Should I Open My Books to My Employees?

[Music] hello everyone welcome to the 21 hats podcast I'm your host Lauren Feldman this week we have something a little different a remarkable conversation that focuses on the merits of open book management the conversation features six business owners three of whom are open book Skeptics you may recognize their name and three of whom are True Believers it's not a fight it's not an argument it's not even a debate instead it's a lively exchange owner to owner about managing strategies what works and what doesn't my guess is that this conversation May dissuade some listeners who are intrigued by the notion of opening their books and I think that's okay open book isn't for everybody on the other hand I suspect many listeners will have their interest confirmed but if they choose to proceed they will do so with their eyes open most important I believe that even listeners who have no interest in opening their books will be fascinated by this intimate discussion of how six smart owners run their businesses first some background the father of open book management is Jack Stack who led a group of factory workers who took over a Springfield Missour manufacturing plant some 40 years ago stack introduced the concept of revealing the company's finances and training employees to understand them so that they can better understand what drives the business the idea is to get employees more engaged all of this has certainly work for Stacks company which is now known as SRC and where he is still CEO SRC has become something of a mini conglomerate with dozens of businesses and more than $600 million in annual revenue one of the businesses created by Stack and SRC is known as the great game of business which promotes open book management and holds an annual conference the Gathering of games which attracts hundreds of businesses from around the world the conversation you're about to listen to was hosted last year by the great game of business and I think they deserve tremendous credit for allowing us to have such an honest and hype free discussion I've been looking for an opportunity to publish it and this seems as good a time as any I started the conversation by asking each of the three Skeptics why exactly they're skeptical those three Skeptics are Jay goz whose companies in Chicago include a picture frame business artist frame service and a home furnishing store Jason home William Vander blumen who is CEO of Vander blumen Search Group a recruiting firm based in Houston that works with churches and other faith-based organizations and white who is CEO of paral Boyd a chain of hair salons based in Detroit the True Believers are Michael Kil basa who is CEO of Kil basa Smoked Meats a sausage maker based in San Antonio Chris mcke who is managing partner of venturity an accounting firm based in Dallas and Bob Schwarz who is CEO of supersuds a chain of laundromats based in Fredericksburg Virginia the episode is titled should I open my books to my employees I want to start by asking each of our Skeptics what their biggest concern is what's keeping them from opening their books because they've all thought about it a little bit Dana let me start with you what's your biggest concern so I have started or have tried an open book management system with my staff um at the time pre-co I had a staff of 19 people um and it has been successful with my operations manager however um my what I've learned in sharing it um I've learned that it's not necessarily a fit for everyone depending on the industry you're in you know when you look at your staff the culture might be there with your team but if you're working with people who have some life challenges or aren't there for the business mindset um it's really hard to open up your balance sheet and your profit and loss and explain it they they'll see it and say oh well you're making this why aren't you paying me more and no matter how many or how many ways we try to explain it to them um we found that opening our books can cause some resentment um and some questioning as to how we're running the business and even though we were open we found that it didn't really help the morale of the company it was fine to do it amongst managers right but when it went to our day-to-day operations with people it wound up not helping as much as we had hoped I suspect that's a concern a lot of people who come to this uh share uh William how about you what's your biggest concern well maybe I just have a fear of the unknown Lauren there are a lot of smart people that do open book and uh they seem to be doing really well I got good speakers today so I I don't know that I have the answer for everyone but I think that right now I have the best answer for our situation some of that may be baggage that I'm carrying from having worked in a form of open books uh in my prior life my prior career was uh actually senior pastor of Fairly good siiz churches and in the type of church that we were uh everything was open book uh including the compensation of every Pastor to a congregational vote every year every line item how much on books how much on vacation how much time and it it while it sounds like a transparent thing that quote the stockholders should get to vote on it it made it very hard to keep people engaged uh where we were supposed to be a cause-based business you'd find people you know being envious and you'd like to think that pastors don't act that way but they do and uh Not only was it open book for our company but it was open book for the world everything was on the internet so it was pretty uh uh shocking to work in that system and so maybe I'm just dealing with scar tissue from what I felt to be overly transparent well it's not like you're just imagining these concerns you you have some experience in this area could give us an example what what went wrong when we try and hire people they could see what well why are you paying the older guy who's been here longer but isn't doing nearly as much as I am more than what I'm getting so the the the decision making had to be driven by the dollar and and as now in my current career as an owner I make decisions for the good of the business that don't always makes sense for the immediate p&l and if everyone in my company's looking at everything on the p&l and say why in the world are we doing that that doesn't make sense now I've got a bunch of people who are acting like owners when they're not freshest example uh we do searches for all kinds of faith-based teams so we help churches find their pastors so that's one of the things we do uh recently there was a pastor he was about 35 years old four small kids he had just given a sermon on helping the the being the Good Samaritan helping the guy on the side of the road couple nights later he's driving down the side of the road sees a car pulled over stops to help them um is trying to repair their car gets hit by a truck he ends up dying it's a tiny little church they would never be able to afford help finding a new pastor and they're decimated and I said we're doing this search and we're not charging a nickel and if everything were open books I guarantee you I'd have somebody saying but what about the p&l it's it's those kinds of uh as an owner the ability to still make highly agile decisions the currency of our company is our cause it's why people come to work here it's why they're engaged it's why they say it's a fun place to be a meaningful significant place to be not all businesses are based in a cause for a higher good totally understand that but for us every I read through all of the advantages of open books higher employer engagement more fun in the office more you know Frontline with customers all of that for us goes back to our cause and not to our Dollar Bottom Line so maybe it's baggage from my past maybe it's that we're cause-based and not so dollars based uh but for us right now it's