Tuesday, December 18, 2007

The Naked Business

An essay on how to treat customers and employees like owners and reap the benefits.

In any meeting, a negotiator can adopt a variety of strategies. Typically, they horde information, pick apart their opponent's every move in hope of understanding hidden meaning, and ultimately attempt to gain the upper hand through manipulation. Sometimes you outsmart your opponent and win. Many times, you are so busy protecting yourself that a deal never happens.

There is a less common negotiation strategy that relies on going completely naked. Instead of hoarding information, you give it freely. You openly explain both your needs and what you have to offer. If the other person reciprocates with open arms, you can work together to capture amazing opportunities.

It occurs to me that many private companies play the game of business as a negotiation situation where their customers and employees are opponents that must be outsmarted. Many deals are left on the table. What would happen if they instead used the naked negotiation strategy? Imagine a company that says to their customers with conviction and honesty, "Here is what I have, and here is what I need. Let us work together to create mutual value."

The rules of an Open Kimono business
The following are simple rules of thumb that guide the behavior of a Naked company.
  • Rule #1 - We are all in this together: By purchasing a company's product, a customer becomes invested in company's continued success. By working at a company, an employee also becomes invested in company's continued success. In all areas, both the customer and the employee contribute to the business and deserve to share in its success as owners.

  • Rule #2 - We share information freely: Where possible, aggregate information that is shared freely within a company should be shared freely with the customers of a company. More is gained from sharing than from hoarding. We seek to build trust, empower both customers and employees, and solve problems together with the best tools possible.

  • Rule #3 - We win through the creation of superior value: In competitive situations, by erring on the side of openness and honesty, we discover mutually beneficial solutions. As a result the company succeeds by being able to offer superior value compared to those companies that attempt to get ahead through trickery or manipulation of perception.
All this is lovely sentiment, but what does it mean? The following practices might vary depending on the exact company, but here is a good start.
  • All major financial data is posted in an easy-to-comprehend fashion on the company web site
  • All major company metrics, goals and progress towards those goals are publicly posted and constantly updated.
  • Periodic customer research is performed and the results are also made available to all customers and employees.
  • 5% of profits are redistributed back to existing customers. Another 5% is given to the employees. If desired, the money can be donated to a charity or reinvested in company stock.
  • When problem areas are identified, customers are encouraged to contribute suggestion, time or resources to the solving of the problem.
Roots of the Naked business
The roots of the Naked business are quite traditional. Successful companies have been using these techniques for years.
  • Public companies: Public companies are required by law to divulge certain internal information to their stock holders. The result is that dishonest behavior is not allowed to fester for long without being exposed to the light of reality. It is debatable however, if public company's slavish devotion to quarterly stockholder gain is a positive long term strategy. A Naked company that has the transparency of a public company, but is measured on pertinent long term business metrics instead of only short term financial data.
  • Open Book Management: By sharing pertinent company information with employees, companies run by open book management empower everyone in the company to innovate towards a common goal. A Naked company uses the same technique to leverage not only the distributed power of their employees, but also the distributed networking power of their customers.
  • Market Orientation: Companies with market orientation listen to both the needs of their customers and the trends in the market when making strategic and tactical decisions. A Naked company's close two-way communication with its customers allows it to respond effectively to the latest market information.
  • Market as a community: Markets are often looked at as system in which buyers and sellers exchange value, where value is defined in financial and material terms. Yet strong emotional bonds form between buyers and sellers that can bring substantial social value to both parties. People will always seek to find meaning in their actions, yet companies often ignore this fundamental need. A Naked company provides both customers and employees with a self-contained community that encourages, nurtures, and thrives upon the creation of social value.
The case against the Naked business
When I bring this concept up to people, the inevitable reaction is "What an idealistic notion. Unfortunately, the world does not work like that." It is utterly self evident that close management of information is essential to any financially successful venture. In no particular order, the following are considered to be fatal flaws in the Naked philosophy.
  • Severe competitive disadvantage: The moment a company provides open information to the public, competitors will use that information to gain an advantage. Copycat tactics, preemptive product releases and attack ads that further publicize embarrassing information are all likely.
  • Expensive: By spending time providing reams of information, small companies are using scarce resources ineffectively. Seeking more sales or creating a improved product will yield better results.
  • Customers lack of business skills:No benefit is gained because customers lack the skills to interpret company information in any meaningful fashion.
  • Public relations nightmare: Honest publication of information means that the company will be displaying warts and all to the public. There is little opportunity to spin bad news or manage your financial data.
  • Customer relations nightmare: If you give customers a sense of empowerment, they will complain endlessly and publicly. This in turn leads to bad press and a loss of sales.
  • No one is doing this: Few profitable companies operate in this fashion. They must have already failed.
The case for a Naked business
The following are benefits of an OK company.
  • Passion: Companies with a strong vision tend to outperform those that focus solely on financial results. By building a culture around a philosophy that people can wholeheartedly believe in, employees and customers will give the extra effort necessary to ensure success.
  • Strong word of mouth presence: A company with a unique and appealing ideology stands out in the crowd. The fact that customers benefit from this ideology yields a powerful source of word of mouth advertising.
  • The customer's network is the company's network: A customer that truly believes that they are invested in a company feels comfortable sharing their contacts and resources. At the extreme end, the customer is a believer that happily volunteers for the company. A thousand customers have a larger and potentially more powerful network than a hundred employees.
  • Faster response to market change: Customers that complain or offer advice provide a highly responsive early warning system to changing needs or competitive threats.
  • Many eyes catch stupid mistakes: Strategic blunders are easier to catch when you have multiple people offering unbiased commentary.
  • Increased customer trust and loyalty: This in turn leads to retention and improved profits. Why go elsewhere when a company concretely demonstrates that it is deeply interested in listening to your needs?
  • Increased employee trust and loyalty: This also leads to retention and improved profits. Employees are the core asset of a knowledge-based company. By keeping them, you build an experience based sustainable competitive advantage.
  • One reality: The cost, both financial and psychological, of keeping multiple books, one for the public, one for the employees, and one for the investors is greatly reduced. The benefit is that customers and employees can talk the same language and use the same data to create mutually beneficial outcomes.
Key implementation areas
Let's suppose for a moment that benefits of an Open Kimono philosophy outweigh the detriments. What are the success factors that must be focused on to gain those benefits?. The follow are key implementation areas that must be addressed in order to achieve success.

