Blair gets David to admit that he was kind of wrong about open book management being just a fad when he originally wrote about it almost two decades ago, and David offers ways that it can actually benefit both employees and clients when used appropriately. Links Financial Management of a Marketing Firm by David C. Baker TRANSCRIPT BLAIR ENNS: David, today we're going to talk about open book management. How does that sound to you? DAVID C. BAKER: Sounds like you think you're in charge. Why don't you say, "Can we talk about that?" BLAIR: Well, let me assert control. David, would it be okay with you if we talked about open book management? DAVID: Great idea. I like that idea. Let's do that. BLAIR: Okay, fantastic. I just happen to have an article here that you wrote. I've actually just pulled it out of your book, Financial Management of a Marketing Firm. We don't talk about that. We should do some podcasts on that book, because that's a book that every principal of a creative firm should have on their desk or their bookshelf. And the reason I had it out is, I was just on a call with the owner of a small creative firm who wants to raise his level of business acumen, and we don't have the training program that he's looking for. Ours is too specific to business development. So I said, "You need to buy this book." And then, as I was leafing through the book, I saw you had the stuff on open book management. We'd already agreed that we were going to talk about open book management. But I want to read something from this that's in the book. BLAIR: It says, "OBM, open book management, is clearly a fad. That doesn't make it wrong, just suspect!" Exclamation mark. "Open space layouts are also a fad, and time will tell how they catch on. Though there's already strong anecdotal evidence, if that's possible, that people jumped on the bandwagon and only later asked where it was headed." DAVID: So you want me to pull stuff out of here to embarrass you, as well? Or not? BLAIR: "In my opinion, open book management is a fad that will not catch on with the masses." When did you write this? DAVID: Last month. No, the first time I took a stab at writing about open book management was in 2000, so you gotta give me a little bit of slack. I was kind of wrong about that. I'm still going to be right about open plan offices, but it's going to take another decade for the world to figure out that I'm right about that. BLAIR: Really? DAVID: Yeah. BLAIR: Yeah, you think we're going to go back or away from open plan offices? DAVID: You know, one of the key components was that the principal or leader or whatever should be out with all the rest of the folks, and that blew up in everybody's faces, so we've already walked away from one of the key tenets of it, and we've also walked away from other things like, now we have places for people to go off and work if they want to, and we're not making everybody sit in what looks like a call center and be all disturbed by everybody's nonsense. So, yeah, I do think it's going to be another ten years, but we'll figure that out, too. BLAIR: Okay. DAVID: But I was wrong on this one, for sure. BLAIR: Well, let's just pick up from there. What did you think was going to happen, and what's the state of the nation right now when it comes to open book management? DAVID: Well, people are more open to it for sure, and one of the things that occurred to me as I was looking back over my first foray into this is that I wrote it at a particular time in history, so this is right during a difficult economic environment, and that's typically when principals move towards more open book environment. BLAIR: Yeah, "look, I'm not making any money." DAVID: Yeah, right, so quit your whining. It's like, I'm not making any money, why do you keep asking me for more money? That's very common, like people go to open book management when things aren't going all that well, and then they're not quite as enthused about it when things are going great. But, we've matured in so many ways around that, and it think that the current approach to open book management is really good. I'm very much in favor of it, to a certain degree. DAVID: I asked a bunch of principals not too long ago, just a couple months ago, about their perspective on open book management, and you and I talked about this poll. It's really, what did you find interesting about that poll? Tell people about the results of it first. BLAIR: Yeah, so the Twitter poll that you did. You said, "As the principal of a marketing firm, my perspective on open book management is: A, everything is fair game; B, all is open but salaries; C, we share the big picture; D, financials are not shared. And the number one response, 38% people said, everything is fair game. DAVID: Yeah. BLAIR: And then 24% was the next, B, all is open but salaries. So 62% of the people you polled are in favor of open book management at one level or another. DAVID: Right, that surprised me. It surprised you, as well, I think, right? BLAIR: Yeah. I mean, I was shocked at 38% said everything is fair game, because the distinction really is pointed out in the next response, which is all is open but salaries. So people are saying, yeah, what the principal earns, what the highest earners earn, what the lowest, everything, shared, or who gets bonuses on what, commissions, etc. DAVID: Right. And I came across something just last week that I found even more interesting than that, and it kind of pegged those results into a better, more I guess, an anchored context. And this was something that Katherine Vasile had done on CNN.com, and she discovered that the big difference in how we approach open book management is a generational one. So, 30% of workers between 18 and 36 have shared what they make with a colleague. So a third of younger workers tell their colleagues what they make. Compare that with older people, like you, not me, but older people, only 8% of those people share what they make. And then flip that around to what do they share about what they make to family members, and 60% of millennials will tell a family member, whereas only 48% of older folks. So there's something about, maybe