just not the decision I want to make I think part of what I'm hearing from you William is you're doing okay with what you're doing opening the books is a big seems like a big risky Adventure that you don't have a compelling compelling reason to uh to try right now and Lauren I should say it also seems like a one-way Street meaning there's no going back once you open them not unless you want to start over with your staff and it's interesting I was reading getting preparing for this one of the big um com competitive advantages of open book is that you're going to be forced to keep your book so well that when invest s want to come and look at your company as a potential purchase they're going to say oh everything's kept so well and that's usually the big stop on purchases well that's fine and well but investors may not want to buy an open book company and I don't know how they undo that once they buy it Jay gz you've known Jack Stack for years you've actually sent people to a gathering of games you've given this real thought you've never been able to pull the trigger or gotten to the point where you wanted to pull the trigger I should say tell us what what what stopped you oh I did I did send three people down there and I have an unusual business in that I've got everything from 40 Factory workers who make you know 15 1617 an hour I have managers making 60 80 $100,000 a year I've got sales people making 50 so I've got a full a big range of of salaries and job responsibilities I don't need my employees to act like owners my employees are responsible I almost never find them doing anything that I wouldn't be doing I I I have employees that are fully engaged to look out for the best interest of the company and they're really solid workwith kind of employees so I don't have an issue with that the problem but I have been I have played around with the open book um theories because it does make sense on many levels and I'm sure it works very well for many companies but the problem I had with it is you know O8 let's talk about my industry you know all all my businesses are home furnishing related we took a 30 % hit and my guys went down to the the games probably right after that or a few years after that and they came back and said half the people there said they hadn't shown a profit for five years and there was no there was no sharing of any money how demoralizing and I had been living through that myself with I I decided I was going to start doing a bonus plan based upon profits and I used to just give it per year if uh you got 25 bucks a year if you were there 20 years you got a $500 bonus if you were there two years you got $50 so I abandoned that and went to some sort of my own half ass you know game of figuring out profits and handing it out and every year I dreaded going to the last meeting of the year go listen guys we really didn't make the money we thought we were gonna make we can't give you a bonus this year and I dreaded it and then finally a few years ago I decided to go back to my old method and I have to tell you it was this huge Albatross off of me they get their bone at the end of the year of how long they've been there everybody's happy and I've just decided at the moment and I'm still open to it and someone can convince me otherwise I've decided that there's three things you could either not do it okay it's working fine I could do it badly that would be worse than anything or I could do it in the best possible way and I haven't figured out how to get the metrics to work for that and William I I'm right there with every single thing you said including making decisions matter if I want to buy new trucks because I don't want my trucks to be driving around the city of Chicago all rusted out the employees go wait a second that truck was perfectly good we could have driven that for another I didn't get into business the answer to what everybody thinks they should be doing in the business I don't really want to leave myself open to having 110 people telling me that oh no you shouldn't have spent money on that we've covered a lot of ground here we got three people now on the hook to answer a lot of questions um let me Michael K let me start with you there's so much to cover and feel free to go anywhere you want to go but I I would ask you to start with this question how do you deal with the the transparency issue I you I know this was a concern for your early on that uh if people looked at what the numbers really were that they would run out the door and find a job somewhere else how have you dealt with people knowing what the real numbers are uh inside the business well thank you Lauren for uh asking me to be on this and I I gu I'm listening to uh Dana and William and Jay talk I'm nodding my head in agreement more than I thought um it's a risky deal and and really the reason uh we opened our books was you know we were growing our business we're a sausage manufacturer uh it was 2013 we were we had just launched this program called values based leadership which is a leadership development program that really puts your your mission and your vision and your core values at the center of everything you do and we were starting to grow really fast we had been growing around 15% a year and we started growing 25% a year and that may not sound sound like a big difference but it's it really stretched all of our systems and processes and I had two conversations going on in our in our business and we were profitable don't get me wrong we were making money but we when you're growing 25% a year you need to be making the margin necessary to finance that growth and if you don't you're going to have to leverage your balance sheet to to finance that growth so I had two conversations going on with my senior managers at this time one was hey Michael we need to uh start building a new plant uh to keep up with our our our growth and the one going on in my head was hey we need to start building cash and uh I had to bridge that Gap somehow and so I I reached out to Vern Harish actually some of y'all may know Vern and he led me to the great game of business and we opened up our books and um it was it was a very uh scary moment for me I mean transparency is is not easy um and but I felt like it was the right thing to do and I really needed to teach people how the business made money and why cash flow forget profit why cash flow is so important and um and the moment I opened up the books I did it with about we had at the time we probably had 150 employees I uh I brought in the top 30 managers including my senior team and I said okay here's reality guys this is what we're making this is how much cash we're generating every year and it's not enough to keep up with our growth we got to figure out how to do this and I went from being a you know a boss that was uh acting like I was letting them make decisions but I was really making them all to giving them the information and becoming a coach to allow them to learn how the business makes money and generate cash so that was seven or eight years ago we've gone through you know a lot of Peaks and valleys during that that period opening up your books is not a Panacea it's uh it it's a commitment but we've you know grown the business 5x over the last eight years and but the more I guess the most important part of that is we've grown the the bottom line about 10x and so um that wouldn't have happened if I if I didn't have the alignment within my organization over how we make money and generate cash and so uh it's been a very powerful uh program for us I William do your point um I we I think we're a little bit unique the great game of business Community I don't know that we're totally unique but I think that having the value space culture and the and the foundation of that really uh accelerated the adoption of the great game principles without having a lot of the drama associated with it um we do not share