This Vital Practice Is Missing In Almost Every Organization

Radical transparency is one of the main trends that can be observed in many progressive organizations. We wrote about the transformation from secrecy to transparency and how organizations put this into practice in a previous blog post.

This practice is not only powerful, but also beautifully simple. It can incline an entire organization to become more engaged in running the business. But before we start let's first dive into the background of this particular transformation story.

A cookie factory in overdrive

In 2004, Kees Pater takes over a typical and traditional business. It’s a cookie factory with all the trappings of a traditional organization in place; top-down command-and-control, directive leadership, a lack of purpose and little freedom. He decides to push the boundaries just a bit more and doubles down on the traditional command-and-control approach.

And it works. He increases the number of employees from 15 to 30 very quickly. At the same time, annual revenue increases from €1.5 million to €4 million. This growth, however, comes at a cost. Employees start to complain; his people regularly feel burnt out.

Rock bottom

But Kees doesn't have eyes for his people burning out because he is too busy facing his own personal struggles. Then Kees hits rock bottom himself. Big personal issues force him to go into rehab for a couple of weeks.

While he is away, he worries constantly that the organization will deteriorate. He believes that his presence is so important that the company may not survive, let alone be successful, without him

After four weeks away, he returns to the factory. He can only imagine the entire organization will be in bad shape. But to his great surprise, he realizes rather quickly that all this time the cookie business continued as usual. It was as if he had never left the factory in the first place. His employees proved him that all his command-and-control mechanisms weren't needed at all.

As a result, and because of the insight that he couldn’t continue with such personal stress, he decides to change his approach. From that moment, he invites his employees to continue running the factory without him there to push them around.

Kees: "I wanted to turn the hierarchical pyramid upside-down. Instead of being the one that made all the decisions, I wanted to be the one supporting the employees so they could perform as best as they could."

The first step to transparency: financial literacy

One of Kees' major focus points during the transformation is to increase transparency. Normally employees would come to Kees to ask for new tools, equipment, or simply a pay rise. He was used to often refuse these request because the financial state of the company wouldn't allow it.

Kees would normally refuse these requests without any explanation. Then he realized that for employees to make good decisions they needed to not just know the financials, but also to understand them

The result? He introduces a simple but powerful practice: teaching basic financials to all employees.

A pack of cookies

To explain how the financials work, Kees decides to sit down with his employees. Then he names, and writes down, all the costs involved in making cookies: from VAT to raw materials, marketing, salaries, overheads and logistics. What remains is the profit.

Most employees are surprised. They had not realized so many costs were involved in the process. For them, it is an eye-opener.

The cost of secrecy

Last week we encountered a similar story when we presented a masterclass to 75 Australian family business owners on Hamilton Island (Australia) at the FBA National Conference. During a discussion on radical transparency some mentioned that a similar lack of transparency is actually holding them back at the moment.

One owner mentioned that the senior managers in their business that are not part of the family frequently ask for a salary increase. When we ask a bit more it turns out that the non-family managers are not even aware that most family members, with higher positions in the hierarchy, were actually earning less than the non-family managers.

The family members are so involved with the business that they are willing to pay themselves less than non-family members in lower positions. The most surprising thing about all of this? The non-family senior managers are not aware of this and therefore keep asking for pay rises!

Remarkably enough, even though they keep asking for pay rises, the family have never actually made transparent to them that they were already earning more than those above them in the organizational hierarchy.

Similar to what we described in our previous blog post) on transparency, the feelings of fairness can be way off because of a lack of transparency. This often leads to a whole lot of frustrations and misunderstandings in an organization.

Transfer responsibility

The moment employees understood the costs of making cookies, Kees taught them other basic financials, like the balance sheet, and profit and loss accounts. He believes that this is what they need to best understand the business. Once the basic financials were known to everyone, he put the ball in their court.

Now the employees know how costs are built up, they can make their own decisions and choices. They suddenly have to figure out ways to reduce certain costs in order to be able to increase their salary levels, or alternatively, buy new equipment. It is now all up to them.

For Kees, transferring this responsibility has two big advantages: his stress levels are reduced, and employees are empowered to think for themselves. The results? Employees came up with creative ideas to reduce waste, improve productivity, and make better use of their equipment.

A good place to start

Teaching all (!) employees financial literacy is an important first step in the process of involving them in running a business. It's a basic and powerful way to drive motivation, engagement, and initiative.

Lots of other Bucket List organizations are aware of the power of making every employee understand the basics of their business. And, although this sounds obvious, this is simply not a widespread practice yet.

So, it's time to sit down with your team or organization to develop this basic understanding. You might wanna grab a cookie while you're at it.