couldn’t believe how open, loyal, dedicated and directed everyone was in our company," says Strite, CR, CGR. "And you know," he says, "[all those good things are] because of our open- management system."
Since hanging out his shingle 25 years ago, Strite has been a business pioneer, researching progressive business practices and bringing the best of them into his company. He uses state-of-the-art computer systems. His Web site is classy and multi-functional. He happily shares cost figures with clients so they can see where their money is going.
But the really big move for his company was adopting open-book management. In the book "Open-book Management: The Coming Business Revolution," business guru John Case says the system has three basic components. First, every employee sees—and learns to understand—the company’s financials, along with all the other numbers that are critical in tracking business performance. Second, employees assume that, whatever else they do, part of their job is to move those numbers in the right direction. And third, employees have a direct stake in the company’s success. Strite puts it this way: Open-book management is where you share the company’s vision and financials with your employees in order to show where the company is headed and what everybody needs to do for the company to succeed.
The first time Strite tried launching the system, it fell flat. "I didn’t have a leader in production who bought into it, so it wasn’t supported," Strite says. Things changed in 1991 when Bob Mundy came on board as production coordinator. Having run his own remodeling company, Mundy saw the benefits of the system, says Strite. Over a year’s time, with the leadership and commitment of Strite, Mundy and the company’s business administrator, Brad Millspaugh, the open-book management system took hold.
Under Strite’s system, everyone participates in the management side of the operation, weighing in on decisions that may affect the company’s success. The company books are open to all, and everyone shares in the bottom line through annual profit sharing. Along with these rights come responsibilities, however. Each employee is directly responsible—and accountable—for the numbers his job controls.
As a result, everyone at Strite Design + Remodel "acts, speaks and thinks like an owner," says Strite. "[All employees] realize what we stand for. They realize why we need the markup. They know [that] if we don’t meet or beat the margin, the first item to go is profit sharing. They know they need to help each other if needed because we all benefit [when the company does well]." And everybody loses when it does not do well.
So far, the company has done extremely well under the open-book management system. "We have increased from a 33-percent margin to 40 percent over the past 10 years," says Strite. "Even with the increases, our variance of estimated gross profit to budgeted gross profit average has stayed within 1 percent. That’s almost unheard of in the industry. I believe the consistency is due to open-book management."
Once Strite decided to convert to open-book management, he needed to reinvent his company as a team-driven operation and train all his employees in business management systems. The first step was to agree on business goals for the company. The entire Strite team convened to formulate—and thus buy into—a statement of the company’s purpose. Here’s the statement they created: "Our mission is to provide excellent service, on schedule, within budget, through honesty and a team approach. Our purpose is to establish quality relationships and to promote personal growth within the Strite team."
The mission statement doubles as a pledge to clients. That’s reason enough not to state a profit goal openly. But, Strite says, "If we meet the schedule and stay within budget, the profit will be there."
With goals in place, Strite brought out the company’s books and, in weekly meetings, taught his employees how to understand and work with the financials. "They have to get it so they can see that everything they do [on the job] influences the bottom line," he says. He started with the numbers most employees understand best—direct job costs. "We taught them how to read the job budget. Next we covered how the job budget relates to the direct cost in the income statement. Then we taught them what the overhead numbers meant. And then we taught them how to read the income statement and the balance sheet."
Strite adapted the training to the learning styles of his staff. For some, the information clicked when they saw a printed report. Others preferred to review the numbers on a computer screen.
The whole company meets for 90 minutes every Thursday afternoon. Most meetings are spent going over the financial status of jobs in progress, comparing budget to actuals and discussing measures to keep jobs on track. Once a month, the staff takes the bigger view, looking at the company income statement and where they are for the year. If there is something special on the agenda for an upcoming meeting, Strite alerts people in advance. Construction technicians, he observes, tend to be "black and white thinkers," who may not have much to say unless they’ve had a chance to mull over a concept or topic. "I set the seed and let it germinate," he says. "It works; they do participate [when the subject comes up for discussion]."
On the other hand, employees are not shy about raising concerns. At one meeting, they probed Strite’s decision to invest in new signs for vehicles and job sites. At another, they challenged his plan to establish the company as a design/build firm because the change would entail a $25,000 expenditure for a new logo and marketing materials. "The owner is accountable," says Strite. "It’s my position to communicate until we understand each other." The whole company has to reach consensus on major decisions affecting financials. "The monkey is off the management’s back," Strite says, but he also has to stay on his toes. So does everyone else in the company. Field personnel receive an annual budget for small tool purchases, for instance, and the marketing manager has 1 percent of annual revenues to work with.
If anyone’s spending gets out of hand, everyone knows. Such situations can be embarrassing, but the staff generally takes a supportive [approach], says Strite. "We post mileage used and phone use [for all to see]," he says. When one person was driving twice as much as the other field workers, the aberration stood out like a neon sign. Together, the staff figured out how to reduce the worker’s road time, and his mileage quickly came into line.
Among employees there’s a continual effort to generate efficiencies. Right now the design department is developing more checklists, says Strite, so that the time needed to package projects can be reduced. Field personnel are always on the lookout for products that save time. Recently they found a shop vac they can wear on their backs. "It’s better and faster [than the old HEPA vacuum system]," says Strite.
But the mission statement emphasizes excellence as well as efficiency, and the company is vigilant about balancing the two. "We had to lighten up [on the time-savers at one point]," says Strite, "[because] the guys were cutting corners to save money."
At the end of the calendar year, Strite tallies up the company’s profits. An agreed-upon percentage is plowed back into the company for capital improvements, but the rest is distributed to the team members.
Some of the money goes to employee SEP accounts; "every year we have contributed the maximum (15 percent) of gross wages for those who qualify," says Strite. Beyond that, the amount of profits distributed is based on formulas tied to job classification and individual performance.
"[All team members] know their individual bonuses are tied to their contribution to the company," says Strite. For production staff, as an example, performance is measured by the mission statement—excellent service (measured through client, vendor and trade responses to their performance), within budget, on schedule." If they have a rating of 80 percent on these items, their profit share is 80 percent of the maximum amount they can earn.
Employees not only reap the rewards of company success, but also have direct control over the amount they benefit. They like that a lot. There was a lot of grumbling and suspicion the first time Strite floated the idea of open-book management in his company. Employees wondered "what’s the trick, what’s behind this," says Strite. "Now the pendulum has swung over [ to the other side]," he says, and his employees are the system’s biggest fans. If new employees express skepticism about the system, old-timers at Strite Design + Remodel quickly set them straight, Strite says. "They say, ‘Hey, believe in this system—it works.’"
Pros and Cons of Open Book Management