individual salaries um we are beginning to share uh the balance sheet and teach the balance sheet to our team members that's a very complex uh element of this and so we've been really I said we we're in we've been doing that for about a year now and um and so you do have to explain dividends and distributions and things like that Michael do you feel like you have people looking over your shoulder uh do do they challenge you on like Jay's example buying a truck or or something like that well I would say they challenge me in a good way I'll tell you a quick story we were uh this is about a year after we adopted the gr game of business we nhr person had come to me and said I need help and I said do you want help above you or below you and she said no I'd rather have someone coming above me to help so I went out on a on a search to find somebody I found a very capable person to help um and I brought it to my senior team and we had vetted this person out and we were getting ready to pull the trigger on on bringing her on and I said to my senior team tell me what the GU on the floor saying about this bringing in show and show and in uh my VP of engineering said do you really want to know and I said yeah I really want to know and he he said the guys in the maintenance room want to know why we're bringing why we're adding overhead when we're not making our budget yet numers yet said wow that's pretty good that's pretty good pretty good uh question sounds like my father anyway we pulled back on it and we did not hire her and we we we lost the person that had come to me and said she needed some help but we we managed through it and it was a uh a very positive and Powerful experience um because it it told me that the guys on uh at least in the maintenance room really understood uh how important it is to uh generate uh iida and cash flow I have to say what you've described is is not necessarily openbook management the fact that the guys in the machine room decided that you shouldn't hire the a what maybe you would have gotten sued for for for not keeping track maybe you haven't seen the rest of that movie yet maybe you think you came out of head but maybe you really did need an HR person you what you've just told me is you have delegated running the company to the guys in the machine room and I I I I don't see what that has to do with open book management it they told you don't spend the money on something that they really don't have the facilities to understand what an HR person really does and the lawsuits and the legal responsibilities and all of that so that's not helping me with saying oh this is a good idea well I I appreciate it Jay but but but really um what it did is it challenged our own systems and processes for bringing on additional headcounts and especially uh we had challenged me to think about uh the HR role and um and what we exact what we really needed I've been over the his over my history I've been very quick to bring in uh people and um and they just challenged it and I I actually give them a lot of credit for challenging uh me a friend of mine told me along who is uh one of the most successful business people I've ever been around said that the uh and I believe in this he said the secret to being successful is surrounding yourself with really smart people and uh and then telling them where you want to go and then get out of the way and so um you know I I uh I I consider myself the smartest guy in the room in our company by any stretch of the imagination did the people in the machine room ask you what the responsibilities of that job were so they understood what they were mixing did they say to you tell us explain to us why you think you need to did they go through that conversation with you well we we explained that the the reason we were hiring is this one HR person felt overwhelmed and they needed help and their response was well let's get rid of her and go find go find somebody that can that can they can take her job did you do that that's what we ended up doing rather than adding a headcap Chris mcke I want to bring you into this you have an accounting firm you have accountants who presumably without open book management had a pretty good feel for how the company was going I'm curious H how did transparency change things for you at an accounting firm I'll say you know a lot of the things that the other folks said really resonate I actually became aware of the great business probably five years before we implemented it and I was thinking to myself yeah that that's that that can't work for us why what were you thinking well like Michael I was worried that they would be shocked at how little money we were making and we were doing fine financially but we were mostly marginally profitable and there was a lot of opportunity um for uh Improvement there and we felt as we as we grew as an organization most of what we were trying to do to improve profitability and improve performance was to run around and and tell people well you need to do this you need to do that and that was just becoming not at all scalable and and it wasn't having an impact and um you know for us our gross margin and profitability didn't really change in those years leading up to implementing the great game of business so um I finally uh after try it was kind of after trying everything else went with opening the books completely and the great game of business we brought in a coach and and took our team through their process and it helped a ton with educating people and preparing them for um being aware of like what does profit really mean some of the things that Michael talked about what are you know what are what are these dividends and how does this and you know we have found that we've um they really uh after going through that process they really understand that we've got to be profitable as a company to invest in the future and to protect their jobs and and it actually brought them a real Comfort level uh at least I think I'm going to speak for my team in knowing that we were profitable and and that they could have an impact on that profitability so um and I just haven't seen a lot of the issues with I feel like I do have 40 people running the company now uh where they're really having an impact or on the things that they do every day how can we be more efficient and effective efficient in terms of um efficient with our processes and therefore leading to more profitability and effective in terms of creating a better experience for our clients and therefore retaining our clients and helping us grow as a company so I don't know those are those are some of the things that kind of came out of it for me but I I I resisted for a long time for some of those same reasons and and once I kind of got past that it was a we've tried everything else and since then it really has made a huge impact on similar to what Michael talked about on profitability I don't feel like I've got 40 bosses I feel like I've got 40 fellow leaders or 45 fellow leaders really helping me run the company and it's just been a huge weight off of my shoulders from that perspective do your people know what everybody makes no we don't we don't reveal salaries we know they know broadly you know we have categories of salaries like um uh the cost of good sold salaries that are related to client delivery and then sales and marketing salaries GNA salaries so very broad categories and you know and frankly we are a little mindful when we're adding GNA salaries um uh about the transparency of that and it really causes us to make uh to um to ask ourselves um if I were uh an average employee in this organization how would this appear to me and it it I think it makes us think about it more mindfully and make better decisions um and and also explain those decisions to the team as well and give them a context for those decisions that we're making so far in three years I think it's been very