  • Dedicated Leadership: Any culturally driven sustainable advantage needs to have buy-in and support at the leadership level. Words alone are meaningless. Consistent public actions by respected leaders help the cultural change permeate through the entire organization.
  • Customer and Employee Education: Data is useless unless the intended audience is capable of understanding it. Putting company information in format that is comprehensible to the customers and employees is a partial solution. Actively educating both customers and employees on the meaning and use of the data is equally important. If there is not an obvious connection between the data and the benefits received by the person digesting the data, then the system has failed.
  • Filtering through the noise: When everyone yells their opinion, it can be hard to capture any useful information. Rigorous data collection and analysis techniques can turn the outpouring of information into actionable solutions.
A strongly customer and employee oriented company is more likely to prosper than a profits oriented company. Profits are still important, but it is wise to remember that they are one metric amongst many. By focusing on satisfying a broad range of benefits instead of merely materialistic and financial benefits, a Naked company attracts and retains both superior quantities of customers and superior quality employees.

In the end, running a Naked company is as much a personal choice as it is a business decision. Openness, honesty, community and mutual respect are concepts I can believe in. All else being equal, what type of business would you want to devote your life to?

take care

PS: With some minor changes, this was an essay I wrote many years ago. In the subsequent years, transparency has come en vogue and it now seems everyone is spouting its praises. Which is a great thing. This message needs to be broadcast as loudly as possible lest it be lost in the morass of sub-optimizers twisting the truth in the name of profits.



  1. It's a neat idea but which companies are actually following this for real?

    Apple? No
    Microsoft? No
    Nintendo? No
    Sony? No
    EA? No
    Nike? No
    Amazon? No
    Google? No

    It would help to have some concrete examples.

  2. Gey GMan, see danc's last point against this ideal. He's covered it.

    There's always a point where no-one is following a great idea, it doesn't invalidate the idea, it just adds risk.

    I really like the idea, and feel that the place I'm currently working for is leaning towards it, however still has a fair few gaps where they become closed and adversarial.

    I think it's right when you look at running a business as more than a means to simply make money, however I think that's a very hard sell these days.

