Sunday, February 27, 2011

How transparent should organizations be?

Openness and transparency are increasing trends in the business world. It's not just for small businesses like our Avoin yritys (Finnish for Open Company): the big ones are also adopting more transparent strategies, be it openness of leadership, innovation, or communication. This is not simply just because people have developed a sudden urge to change the world for the better: instead, with the rise of new communication methods and the social web, companies have realized that the open way is also often good for business.

When companies strive to be more open, a logical question arises: what is the correct amount of openness? Does openness have limits, and if so, where are they? Are there situations where being open causes more damage than good? We'll tackle these questions by comparing the benefits and possible problems related to openness.

Benefits of openness

A better relationship with employees. Leadership can be defined as trying to get the best performance out of people. Openness is a great way to promote that. People are smart. If you communicate with them openly about the company’s strategies, values, and just generally what is going on, they feel like they are being treated as equals, which often results in increased productivity. Furthermore, it's very common in companies that the left hand does not always know what the right is doing, which results in wasteful duplicate work that is avoided by transparency. Moreover, the organizational structure can be a lot lighter as layers of bureaucracy put in place to seal "classified" information can be removed. No more NDAs (Non Disclosure Agreements), privacy policies, and stalking your employees. Netflix is a great example of a company that has achieved tremendous results with their open "freedom & responsibility" culture.

A better relationship with customers. Openness is good marketing. Transparency reduces the possibilities for corruption and tells the customers that you are one of the good guys. And being honest and open when a mistake has been made is often the best kind of customer service. Customers are built that way, and when a company has loyal customers, it has marketing value which money cannot buy.

A better relationship with competitors. Collaboration with other companies becomes a lot easier when all cards are laid on the table. It's easier to work together when you know that the competitor is not about to stab you in the back the moment you look away. Naturally there is the threat that the others will copy you, but being open can also sometimes be a more effective way to prevent copying than a copyright or a patent. By telling the whole world you did something first puts the potential copycats in a difficult position when they try to sell the copied product. The rise of the open source movement highlights this fact. And unlike patents, openness doesn't cost a dime.

A better relationship with the society. Nowadays it is more and more important for all companies to do their share for the common good. With the wide adoption of social media, companies are observed a lot more carefully than ever before. If they are doing bad things, the truth will eventually come out, which results in a PR crisis and a loss of customers. Openness helps prevent companies from shooting themselves in the foot by enabling them to avoid damaging violations; like ignoring the environment or abusing human rights in hope for short-term profit but resulting in damaged goodwill. That kind of actions simply will not do in today’s world. The world is already open, transparent and connected, whether the companies are or not. When a company is truly open, being beneficial to society becomes the natural way of operating.

Problems with openness

Losing the first-mover advantage. If a company in high tech business always releases its future plans and the technologies it is developing it might lose the decisive edge. Even if all the data is available only inside the company it is more likely to leak than if the knowledge is kept to the few who need to know. Apple is an example of a company that bases its popularity on being the first to introduce certain devices and services and for that reason it is able to charge premium prices. By being secretive it has built an audience that keeps gossiping franticly about every impending product launch and that generates very effective marketing. If Apple had no secrets it would lose all that.

Losing the control. Again Apple is a good example, since it seems to go in every way in the opposite direction to openness-embracing companies. Apple is a classic example of a "good dictatorship": the power is in few hands but the ones making decision have so far been capable of making the right ones. In democracies decision-making process can sometimes be overwhelming and focus can be lost: Google's open source Android platform has already become quite fragmented, which makes it more difficult for the developers to build applications that work in all phone models. However, Apple's model might not be sustainable in the long-term because it is so dependent on the few key players. For instance, there is a lot of speculation about whether Apple's ability to deliver will drop significantly after Steve Jobs steps down.

Losing the confidentiality. The case of Wikileaks has revealed both the pros and the cons of openness. While the released cables have brought numerous important aspects into the light of day, they have also caused damage by revealing insulting comments diplomats have made about one another behind their backs. This information carries no societal significance but has instead hurt many diplomatic relations that are vital for the ability of nations to make big decisions together. The eternal problem with full transparency is that people are not purely logical creatures but instead have strong feelings that from time to time trump reason. And it is difficult to screen for unintended consequences when the audience is unknown. Thus, in order to avoid insulting each other it is often wise to keep mum when having thoughts that somebody might misunderstand. What this means for companies is that it is vital to consult all the possibly affected stakeholders before opening up information related to them.

Losing time. Openness requires some time and effort, especially taking into account that due to previous reasons it has some limits, and these need to be clarified. What stuff should be opened up, and how should it be done? Where should the limits be set? At the same time the benefits might not be instantly visible so one might wonder whether doing all that work and preparation is actually worthwhile. However, minimizing communication is obviously not the most sustainable way to save in costs.


As you might have already guessed, there is no single solution that would fit all occasions. The degree of openness varies by the company size and industry. However, one thing probably holds true: instead of the traditional "let's only open the stuff when we have to", it would be better for all companies to start going by the rule of thumb of only concealing the information that needs to be concealed and keeping all the rest open.

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 Unported License. Original author's Juho Makkonen and Hub Generation must be mentioned when the content is reused.

Note: Click here to get a PDF transcript of the Hub Generation Linkedin discussion behind this blog entry.

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