collaborative and um I think we've had some good we've had some decision points in the company where having that sort of thought process and even some of those conversations has held us a little more accountable to some of the decisions that we're making and some we've moved forward with and some we've pulled back with like like Michael's talked about so um I think that's and I think that's even brought more credibility to the open book process for us is that process of really listening to the team how much do the average person make it works for you there that's a great question I you know it's gonna be it's obviously going to be more than in your in your situation like multiple times more is it 80,000 um I don't know if it's quite that high I think it's it's probably more in the 60s but sure it's it's going to be a little bit more and hey look we have a I'm gonna say we have an advantage in that we are an accounting firm people have some financial literacy but I you know some of my folks are on are on the call so they're going to probably be upset for me telling a story on them but before just before we showed them the p&l we asked the team how much money do you think we're making Topline and bottom line revenue and then how much of that is making it to the bottom line like net income and and my team is accountants and they're very conversent with financials and at the time we were roughly a four and a half million dollar company and we had an an about probably 35 folks and we had guesses anywhere from revenue of $500,000 to $50 million and net income of $250,000 to $25 million um and so there was a thought that I was potentially making maybe $25 million a year and so you know even accountants need I mean opening the books really gave them much more of a perspective and they see clients financials every day um but everyone thought that 50% of Revenue was dropping to the bottom line whether it was $500,000 or 50 million so um I think I think education process has got to occur regardless and I think people are capable of learning Chris that's is a that's a great Point Jack Stack always talks about how you know when people ask him um you know say to him I don't want people to in the company to know how much we're making he says you know believe me they already assume you're making way more than you really are and if that was true in an accounting firm you can imagine it being true elsewhere um Bob Schwarz I I want to get to you in Super Suds you have a uh particularly interesting situation you have a Wall Street background you bought a chain of laundromats it's not an obvious um you know Target for open book management I don't think you have multiple locations employees who aren't paid uh a lot of money uh what What attracted you to it oh thanks for including including our company in this I really appreciate it um yeah the the background real quick um was a Wall Street background years ago so I came from a financial background I understood numbers I was a deal guy right investment banker um but there's a what I learned out of frustration and ignorance was there's a big difference between investing in a business and operating a business you know um and at the end of the day after 20 some years of different stuff I got frustrated with the operating side um I I didn't consider myself a great operator a great manager necessarily I thought I was a pretty good deal person but like I said there's a big difference and so I think one thing couple things that I I wanted to bring out to everybody here and some comments was one I think open book management is just one piece of it right sharing the numbers is just the piece of the great game um it's you could say it's the foundation but there's so much more to it than just sharing numbers um you know there's the engage there's other components to the great game just in addition just sharing numbers from huddles um people trust you are employees trust each other you know it's not easy it's not a Panacea it takes a lot of hard work but um you know our performance has been you know remarkable since we've done this and it's you know you don't have to share the salaries like every like Chris said you can create open book any way you want to meet the needs of the company so if you don't have to share what you make personally um but you're still getting the same effect you're getting buying you're getting trust you're getting alignment well let me stop you there for a don't don't your employees have some sense of how much money you're taking out of the business if if the books are open yeah they have some sense but it but as a result there's a level of trust I believe that they have with what we're doing that at the end of the day people want to be part of a team they want to to be included they want to be heard they want to be felt right and you know at the end of the day they're not pointing fingers at the owner and saying oh look at him they may have been prior to doing this but now that we've opened it up my CFO knows basically obviously what I make but it's you don't have to bring it down to the hourly wage person know what I'm bringing home to get the same effect of open book management I don't think that makes sense and why do you think opening the books improved the performance of the company what difference did it make I'll give you a simple uh examples I mean we we have 20 you know anytime we have somewhere between 25 to 30 stores depending upon what we're doing or selling or building um so a lot of our you know it's a big capex business we all we have utilities are a big component of it right so we have all these locations all these stores and it sounds crazy but just to the very simple level our store staff or store team members are responsible for you know the p&l at each store and a big driver of that is utilities so prior to this you know the doors were left open Waters I mean it just goes on and on the utility cost through the roof the minute we started saying okay here's the deal here's our p&l at this store bonuses are tied to the profitability all of a sudden it's like the light switch comes on and it's amazing what people will do to to to tighten down the hatches and and the drive proper I mean it's just it's just human nature I don't know else to say it you know they're shutting off running water valves or closing the doors or not running the AC all the time it goes on and on and on and you know after three or four years it really adds up Bob you're you're a as you said a deal guy you you bought Su Suds with the idea that you would probably flip it I wonder if you would address Williams uh concern about what it would mean if you were looking to sell the business at some point uh having gone down the open book road yeah no that's a good question um you know that was my that was one of my problems is I got into business and I and I enjoy running it now but I didn't at first but now I'm like okay how do I get out of this thing you know um and what's my exit strategy everybody's different everybody's personal story is different in my case um I've made the decision that I want to continue to operate the business um my plan is to create an ESOP out of it we'll be the first in the entire industry to do it as far as I know um so there's a way for me to Exit through an ESOP right which I was not even aware of until I got into this whole great game thing so it's created an exit strategy for me that I was not aware of um at the end of the day financial buyers care about if you're going to sell it to a financial buyer strateg buy they care about what your profit loss is you know what kind of return you're getting and if you can if it's open book and it's driving numbers all the better I think you know they're gonna they're G to buy what you're you're selling and you're selling an open book that's fine now if if you don't you don't have to create an open book you know like Jay you