it's transparency. I'm not sure I completely understand that, but that's the difference. It seems like it's a little bit generational. DAVID: And since these younger folks are running firms, they're taking their personal perspective to how they want to run the firm. I think it's great. I think it's fantastic. BLAIR: I probably should have done this at the beginning, is the one interviewing you. We should probably define open book management. Do you want to back up and do that? DAVID: Sure. So, it's being more transparent about what is happening in the business, and if we back this train up 20 years, it was pretty common to find agencies who didn't even show employees ... they didn't know what the hourly rate was, really wild, bizarre, and they never got to see the proposals that clients were accepting, which I also found incredibly bizarre. And then, so , what the hourly rate is might be the first step. Next would be seeing proposals, what clients are paying for what they're getting. A deeper step might be, what are the top-line numbers. What are our top-line financials. Not the net, not all of our expenses, but what, like, we're a $4 million firm or something like that. DAVID: Next step down would be looking at more detail in the income statement. So, you subtract all the expenses, what's the net. And then the deepest you could go would probably be sharing what everybody else is making individually. I would stop short of that for a couple of reasons, but that's the progression for open book management. So it's not like you're either open book management or you aren't, it's more a matter of degree, probably. BLAIR: So is it all financial when we're talking about open book, or are we talking about The Books, the accounting books? DAVID: Generally it is, yes. There are some other things that people aren't nervous at all about sharing, like the purpose of the firm, the future of the firm, what the principal's timeline is, what we're thinking about in terms of maybe opening another office, maybe changing our perspective about certain service offerings. I don't see anybody ever thinking about pulling back from that. Universally, people are open about that. So yeah, it really does come down tot he financial side. And when you think about the classic term, open book management, that's always around financial stuff. BLAIR: So, it seems, looking at this article from 17 years ago now ... Wow, I can't believe we've been doing this this long ... to where you are now, you just said you think this is great, the openness, the trend towards openness, so clearly it's not a fad. It's stuck around. It seems to be gaining some traction. You're pointing out that it seems to be a cultural thing, as the younger people live in a more open and transparent society where everything is out there on social media, etc., there's less inclination to hide things. So, your assessment is this is a good thing and we should all be embracing it. Is that correct? DAVID: It is. Up to the salary side. Maybe that'll change too. I don't have a history of predicting this very reliably, so I'm hesitant to do it again. Maybe that'll change, but I do think that we tend to judge people too quickly based on how much money they make. So we tend to assign a human value that's tied to what they make, and I think that's a massive mistake. Because it really is more about, it's really a positioning question, like how easily replaceable is somebody's labor, and it has nothing to do with how valuable they are as a person, and we can't separate those two things in our minds. So I don't think sharing salaries is good. I think sharing the whole bucket of salaries, like this is what everybody makes together, and that should be less than 45% of AGI, that's fine. But I do think it's really good if we stop at that particular point. DAVID: I wish that our transparency just extended to actually with our clients, as well. I would welcome a little bit more transparency about the financials of agencies, so that clients could actually see them too. BLAIR: Well, that's interesting. DAVID: And clients are demanding it, right? You've seen some requests for that. Some of that is just intrusive, asking a lot of those stupid questions. But I think clients do have a right to know whether your agency is financially viable. They don't have a right to know what your people make and all those other intrusive questions. They're asking because they can, as you're famous for saying, but that doesn't mean it's right. Bu I am in favor of more transparency around financials. BLAIR: So, let's come back to clients for a minute. I just want to go back to the idea of sharing salaries, what people on the team make. When I think back to some of the stories around professional sports ... as a Canadian, I'm going to use NHL hockey as an example. And for many years, quite famously, the salaries of players were kept artificially low by the fact that it was either a written agreement or it was some sort of "gentleman's understanding," in quotes, that players wouldn't share with each other what each other was making. And Gordie Howe was this player who was kind of famously responsible for ... He was privately told he was the highest-paid player in the league, and there's a culture in the league of players not talking to each other about what each other was making. And the NHL ownership was famous for being successful on that level. And then at some point, somebody pointed out to Gordie Howe, made this comment in the room, "No, I'm the highest-paid player in the league," and some junior guy said, "No, no, he makes more than you, he makes more than you, he makes ..." BLAIR: And that was the beginning of kind of a slow move towards like full disclosure, and as everybody became aware of what everybody else made, then the salaries just started to go up and up and up. So that's what happens in professional sports, and I can imagine that in the average firm, if, especially as you get larger firms, and I've worked in some large firms where it's a very kind of competitive culture, like not to an unhealthy degree, but when you get into a firm of hundreds of people, you look at some