Small Giants

Want to Rally the Troops? Try Candor
February 11, 2006
Joseph Nocera

INC. magazine's cover article this month is an excerpt from a new book by its best-known writer, Bo Burlingham. The book is entitled "Small Giants: Companies That Choose to Be Great Instead of Big," and it aims to do for small private companies what "In Search of Excellence" did two decades ago for big public companies: shine a light on a handful of business practices the author admires, and which he believes are the reason some companies consistently do better than others.

Small Giants

Mr. Burlingham, 59, joined Inc. in 1983, just after its fourth birthday, and in many ways "Small Giants" is a distillation of the knowledge he and the magazine have acquired over the years. Mr. Burlingham believes that the entrepreneurs who run the companies he profiles — CitiStorage in New York, Anchor Brewing in San Francisco and 12 others — have a set of values that go well beyond making a profit. They are incredibly passionate about what they're doing. They have relationships with customers and suppliers that go far beyond the norm. They believe strongly in creating a working environment that addresses employees' "creative, emotional, spiritual, and social needs as well as economic ones." And many of them use something called open book management— a term Inc. coined in 1990.

Open book management refers to the practice of making a private company's financial information available to all employees. This is anathema to many small-business owners, but its proponents believe it can unlock a company's potential like nothing else. By sharing information with everyone, up and down the ranks — and by educating employees about what the information means, and what their role is in helping the company improve — open book management "can change people's lives forever," said Jack Stack, the chief executive of SRC Holdings, a manufacturing company that has been using it for over two decades. "They go from entitlement to entrepreneurial," he added.

Although Mr. Burlingham was not the Inc. writer who coined the phrase, he is the journalist most closely associated with open book management, writing two books with Mr. Stack, and helping him set up a conference division to spread the open book gospel. He has also written numerous articles in Inc. promoting its benefits. According to a survey Inc. conducted last year, 40 percent of the companies in the Inc. 500 — the magazine's annual list of the fastest-growing private company in the United States — use some form of open book management.

And now, add one more: Mansueto Ventures, a new private company that owns two magazines, and which lost over $10 million last year on revenue of about $40 million. One of the company's magazines is Fast Company. The other is Inc. Which means that Bo Burlingham — and everyone else at Inc. — will finally be practicing what they've been preaching all these years.

INC. has been to hell and back since the end of the dot-com boom. Founded by a Boston entrepreneur named Bernard Goldhirsh, the magazine had a prosperous first two decades of life. At the exact moment entrepreneurship was finally getting its due in America, Inc. spoke directly to the entrepreneurial class. "Think of the companies we covered back then," said George Gendron, who edited Inc. from 1980 to 2002. "Timberland, Patagonia, Oracle. We were all growing up and discovering business together."

Mr. Goldhirsh was hardly the open book type. "Bernie was always worried that open book would limit him in some way," Mr. Burlingham said. According to Mr. Gendron, the founder eventually lost much of his passion for the business, which was humming along nicely without his day-to-day involvement.

Then, two things happened. In 2000, Mr. Goldhirsh learned he had brain cancer. The news caused him to sell Inc., for the astounding price of $200 million, to Gruner & Jahr, the magazine division of the German media giant Bertelsmann. A short time later, G. &J. paid an even more astounding $350 million to purchase Fast Company, a seven-year-old magazine that had had an instant and dizzying success. (Mr. Goldhirsh died in 2003.)

The second thing that happened, of course, was that business magazines fell off a cliff. Practically from the moment G. &J. bought Fast Company, the magazine began hemorrhaging money, as the dot-com ads that had made it fat and profitable disappeared. Inc. wasn't doing as poorly, but its ad pages were in steep decline as well. G. &J. made a bad situation worse by dictating strategic shifts for magazines it didn't understand. The lowest moment was probably when the company told all its United States magazines to reorganize themselves to replicate Child magazine, because it was the most frugally run of the company's properties.

Finally, in May 2005, G. &J. gave up, and put Fast Company and Inc. on the block. The executives of the two magazines took matters into their own hands and found a buyer in Joe Mansueto, an entrepreneur who had started Morningstar, the hugely successful mutual fund monitoring and research company. He paid $32.5 million for the two properties.

Inc.'s editor during most of the dark days was John Koten, 51, a former Wall Street Journal reporter who signed on in 2002, after a 10-year stint editing Worth, the personal finance magazine. Mr. Koten spent at least as much time trying to keep the ship afloat as editing a magazine: fending off the German owners as best he could, managing cutbacks to minimize the damage, and trying to maintain some semblance of morale in the midst of the turmoil.

He also led the effort to find a buyer when the magazines were put up for sale. The process of trying to save Inc. made Mr. Koten realize that he had become extraordinarily passionate about the magazine and the subject it covered. "Entrepreneurs," he told me, "are the ones adding jobs and changing the economy. But they are an untold story because most business journalists only cover big companies." When Mr. Mansueto was searching for a chief executive for Mansueto Ventures, he concluded that Mr. Koten's passion made him the logical candidate.

One way Mr. Koten kept the place together during the G. &J. era was by lifting the veil of secrecy. "He was straightforward with both good news and bad," said Loren Feldman, Inc.'s deputy editor. Employees appreciated it; Mr. Koten proudly points out that not a single Inc. editorial employee left during the bad days. But he also admits that he took the open approach mainly because "it was what felt most comfortable to me."

Then, after the deal with Mr. Mansueto was struck, Mr. Koten assigned Mr. Burlingham to write a lengthy account of the sale. Although the article's publication was resisted by much of the staff, Mr. Koten views its publication as a turning point, the first step toward an open book approach. "Telling our own story was a gesture of the kind of company I wanted us to become," he said.

He began a series of discussions with Mr. Burlingham about formally instituting open book management at Mansueto Ventures. Mr. Burlingham was predictably enthusiastic. The two men traveled to Missouri and spent several days visiting Jack Stack's operation at SRC. For all the many articles Inc. has published about open book management, Mr. Koten still found the visit eye-opening. "We sat in on a big open book meeting where all the employees were gathered," he recalled. "People would get up and ask why the costs were so high in this area or that. You never see that at a big company. Employees never get to connect what they do all day with the overall success of the business."

After he returned to New York, Mr. Koten sent out a survey to the staff, using questions modeled on the surveys Mr. Stack uses at SRC. In early January, Mr. Koten took the next step toward open book, writing a long memo to the staff about the survey results. "Your trust in the senior management here is higher than I expected," he wrote. "The reason that surprised me is that I think that I and the rest of the senior management team still have a lot to prove to you about our ability to steer this company." He told the staff that the company was probably going to lose more than $10 million in 2005, and that its goal was to cut that deficit in half this year.

"One of the things I've learned about open book is that it is hard," said John Case, a former Inc. writer (and the man who did coin the phrase). "It takes a passionate leader. It takes sustained commitment. It involves a lot of training, and a lot of work. There is a lot more involved than just opening the books." Mr. Koten held his first big all-employee open book meeting yesterday. The process has begun.

"We have a big job ahead of us," Mr. Burlingham said. Then he smiled. "And now, everybody here knows just how big a job it is."

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