Being Open with Employees & its Effect on Company Culture

Apr 27, 2018

One of the core principles of creating a more valuable business is ensuring it can run without you by getting managers to think like owners. Make sure to check out my article about Employee Ownership Mentality.

As the theory goes, empowered employees are the best positioned to solve your company’s biggest obstacles, as they are the ones closest to the problems. When employees are involved with the process of problem-solving, they become more invested in getting to the best solution. This has the potential to contribute in a positive manner to a company’s culture.

Potential is used because being too open with employees can also backfire.

Case Study #1:

American Data Company, founded by Josh Holtzman in 2003.
Holtzman had built his consulting business, American Data Company, up to more than $3 million in revenue by 2011, when he came up with the goal of building it to be a $15- million business. Holtzman knew that a $15-million business would have the scale to provide his employees with more opportunities and a better exit-multiple if he ever wanted to sell.

Fifteen Cubed—The Goal of Getting to $15 Million

To electrify his team around the idea of getting to $15 million, Holtzman came up with a catchy concept he dubbed “Fifteen Cubed” (every effort must be titled with something catchy to illicit a natural team mentality). The idea was that his team would help him build American Data to $15 million in annual revenue by the year 2015 and, if successful, he would share 15% of the proceeds of the sale with his staff as part of a phantom stock option program.

Holtzman announced the goal and bought Fifteen Cubed bracelets for each of his employees to wear as a reminder of their collective goal and how they stood to gain personally if they were able to achieve their common goal.

Initially, the program was received positively, but a year after the announcement, American Data had failed to grow. Another year went by and still American Data was stuck at $3 million to $4 million in revenue.

Suddenly, the prospect of hitting $15 million looked like a long shot. Ultimately, the only way Holtzman could hit the goal was to merge his company with a much larger one, which is what he did when he swapped his equity in American Data for a minority stake in Magnet 360, a consulting company about five times bigger.

The merged companies exceeded $15 million in combined sales and Holtzman’s employees were able to participate in Magnet 360’s phantom stock option program, even though their portion of the proceeds was diluted when American Data merged with Magnet 360.

It was a good outcome for all involved, but not quite the home run Holtzman had imagined when he first announced the $15 million revenue goal.

Keeping Employees in the Know

having a valuable business means being open with employees can be a great energy boost when things are going well. Employees see the charts and graphs all moving up and to the right and that can contribute to a positive vibe in the office. But just like using leverage when buying a house can boost results in a good market and magnify mistakes when things turn down, being open has the potential to backfire dramatically if you don’t reach your projected numbers.

As an entrepreneur, you can handle a high degree of ambiguity and you probably have an abnormally high degree of optimism. Just remember the people who work for you have chosen not to be entrepreneurs and for some of them, there may be such a thing as too much information.

How did Holtzman’s efforts backfire?

For a valuable business, in this particular case study, there were no defined continued efforts of motivation and “mini-goals” to get the team fired up about accomplishment. The only goal was to jump $12million in revenue in 4 years. Assuming Holtzman IS a good manager/owner, he had a strategy to make this great jump. Chances are if this is true, then the efforts were put in the wrong areas, not focusing on the people involved with achieving this feat, not managing milestones properly, not rewarding behaviors that were conducive to reaching the goal, etc…. except for the bracelet.

His goal was too big for employees to grasp and really buy-in to. The greater the goal, the better and more effective management needs to be.