don't you know if you're happy running the business the way you're running it you know I mean it it for me it was a personal decision to create a better operating structure at the end of the day that's what that's my decision you know I just needed a better way to operate my business I mean some of what I've heard is we had bad management we had employees that weren't doing what they were supposed to be doing we had managers that had no clue how much money we were making and that this fixed all that okay well to me that's a false choice there's good management there's bad Management in the great game of business which is a form of good management I don't know that one needs to jump to the great game of business to start practicing good management which is Bob in your case why is the air conditioning on and why is the foret on and why is the door wide open to me that's management like why did it take having to put the great game of business in to have a manager who knows that shut the door turn off the air conditioning and turn off the water or and and the other thousand things that managers are supposed to be doing I found that you can get people to act like responsible managers without doing this and that there's some downsides to doing this that I at the moment and I'm still open to it believe it or not I look at some of the downsides and I say to myself it's just not worth all the energy I would just look at someone with a $10 million business and say if somebody's pulling $600,000 out of the business how do you either hide that in the financials if you're truly open book and they see management and they see that number it's just it's someone's going to go oh that's okay he deserves six Grand he put all the risk into it and he's been working at it for 30 years and when he loses money I don't put it I I I just don't know that I want to open myself up to having to explain why the owner of a business should be making a return on investment and what it should be even that you know we don't practice open book management with the entire staff everybody on my staff knows what everybody makes we have that open book right and they know you know because I'm young and the business is Young Dana's not pulling out anything um but I believe when the time comes and it's time for me to draw a salary from my business I know not to disclose that um just like I know not to pull up to the salon in the Cadillac you pull up in the Pontiac right and that's having a culture but I just think it's interesting how this open book manage it but we don't really talk about what the what everybody makes versus you know we tried to practice it it really you know hurt the business as far as how people interact with each other but everybody knows what everybody makes just an interesting flip on it I like to jump in and address Jay's point about bad management versus good management look we have mostly the same people that we had before we implemented the great game of business going open book management whether it's through the great game of business or some other methodology has made them better managers better leaders better team members because now they can see a lot more how the business all fits together and works and how they can have an impact and so and and quite frankly they're they're better um at servicing our clients as well because the things that our team has learned and learning how our business Works um learn teaches them how to talk with our clients about how their businesses work as we we do the accounting for our clients so um yeah I think that's you know for us we've got all the same people it's just this has really helped us um uh help help educate them um and take them to the next level they were already really smart uh effective people but it's an additional tool that's helped them grow yeah Chris I I would second that by this education of uh the financials we've created some managers that have become really good uh that maybe weren't as financially sophisticated as they were prior to the point now we're creating some other uh vertical businesses within supid unrelated stuff that I'm going to get you know that they're going to manage um which they couldn't have hon honly they probably weren't prepared to do it five years ago I mean look how many businesses SRC has what do they have like 50 or 60 you know the the point is there's there's a big there's a big bandwidth um I'm doing some of the I'm probably doing half of what the great game of business is about wait a second j a third a quarter some part I'm not suggesting keep everyone in the dark it's it's when it gets down to tying their compensation to how the company's doing so my question is and maybe some of you don't have business bus that ever had bad times for those of you that have had periods where the company just didn't make money for two three four five years do you feel it added a different level of stress to yourself or to your employees Michael maybe you could uh address this to what extent do your employees uh profit more when the company does better and how big an issue is it if the company has a tough time well they've got a direct line of sight to whether the company's doing well or not which kind of demystifies the whole uh process I I will I want to jump back to something that may maybe I think William brought it up or maybe it was Jay um you know we're we're a branded sausage business and so when you're building a brand you're you're making Investments don't necessarily translate into profits right away whether it's going into a new market whether it's introducing a new product line whether it's uh beginning a relationship with a new customer I mean those takes that takes Investments and for years we had a real disconnect in our business because we were we were bonusing off the Eid die what I was trying to do is really build build brand value which is two different Dynamics and it really caused a lot of stress in the organization and and uh it wasn't an easy conversation but I had to spend a lot of time coaching people uh on the importance of the brand value um and uh but we we we have made I guess you know with the addition of a really great CFO who's who who's come in uh and helped as we've grown the business we've been able to really uh gel around ebit dah and uh and and and get to a a performance standard for a brand uh so we just got through paying a um almost a million dollars out in in bonuses to our team members last last uh last well it was for the past six months and I cannot tell you the excitement and they knew what was coming because they saw the they saw the financials uh every month but they they were just you can't imagine the excitement and going back to Bob's comment around trust the transparency of the you know the great game of business and the great game of business is simply an operating system that uses open book management as part of the tool it's and that's very important to understand um it's an operating system that uh we recommitted to actually back in 2017 and since we've recommitted to it it's been amazing amazing journey but the transparency of the of the GRE G business magnified the trust in our organization which Unleashed creativity in every area of our business create much more creativity than me or even my whole Senior Team could could unleash and that to me is the secret sauce that makes businesses successful is the creativity to the point of challenging your employees challenging your decisions you you had a tough decision last year where you walked away from a very big client of yours uh which might have been a tough decision to explain can you tell us about that talk about a gut-wrenching decision that'll so we just spent about $4 million adding capacity to our to our business we added a new production line and increased our our capacity about 50% uh right after we did that um our third biggest customer came to us