    Mind you I'm completely sold on the idea, love it to bits, unfortunately however, I don't think I'm likely to run my own business

  3. The first like of your article game me an idea. What if you could really invest into a company by buying from it?

    Imagine going into a shop, buying something, whether it is meat or a present for a relative, and to get with your purchase a piece of paper that entitles you to a very small percentage of the shop that sold it or of the company that manufactured it.

    Forget stock market, do it directly with your own Monopoly money! A part of these "bonds" will never be cashed, some will be cashed right away, but some would be kept by customers that have faith in your company. Now that's investing your customers into the company's success.

    The biggest problem would be counterfitting, but considering these bonds come with a serial number that is linked into a database with a purchase, it could be easily solved.

  4. Agree with gman, I too would like some concrete examples of real companies.

    And before Travis pipes up again, I completely understand that he's covered the argument against it. But at the end Danc claims that transparency has become "en vogue". So who is embracing it?

  5. There's clearly a demand among consumers for this sort of thing. Look at the endless coverage, commentary and debates around Apple and the rival game consoles for instance. When the information isn't open and the companies are silent, analysts are quoted in their place and news cycles are generated from virtually nothing instead.

    The number of sites (and page views and active forums) which cover Apple alone are something to be seen to be believed. There's a daily news cycle around that one company alone, where every mention of them in the broader media is dissected and every notable 3rd party developer's move is added to the whole. That's not even mentioning the ever popular rumours side!

    Yet Apple is clearly one of the most secretive companies in high tech … admitted by a fan, as I count myself

    I do like the sound of your model, and expect at least portions of it to keep on growing in popularity. But I think there's another dynamic which underlies who really becomes big and which kind of companies really dominate.

    It's a question of role. Apple own and maintain an entire desktop platform, and the iPod and iPhone and who knows what in the future. Everyone who uses it is highly invested. More so than when buying a game or really any 3rd party app. Other large software companies like Adobe are vital too, but to fewer people on a direct basis as most of us don't run Photoshop or Illustrator. Whether open or not, there are different breeds of company thanks to the scale of their product. This seems to have a huge influence on the media and the scale of popular support and interest they receive.

  6. What a lovely idealistic vision. ;)

    How quickly you forget the Prisoner's Dilemma

    It's mathematically proven, by game theory(!) no less, that a purely open honest strategy will fail to minimize your maximum losses.

    As your lawyer, I recommend you stop trying to save the world with this tree hugging hippie bull-crap, and go back to drawing pretty pictures. :P

    haha! Just kidding. I <3 you Danc.

    Thanks for the interesting read. I personally believe that the quality of decisions made is directly related to the quality of the information they have. Starving information and manipulative strategies in business are a sneaky theif, to be sure.


  7. Who is doing this

    A good question that is worth answering directly. This exact formulation is my idea so I doubt anyone is doing it. However many of the major pieces are being used with reasonable success right now, even by some of the companies that that have been mentioned. It is also worth noting that a substantial majority of wealth in the US is created by young companies, not the companies that capture the headlines in Newsweek. It would be unwise to exclude from our net the 100 million dollar successes just because they lack consumer brand recognition.

    - Public companies with strict information sharing laws: Google, Apple, Amazon, Nike, Sony, EA, etc.
    - Sharing information within the company using metrics whose results are owned by the employees: This is standard practice at many well run companies. Six Sigma, TQM and the Toyota Production System all are strongly influenced by this concept.
    - Open book management: Here's a book that covers 100 case studies of companies that share financial data (and training to understand it) with their employees. Open-Book Experience: Lessons from Over 100 Companies Who Successfully Transformed Themselves
    - Companies moving towards more direct relationships with customers by sharing information unfiltered by PR machines: Consider blogging at Microsoft, Google, innumerable internet companies. You can't start a business without a blog these days. :-)
    - Coops: There are a variety of successful coops that attempt to include their customers in the process of running the company. REI and PCC come to mind. There is more to be explored here, especially as you add in the networking power of the net into the equation.

    So many of the pieces are there and they are working. Food for thought. If you fundamentally disagree with the concept of working together, this may not be your cup of tea. On the other hand, what if it did work?

    It is worth noting that of all the companies that have attempted these processes, the ones that succeed do so because the right people were on board. If the core people don't believe in the ideals of the company then these ideas will be difficult to implement.