of your colleagues, and you see them as direct competitors for the job that's the next level up. And I cam think of a couple places where I worked where that was rife. And again, not necessarily a bad thing, if you're a competitive person, but just the salaries, I can imagine, in a firm like that, large firm, multiple competing for the next promotion, everybody's measuring themselves against each other. That would have to drive salaries way up, would it not? DAVID: It would, right. And that's why I think it's healthy to publish a salary range, and maybe not publish it on your website, but talk about it when you're hiring somebody, so that somebody knows that you are going to move around within this salary range, and that won't change unless you take on additional responsibility, or the firm grows, in which case, that range for that particular role might rise a little bit, otherwise you're going to end up overpaying people. DAVID: One of the things I've noticed is that the people that tend to get overpaid or paid too much are the ones that have been with you for a long time, or the ones who know what other people are making. So you give a bump in pay to somebody, the only other person who knows about that, besides the person, is the CFO. And so, as all of these little raises are going out, the CFO or the bookkeeper, the accountant, full charge bookkeeper, whoever that happens to be at your firm, knows about this, and you feel duty bound to sort of send them some bumps along the way. Those are the two people that tend to get overpaid. DAVID: But there's a dynamic that's changing out there. LinkedIn did a fascinating study, and this certainly applies to agencies as well. People don't make more money by just staying at one place longer. They make more money by changing jobs, right? And so they pick up that bump in pay at the intersection, when they cross the boundary and go to work for another firm. And so you don't have quite that pressure of paying people a lot, because they stay for a long time. DAVID: The other things that's interesting to me, and there's a pretty strong argument that the unequal pay between male and female has come about largely because of the secrecy around what people make. And so, if I think of one particular factor that might tip this in favor of more transparency, it might be this notion, not notion, it's true, it's real, that females are not getting paid as well as males are for the same work. So that might be enough to tip the balance towards more transparency, so that we can erase some of that wrong in the marketplace. BLAIR: Are you aware of any information studies that have done, either of yourself or anybody else, that shows the benefits, either financial or in any other form, of moving to open book management? DAVID: Yes, there is an organization, the organization that basically founded the whole ESOP movement, which stands for Employee Stock Ownership Plan. I think it was 40, 35-40 years ago, and this is an organization that is self-interested. In other words, they have a strong incentive to say that open book management really benefits the companies that practice it. And even with that bias, they could not come up with any demonstrable proof beyond about 1-2% gain. So in other words, open book management is not something you do primarily to boost your firm's performance. And that mirrors what I've found in the marketplace. It has virtually an unmeasurable effect on the firm's performance. That is not why you do it. You don't do it to help people self-manage or to say, "Let's align everybody's activities with some goal that will benefit them individually and the group." It just simply doesn't work. That's not why you do it. There are good reasons to do it, but that's not one of them. BLAIR: You mentioned in this article from 2000 that there's a really bad reason to move to open book management. You just touched on it, and you said the bad reason is this idea that open book management will lead to a self-managing culture. DAVID: Right. So it's usually instituted by principals who don't particularly enjoy management, and therefore they're maybe not that great at it, and so they're searching for ways to have employees self-manage the environment. You see this in environments where they have this owner's manual, that's kind of what I say, it's really more of an employee manual, but I think of it as an owner's manual, that's 300 pages long, and no matter what the circumstance, all they have to do is just point to this page, and that's what will fix the situation, or you see them with this very convoluted compensation structure for especially the sales people but also other people as well, so that they don't have to make decisions. DAVID: Principals cannot insulate themselves from making decisions. They are responsible for the profit that the firm turns over. Setting those priorities, having the right people in place. As you talk a lot about thinking about future value, that's their job. And no open book management plan or anything else is going to relieve them of that responsibility. That's why it's really dangerous to put open book management in place if you're doing it for the wrong reasons. It's just simply going to disappoint you. BLAIR: Does the size of the company make a difference on whether or not you should consider open book management or the level to which you should exercise it? DAVID: Well, if you have a three person firm and you're publishing the aggregate salary number, then it's going to be a little bit easier to figure out what somebody else makes, but I don't necessarily see any difference there. You know, here's something interesting. I have a client, about a 40 person firm, and twice a year is they do this employee retreat. Instead of running all the employees through the same sort of disclosure about say the future marketing plan, and about our facility, and about our financial performance, and our clients, and maybe a survey we did. You know, instead of running everybody through that, they set up stations instead. They set up six stations. One of them was financial performance. One was our marketing play. One was our survey