and said hey that that branded product that you make that we sell well we want to convert it to a private label product want you make it and I said well we really don't do private label and the buyer said well if you don't do it I'm going to get somebody else to do it so I had to go to our team what do you want to do here let's talk about this because again I'm not the smartest guy in the room here I want to get everybody inv involved in this we quickly understood that although this guy was our third biggest customer and had 20% of our business it was our lowest gross profit uh margin customer and we really didn't need to replace the uh Topline dollar associated with this we had to replace the gross profit associated with this and so that became a much different conversation over how we were could replace the gross profit associated with this and it made the conversation and the decision much easier for us to make as a result of that I mean we still walked away you know we had to replace that business but it was an educated and and we're we call it holding hands in our business um it was a for us to hold hands on a on a strategy to actually become more profitable than we would have um had we maybe not frame the conversation in in terms of gross profit so how many people were in that meeting that you discussed that with the whole company um no no no no probably initially it was the top uh seven uh team members in my organ so i' call my senior team but then we took that uh took that conversation down to uh our midlevel managers which are about five people and and explained it to them and got their input uh and they all agreed that you know look let's go chase after the loss gross process I do the exact same thing so I I that's where I'm trying I'm struggling with that's what any good company would do they talk to their key people and have that conversation I don't know what that has to do with having a great game of business down to the the guy in the loading dock I I any good company would have that conversation so I don't think this is all or nothing I don't think this is great game of business or you don't tell anybody anything I think there's somewhere in between and I just want to ask you the million dollar bonus what percentage of profit was that uh it was about uh 15% okay and Jay uh you know have you have those conversations but when you've opened the books and really educated them about the business those conversations I think that's part of Michael's point it uh the conversation was a different conversation because they understood the business a little bit better rather than well gosh we just need to keep every customer at all costs you know if they don't really have that perspective on the financials some of these decisions are just they're just the the feedback that you get is is not as is not as informed um because they just don't have the context and I think I think that's where I think it's part of Michael's point is you just get better decisioning all the way down to the loading dock um uh it's it's not just about asking them it's it's about giving them the tools to actually help you I wanted to go back to you William when you gave the example of the church that you wanted to help out without charging them because their pastor had died being a Good Samaritan I have a hard time believing that your employees would struggle with that I think that I know you've hired people who are looking for a a larger cause I think they probably would have been okay with that so I don't think that's the real reason you've shied from doing this I'm curious if you're hearing anything here that's that's making you think about it at all yeah so Lauren we're all in sales here right everyone on this call so I picked the easiest example okay but the underlying principle is the same and it was a question I'd like to raise with Michael's example this is a fascinating decision you had to go through Michael props to you for getting through it and makes me want to go buy your sausage over at HB unless they were the customer they were not the customer so Props to you but what happens so two- layered question one's actually just selfish I'm curious to know of that senior leadership table that you have Michael your family run business were any of those people related to you in any way no none of them were related okay that that clears a lot up because I we work with a lot of we're a family business we got a lot so where does that come into everybody knowing what's going on and that's a whole different whole different onion peel to me you know I'm really not the smartest guy on this call I am truly a recovering Pastor that's just trying to figure out how to run a business and what has served me well over the years are some gut level decisions that really didn't make sense at the time and to me that that's not a that sounds like a non- datadriven uh reason to not be open book but I've got a a friend who is a pastor of a very large church and he was talking about his compensation and retirement and such and he said me will him I don't I don't think they pay me to preach anymore and I said what do you mean Mark and he said the preaching's fine I like doing it it's kind of for free but where I earn my salary I get paid to make about four decisions a year no one else wants to make and you can be as open as you want but sometimes the owner makes a call that's going to go against the grain of what everyone else thinks or believes now maybe you're in a purely data driven business maybe you're more mature as a business I mean Michael your business has been around long time way to go for being open you know what almost 70 years or a little more that's a long time so you've got a lot of data We're Young things shift things change we have to decide during the pandemic what are we going to do churches and schools have been closed that's put a little bit of a damper on our business so we've had to make some pretty hard decisions uh some of which we've done very similarly to what I've heard the panelists that are are pro open book do but but at the end of the day the decision is with the people who have the name on the door and and I Lauren I'm just not I'm not getting more convinced I if anything I'm more convinced of my position I think what I'm learning is uh open books doesn't have to be telling everybody what everybody makes that's a big deal um but what I'm also learning is the things I'm hearing which are super good practices in the companies using open books are things we're doing anyway but we're driving our conversations by our values and I do have people that have worked their fingers to the Bone during a time when we've been down in business and for me to say we're going to take on a search which is a big tall order we sell big widgets not little ones and nobody's going to make anything but you still need to work just as hard like that's just not going to go well even if it's the Good Samaritan getting killed now I did pick the easiest decision so valid call on me but but whether it's that decision or another there there are through the history of our company a number of times where we've done the thing that's counterintuitive and it's been our best decision I hear you did you see the question here I'd be interested to hear the panel's take on sharing specific financial performance metrics versus totally open book management can you get the benefit without the downside I believe so I that's kind of my whole point I think totally agree I can't think of one time in 42 years where I had my key people sit around at a table they gave me their opinion and I said thanks for the input but here's what we're doing it's my business I totally am doing all that stuff it's the connecting it to income that I choke on because I think that's where it just adds a whole new layer of potential problems that I don't want to accept Chris mcke you not only have