    Prisoner's Dillemma
    Arguably your relationship with your repeat customers is closer to the Repeated Prisoner's Dilemma".

    By treating customers as antagonists instead of partners, you are leaving value on the table. By erring on the side of openness, you leave the door open for mutually beneficial solutions.

    Of course, not all businesses are the same. Some businesses prefer to sell commodity products to anonymous customers. As long as you get the suckers to buy the box, you could care less about any future relationship. Short term, you maximize profit and minimize support costs. This strategy works well in market environments with limited communication and poor customer information.

    Yet, I wonder, in this age of Google searches, instant price comparison and gossip blogs if such an environment is actually predominant.

    take care

  8. I'm not sure I understand why I would want to allocate 5% of my business profits to a customer who spent maybe a total of $20 on my product, assumes absolutely no risk in starting and running the company, and yet should now receive an interest in my profits? Why? How does this make financial sense?

  9. I feel pretty confident saying that we're doing this. And it's working pretty well.

    Great post, Dan; wish I'd seen it early enough in the day to reblog it before bed. :)

    I don't think that "having a blog" is a sign of useful transparency or commitment to collaboration with customers, though. It's a publication channel, and what you put into a channel matters a lot more than that you offer an RSS feed to it. And the most valuable, but also scariest, part of being in a genuine collaboration with customers is letting them have influence as well as information.

  10. Hey Danc,

    This reminds me a lot of what is said in "The Honest Business"
    a tiny book, well worth the read.

    As for examples of companies doing this, my company is a teeny-tiny game dev studio - pretty much the opposite of a billion dollar corporation - but this is pretty close to how we do things and it's working well for us.

    take care,


  11. I'm not sure if the drawbacks listed in the article are really the best the opposition can do or if it's a straw man, but I don't see many of them holding water.

    Competitive disadvantage: If a company's openness succeeds in building relationships with its customers, that's a competitive advantage. Your customers are emotionally invested in your success; even if someone else makes a technically superior product, do they offer that open relationship? The relationship itself adds value.

    Expensive: As you point out later in the article, keeping only one set of books reduces costs. Also, one could argue that openness is itself a marketing strategy, so the additional cost can be thought of as an alternative to traditional advertising. If you're in a niche where word-of-mouth is important, it's probably BETTER than traditional ads.

    Customer lack of business skills: Even without providing educational programs, it doesn't take a Ph.D. to take a financial report and put it in plain English. (Honestly, I suspect it takes more time to write an obfuscated financial report that makes you look good to shareholders.)

    PR trouble: People actually seem quite forgiving when someone 'fesses up. We understand that mistakes happen, especially if it's explained why it happened and what's being done to prevent it in the future. It's when a company covers things up and then the truth comes out later that people start reaching for the torches and pitchforks. I can name ten PR nightmares off the top of my head that came about when a secretive company tried to sweep its problems under the rug (Hot Coffee among them). Can anyone name a single case where a company openly confessed to a mistake in a press release before anyone else had noticed, where it ended up becoming a real PR problem for them? I can't.

    Customer relations: Yes, some customers will complain and demand the stupidest things and act as juvenile as you can imagine. And other customers will back you up, so that you don't even need a PR department to handle this -- your evangelical customers will cover it for you!

  12. Definitely my preferred way to do business. What I've found is that say 75% of the time you're rejected for various reasons. But what you do get now and then is a really good, strong and pure relationship with an organization, individual or cause. Personally I value those relationships far and above any other. It's almost like taking a sort of moral or karma-driven path in a way.

    This fits in with some of the things that Guy Kawasaki talks about in his new "Art of the Start" book. He talks about just out and out talking about what your idea is when trying to start something. Evangelize it, talk about it, share it - but above all DO it. The result is you become more and more clear on what your message, your idea, your service or your business is as you do this. And sometimes people will get interested. The key there is not to sit around and hide in some kind of "stealth" mode.

  13. Hi Danc,

    Could you please contact me at



  14. Danc - the Polish supposedly have a phrase for being honest in business dealings: "Let's talk like people"

    (source: http://blogs.msdn.com/oldnewthing/archive/2007/05/29/2955172.aspx)

  15. Free information, that is the next step on the technology age...