with clients, those kinds of things. And they let their employees decide what they wanted to learn about. DAVID: And what they found consistently over the years is that very, very few people actually went to the financial station. Not that many people were interested in it. The ones who were interested were very interested, but it wasn't that interesting to most people. And that also mirrors what I've found. If you're going to talk about financial stuff, then make sure people are interested in it, and I feel like it should always be married with financial literacy. So like, explaining to folks, "what does this really mean?" Because some of your people have run businesses and are very astute, other haven't. They run their own personal finances, but it's different. So, coupling any information with financial literacy training would be useful as well, but I think we overestimate how interested people are in this stuff beyond the top level open book management. BLAIR: Yeah, I wonder, and you probably know the answer to this, how many people in the typical creative firm are actually able to read an income statement or a balance sheet. DAVID: Not many people. Not many principals can, honestly. And when you talk with CFOs and controllers and so on, and they're frustrated because they cannot get their principals to understand the basics of a financial statement. And every principal is very different about how they want to process this information. They want to see I ton one page, they want charts, they don't want the detail. They usually want to see a stack of detail, but they don't want to have to dive into it. They just want to know that somebody has done all the detail work, but they don't really want to look at it themselves. And I think that mirrors what most employees are interested in, as well. They almost want access to it, but as long as they have access to it, they're probably not going to dig all that deeply into it. BLAIR: Yeah, interesting. Anything else you want to add on this before I circle back to the doorway you opened earlier, and that's the idea of more financial transparency with clients. But, anything on the employee front? DAVID: I think I see this changing still over time. I think more and more of this transparency will surface, and I think that's a good thing, as millennials and so on and folks who are more driven by transparency and openness as they take over more and more firms, I think this is going to be a movement that continues contrary to my prediction 17 years ago. BLAIR: And you think that principals should embrace it? DAVID: I do, absolutely, think it's great. BLAIR: Yeah, okay. So again, back to the idea of aversion of open book management or at least financial transparency with clients, there are some kind of well known examples out there in either the design profession or the advertising profession of large clients running arduous, elaborate pitch processes where part of the process is they demand to see profit level and they want to see employee salaries. And I've always been quite vocal on the fact that that is none of their business. But I do identify with what you said, the idea of, you know, a client does have a right, I think, and I think that's what you said, to know that you are financially stable. What's the level of transparency that's appropriate to clients or prospective new clients? DAVID: I agree with you on that front, that that level of disclosure that they're asking for is not only stupid but it's also dangerous, but it does seem to me like we could develop a policy that explains to prospects, and maybe even to employees who seem to be interested in the financial viability of the firms they're beginning to work for, and there's more and more I guess concern on their part about whether the firm is worth taking a flyer on. But, we could develop this policy that talks about what our perspective on business, like the solidness of business. Like, how do we view the role of profit? And how do clients fit into that? And what are our principles about maintaining debt levels below X amount? And where we let our net profitability float between X and X, and how much of our income we reinvest in innovation, which is, as you pointed out several times, is the enemy of profit. How do we make choices there to throw profit away and invest it in innovation? DAVID: So like having a sort of a ten part manifesto around our perspective for money, and make that very visible on our website. I think that would be a very healthy thing to do. I've never seen anybody do that, but I would be very in favor of it. BLAIR: That's an interesting idea. I mean, to publish that, you would have had to have thought through these idea first, right? And how many firms have? DAVID: Right. And that's the biggest advantage, right? BLAIR: Yeah. DAVID: This forces you to think through it before you publish it. BLAIR: So that would be publicly available to clients and to employees, and to prospective employees, to prospective clients? DAVID: Right, yeah. BLAIR: Gee, that's not a bad idea. Where would you put the cap on the profit? DAVID: Well, it's like I would say, maybe ten to 30%, that's probably what I would say, and also explain that the economy is notorious for sneaking up on us, and when that happens, we want to have enough padding that we can still pay our people fairly and still exist for our clients. And so, we recognize that some years are going to be lean, and those will be offset by the better years, and so we have a commitment to that. And if we fell like we're consistently making more than 30% profit, then we're probably overcharging clients or we're underpaying ourselves, and we have to bring that back into balance. That's the level of disclosure I would be in favor of. BLAIR: That's fantastic. Do you have a name for this document of financial disclosure? What do you call this manifesto? DAVID: I don't know. I haven't written it yet, but maybe that's something we should do together. Wouldn't that be interesting? BLAIR: That'd be very cool. Alright, this has been fascinating, David. Thank you so much for this. DAVID: Thank you, Blair. It was a fun discussion.