a a window into your own business but you're an accountant you uh talk to lots of other businesses maybe you could deal with that question uh that that Jay just read off the uh the screen yeah you know we had considered um just opening the books and in fact for a number of years consider just opening them down to gross margin and that is our critical number uh in in great game of business parlance which is what our bonus is based off of um and we um and I think that's something that's very doable so you could you could open up down to a up to down to a certain level and everybody uh and and and gross margin for us is sort of the thing that everyone has the ability to impact the most and all the little decisions they make every day and that's really the piece that's changed the most for us so I would say it's a process that everybody's got to go through when they're implementing the uh open book management however they decide to do it um and that that piece of it has has been really impactful um we decided to gohe and open all the way down to the bottom line because we really wanted people to understand the context in which we were operating in and why it was important perhaps to generate more gross margin beyond the theory that there's a lot of other bills that you've got to pay but I I don't think it's an absolute requirement you know I'd say the only difference really when we used to just open the books down to gross margin we were bonusing people off the gross margin that they were generating we were organized in little teams and we were bonusing based on gross margin by team and we were finding some teams that were doing great and some teams that were doing not so great and in the end the company wasn't it didn't move the needle for the company at all was just we were paying out bonuses to people that were already doing well and and and um and not to people that um uh that needed help and that kind of thing and so what it really move into the great game of business methodology sort of pulled that all together and we all began to working together much more as a team um but I I do think there could be situations where you open the books down to a certain point and that H and you design your bonus structure to to create movement around that number and you don't have to necessarily open all the way to the bottom line and show owner compensation and if that's a big piece of the heartburn um you know I I think there is an opportunity to consider that if you're a sole owned business and you show all the way down to your bottom bottom line how do you not show owners compensation yeah no I I agree I agree but you know I think there's an education process that again that goes on with that money doesn't all just sort of go into my pocket if you will and we do have a couple of other several other owners within the company but I'm still the majority owner but they understand we've educated them about look we there there's we have to finance receivables you know that that we don't I don't get to just take all that money out every day at the end of the day and write myself a big check there's there's cash flow demands in the business and maybe my team understands that a little better because they're accountants are it was easier for them to figure out but I I know by going through that education process they understand why a business needs to show a profit at the end of the day and sometimes it's a substantial profit because there's going to be times difficult times where where you've got to be able to dig into that profit as well as super well said Chris one of the things that U my wife and I have talked about this a number of times we've talked with a lot of other entrepreneurs and and one thing that keeps coming up is you know if we were a publicly traded company and we had a just call it a small number 100,000 shares out there with 500 owners and there was a rock bottom line that was get getting split among shareholders I don't think employees would have a problem with that but when it's one shareholder they do and that's what I keep hearing over and over it's a $1 million business or $10 million is if if there is only one stockholder and you're running the business at healthy margins that would be appealing to somebody like Bob if you were coming to do a deal well I'm not going to buy that business if they're only making 1% a year but I'd buy them if you assuming healthy margins in one owner I I I don't know how every business can say open books is good categorically and I think it might be great for some I think gosh Bob as thinking about ESO this makes total sense I mean wow that's perfect for us and where we are in our life as a company it it just doesn't so here's the question open book management let's everyone's given their opinion I'd like to know officially from someone that works for the great game of business open book management to me has always meant open book management all the numbers are out there and now I'm told well not necessarily it doesn't have to so what is it is it is it the employees is it the owner's salary or is it not because I could I could take an $800,000 salary and leave a $100,000 profit and go yeah we're barely making money so so I like a call I like a clarification on that Jay I think uh I can answer that that no one has ever said associated with the great game of business that salaries have to be included uh Chris mcke am I right about that we don't and um again do think that uh and and and I will let some if somebody from the great G business does want to jump in and sort of say verify that you know it it it's tailored to every company's need you go through an implementation process and and you and the team help design how open book management is going to work for your company we have a saying adapt versus adopt the great game of business that yes thank you Donna Bob Schwarz I wanted to ask you um maybe to address a point William made earlier about what it's like doing this through a through a down period uh I don't actually know for sure but I'm guessing this has been a tough year for a chain of laundromats I assume you had to be closed for a while what has it been like for you uh with your employees yeah no I was gonna I was going to address that you know when the times are tough is when you want to be doing this at the end of the day come March we were we were swea because there was you know we're in five different states and every state had a different view as what's considered essential business and so fortunately we were considered essential which means we we stayed open um but what happened to us and I didn't bring it up I had many employees come to me and say do we need to take a pay cut I'm willing to take a pay cut defer my bonus okay that would never have happened never have happened you know it would always been me making a tough decision and now the tables are turned uh because people generally understand how we operate and they have a level of trust that we're going to do the right thing by them right and they want to stay in this in the long term can you do it without great game I'm sure you can it's just it was a better operating system for me um to run it this way and especially when times are tough you want to be transparent to people you want they they'll come to the right decision I believe the end of the day if you're open with it Michael does it work for you and tough times yeah I mean when we when we walked away from that 20% of our business our volume after we just added a 50% capacity we were able to to really engage everybody throughout the organization on how do we reduce costs to get through this because you lose we didn't replace that gross profit right away it took time what Bob says is exactly exactly right and I'm not I don't want to uh I don't want to sound like you know IMA uh this is the only way to make it work I mean it sounds like Jay and and and William