Tuesday, October 9, 2012

Changing How Associations Think: What Business Can Show Us?

Someone on the ASAE Collaborate CEO Online last week asked, “What are you budgeting for salaries in 2013?” An exec from a local realtor association responded, “We’ve budgeted 3% for staff raises in 2013.”Something about this discussion bothers me. 
But, I’m not sure what. Perhaps I’m bothered by this apparent “doing what we’ve always done” attitude? 
The online discussion makes me wonder how associations can continue to increase the overhead costs reflected in staff salaries and the corresponding benefit increases? 
I’ve been both an employee of a large national association and the owner of an association management company which served as the staff and headquarters of nine national or regional associations. As an AMC owner, I knew that anytime salaries and benefits exceeded two-thirds of my total revenue, I was in trouble. I’m not sure of the ratio for stand-alone associations.

Given that experience as an association executive, my questions become: 
  • What is appropriate salary administration strategies? 
  • What is the “right” balance of use of resources for staff versus programs and services?
  • Where do associations find increased revenue to cover the increased staffing costs?
  • Do we have better alternatives on the use of our association resources?
Around the same time as the ASAE online discussion, the Wall Street Journal ran Hog Maker Harley Gets Lean by James Hagerty. It provides some insight for association boards and association executives.
Harley-Davidson – and other companies – have moved to a “flexible worker” strategy to more closely link staffing with sales:
  • Until recently, the company's sprawling factory here had a lack of automation that made it an industrial museum. Now, production that once was scattered among 41 buildings is consolidated into one brightly lighted facility where robots do more heavy lifting. The number of hourly workers, about 1,000, is half the level of three years ago and more than 100 of those workers are "casual" employees who come and go as needed.
  • Like Harley and others, Caterpillar Inc., CAT -0.94% a maker of construction machinery, now relies more on "flexible" workers, including part-timers and people working for outside contractors. Caterpillar generally doesn't have to pay severance costs when it lets such workers go during slow periods. Flexible workers accounted for about 16% of its global workforce as of June 30, up from 11% at the end of 2009, when many of those workers were cut because of slumping orders.
  • Production fluctuates depending on day-to-day sales, so the company doesn't have to stock up well ahead of the spring peak-selling period and guess which models and colors will be popular.
While following the “industrial model” of reducing staff (and other) costs during downturns seems “unnatural” for associations and nonprofits, what are our choices?
When I was the #2 at a large national association, I remember the angst we faced when a shrinking budget forced resource re-allocations which sometimes meant staff reductions. It could be brutal. But, we often had no choice.
When I owned my AMC, I had a bit more flexibility as I had several other clients and could adjust staffing assignments to avoid staff reductions.
So, perhaps our question should be broader than “what salary increases are we giving this year?” 

Perhaps we need to look longer term and ask what mix of staff (full-time, part-time, temporary, contract workers) can we afford to ensure we get the job done and have maximum flexibility to achieve the missions of our organizations.
What metrics help guide us? (I mentioned that for my AMC, I needed to keep total staffing costs at under 65%.)

One way is to review the work of Tom Morrison regarding Return on Management.
He suggests associations use Return on Management (ROM) as the key metric:

If the association is managed by an Association Management Company (AMC):
  • Total net worth of the association divided by the AMC annual fee.
If association is NOT managed by an (AMC):
  • Total net worth of the association divided by the total of salaries, payroll taxes, employee benefits, the cost of office space, and expenses associated with maintaining an office.
ROM is Key to Inspiring Staff to Change

Here is a sample calculation: 

If the association’s total net worth is $800,000, and the total cost to manage it is $330,000, then the return on management (ROM) is $2.42. What this says is, for every $1 the association invested in management, it has $2.42 in net worth. Over time as management fees rise or fall and the association net worth rises and falls, the ROM metric gives you a trend line to help you quickly identify if you are on the right path or have a problem.Keep in mind, this number doesn’t mean a thing for one year. The power in this metric is trending it over time. Seeing the direction of this number provides an incredible visual to management and staff. It shows how effective they are as a whole in delivering value and building financial strength for its membership related to the cost of management. Every activity we do as associations always leads back to increasing or decreasing our net worth. If we are making good choices as associations, the net worth will rise. If we make bad choices, the net worth will decline.
And, what seems to be missing is a “benchmark” for what is the maximum amount an association and/or nonprofit should be allocated to staffing costs?
Your thoughts please!

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