have great operating systems that that can produce the same same impact it's just it works for our culture um it works for our the way I want to run the business it uh we have aspirations Bob as well as you do for ESOP down the road so it's it's setting us up for that um uh option I don't want anyone to walk away thinking that this is the only way to do it there's a hell of a lot of successful companies that don't do open book management but for our culture for the way I want to run the business it's really uh it's uh it's been very very effective for us I believe that 75% of the great game of business is just called good management and I I think I'm doing the exact same thing many of you were doing there's that other 25% that and believe me I still there's probably some more I should be doing and I'm thinking more about it now as usual and bringing it down to a lower level and having some more meetings on that so I don't think this is all or nothing and I'm thrilled to hear your you're saying of adapt don't adopt I'm I'm thrilled to hear that because I think that makes perfect sense I think it's a matter of of of bandwidth and you going to do 75% you're going to do 100% you're going to do 80% and after this conversation I'll probably add another 5% because I probably could have some more not probably I could have some more meetings with my lower level people that frankly I haven't had in five years and it reminded me to do that Dana you know you can create a great culture you know you can have all of that but I think as a business owner you have to also know your staff and you have to know what they're dealing with um my staff doesn't want to look at the p&l and figure out not even figure out but be told how they're contributing to it or how not they want to know how much you're paying me when am I getting it and is there a bonus how much of that are you giving me that's it when during covid and I would be on these you know in these zooms and and everybody's like oh we're doing a Dueling Piano Bar happy hour for our staff and it's not that I work with bad people but I understand the issues that are facing the women that I'm working with single mother of three kids she's okay like so does this mean I'm not getting my check on Friday so I can pay for this or what does this mean um I'm not working with people who want to be business owners so I'm listening to everybody and just thinking wow I just come from a very different culture that's a great comment Dana let me take that to Bob uh Bob you don't operate a hair salon but I suspect your employees were not in before I open book were not thinking about what it would be like to be a business owner either could you address uh Dana's concerns yeah sure it's a process I mean what we found is it's a process it takes time uh adoption is not easy you know it it takes a it takes work what we've done is yeah we share all the numbers we share the company p&l we don't you know people don't know that you know Mary makes this and Sally makes this and Y Yad y you don't get into that minutia uh we do share pnls every month every quarter but what really matters to employees at the stores is like you said what am I getting paid can I get paid and oh what is my bonus and you can create a scoreboard in our sense every store has a very simple you know scoreboard that we've worked with ggob to develop that matters to us and it's basically six or seven items and that's what they're looking at every day it drives the number but you know it's not into you know the the the minutia of the p&l it's very simple but again it's line of sight that ultimately drives the bottom line of the company and they share in that bonus simple as that so we have our key performance indicators for our staff yeah um and we give them bonuses based on that but what we found that when we shared the balance sheet the profit and loss with anybody that wasn't managers the mindset wasn't wow I want to make this better it's why aren't you giving me more if and they they just were not connecting the culture at per boy is these women are extremely committed to healthy and quality hair care for women that have been overlooked right and and for being committed to timeliness being committed to healthy hair care Dana this is really important to me um you mentioned about the socioeconomic um you know cultural cultural uh uh you know we we talk about The Great Divide you know and and the halves and Have Nots you know this is my personal opinion you you're free to agree or disagree but in my opinion the the the free enterprise system is the most powerful engine for social justice the world has ever seen ctia alra stories do you want to hear of people going from immigrants coming over to this country and starting with nothing and creating something because of their uh entrepreneurial and their resourcefulness and this is this is what's made this country great and we're at the I think we we're at a risk of of losing that because we're unwilling to uh to grab the narrative on the power of the free market to lift people up and and part of that is our unwillingness to to be transparent and how business operates and why profit is necessary and really teach when I when we opened up the books and and keep in mind half over half of my Workforce primary language is Spanish and um and when we opened up the the books and we started uh teaching them about okay this is I'll never forget we did we did our first open book budget and I got to the bottom line and I said okay guys what do youall want to do with this money what do we want to do with this money I mean uh clearly we're in a you know we're in a business that if I take everything out every year we're not going to be around very long so we had to reinvest this money and and and they started talking about these items that we needed to invest in whether it was equipment or whatever and I said wait a second I forgot to tell you something I said 40% of that this is several years ago so 40% of that goes to the government taxes and they couldn't believe that 40% of that money that they were working very hard to get was going to get at the government and I I'm not trying to tell you this I'm not trying to make a political statement here I really think that you bring up a really powerful element of the great of why it's important for us if we don't adopt a great game of business and and there's a lots of different ways we at least need to initiate a conversation around uh the importance of the free market in this world uh and especially in this country because I I think we are um in dang of losing the narrative here guys I I hate to do it but I think I have to end this conversation my thanks to Dana White of paraly Boyd Jay goz of artist frame service and Jason home William vanderlan of vanderlan Search Group Michael keilbasa of kilbas smoke Meats Chris mcke of venturity and Bob Schwarz of su Suds I do think we may have changed some lives today I think people learned some things here uh either by convincing some people to give us a shot or by convincing them to run in the other direction which is Service as well uh we all know it's not right for everyone thank you all for taking your time the time today I really appreciate [Music] it wait wait don't leave yet if you have a question or a comment that you'd like the 21 hats owners to address send it to me by replying to your Morning Report or by email at Lauren 21h hats.com that's l r n21 hats.com do it now before you forget and don't be afraid to tell Jay what you really think you can take it and if you got something out of this conversation help us reach more business owners tell a friend subscribe and review us wherever you get your podcasts follow us on Twitter subscribe to the morning report at 21h hats.com this episode was produced by Jess Theron founder of blank word Productions okay now you can leave thanks for listening everyone [Music]