Operating Ratios – We Can Do Better

Michael LoBue writes: Earlier this year the 13th Edition of the Operating Ratio Report (ORR) was released by ASAE. This edition is a solid improvement over earlier editions. The ORR is an important, no make that an essential, benchmark report for AMCs of any size.

Included in the improvements in the 13th Edition is the reporting of medians, in addition to the usual averages. For those who took “Stat 101” too long ago to remember, median is that value in a range of numbers that is exactly in the middle of the distribution — half of the values are above that median and half are below. So, if the median is greater than the average (aka: mean) it means that the range of numbers contains “values below the median that are pulling down the average”. The opposite is true if the median value is less than the average. Thus, including medians gives us more information about the total distribution of values than the average alone provides. It also includes key performance ratios by organization types — these ratios are:

  • Profitability
  • Productivity & Efficiency
  • Leverage
  • Liquidity
  • Revenue & Expense Management

All this is good! But, we’re still lacking important data in the ORR that will give association managers a much better sense of how our organizations compare to like organizations. For example, it is misleading to compare a single organization to the ORR by revenue class and draw any useful conclusions, or even inferences, about how well our organization may be performing relative to the industry.

Chances are, any organization we compare the ORR metrics will be above or below the average and median. If our subject organization is below, does this mean it is leaving revenue on the table, or under-investing on the expense side? Presumably, deeper comparisons to the Key Performance Ratio will give us a better handle in comparing our organization. But, there is a missing metric that must exist in the data sets that would answer a key question. That question is: “How does my organization compare to the surveyed organizations that occupy the same point on the distribution?” To answer this question we need the “missing metric” and associated data from the organizations corresponding to the metric:

  1. incremental data points – either standard deviation values or quartile values; and
  2. demographic characteristics of the organizations at each incremental marker.

For example, if your subject organization is “some-number” in percentage points above the mean (and median), wouldn’t it be more valid to compare your subject organization to the organizations in the ORR that are at or near 8 percentage points above the mean?

Take the following model distribution curve… all the response form the “bell curve” distribution, where 68% of the responses (value) are 1 standard deviation above and below the mean value and 95% of all values in the distribution are between 2 standard deviations above and below the mean value. Assume your subject organization is somewhere between +1 and +2 standard deviations (see red X inside red oval below — wouldn’t it be more useful to compare your subject organizations to organizations in the distribution that were near the position of your subject organization (within red oval) than the general mean for the entire distribution? After all, isn’t the mean the best of the worst and worst of the best — that’s no target to shoot for!

The following list of comparisons should be available from the existing ORR dataset:

  • number of members
  • age of organization
  • scope (e.g., local, state, national or international)
  • line of business or profession
  • revenue source ratios

In conclusion, this should not be a difficult threshold to reach for the professional management of associations. After all, it’s being taught these days in high school!

This has been cross-posted at: Association Voices.

Virtual Staffing – Tell the Whole Story

Michael LoBue, CAE writes: The September issue of Associations Now magazine from the ASAE & The Center for Association Leadership contains the article Virtual Staffing, Actual Success, which is worth reading despite the author’s glaring omission of not having interviewed an AMC on the general subject of “association outsourcing”.

Just to be clear, I am an AMC owner and presently serve on the board of the AMC Institute. Naturally, you can expect the rest of this article to be pro-AMCs. Fortunately, the AMC model for association outsourcing is highly successful in its own right that I don’t have to be reactionary in pointing out the misconceptions about the AMC model raised in the article.

Before addressing some of these misconceptions, I think it worth pointing out that no association management model is universally better than another. The article features a “hybrid model” of direct staff and consultants, which obviously meets ALA’s needs very well. What is most critical for an association considering staffing options is to be very clear on their needs, culture, goals — to know themselves. It also requires that they fully understand the strengths and weaknesses of the options and to be sure to put the right processes and incentives in place to make the option they select consistent with their desired results. Below is a table that outlines the general strengths and weaknesses of the three major management/staffing options for associations.

 


Option

Strengths

Weaknesses
Member volunteers
  • High commitment to and understanding of the organization’s mission
  • Low direct cost (initially)
  • Time conflicts with volunteers’ employers
  • Not experts at running an association
  • Turnover creates inconsistencies
  • No neutral party; open to conflicts of interest
Employed staff
  • Dedicated staff
  • Specialized knowledge
  • Continuity
  • High overhead (office space, equipment)
  • Not able to staff key positions or areas of expertise unless can justify full- or part-time employee
  • Higher burden and risk associated with being an employer
AMC
  • Experts in association management
  • Lower overhead (shared overhead)
  • Expertise in multiple disciplines
  • Eliminates many typical legal risks associated with operations
  • Continuity
  • Possible mismatch between the association’s needs and the AMC’s expertise

Peter Gaido, ALA’s legal counsel asserts a completely unfounded conclusion that

“ALA’s model represents a significant advantage over the traditional association management firm, which from a cost-benefit standpoint naturally pushes tasks down the employee pipeline to less-experienced staff members”

This holds as much water as any blanket generalization, including that the outsourcing of the private practice of law pushes legal work down to less-experienced staff — implying that private practice law work is inferior to in-house legal work.

Of course there are probably cases where this happens, but conversely there are cases where in-house staff (and legal work) is misaligned with the resources doing the work. This is as much the result of poor oversight and delineation of the scope of services as anything else, which can happen as often with any staffing model.

Then there’s the reference to the hybrid model “statistically outpacing” both stand-alone and AMC models based on the ASAE’s Operating Ratios Report. With all do respect, Mr. Gaido should stay with the practice of law and leave management and statistical analysis to others!

One of the most common mis-applications of the Operating Ratios Report is that the averages reported are any kind of benchmarks of goodness, or some sort of “pricing/cost model” to be emulated. The point of operating ratios is to provoke questions about one’s operations that might otherwise be missed in the analysis of operations and budgets. Averages, after all, are nothing more than the best of the worst and the worst of the best. In management it’s outcomes that matter most, not inputs!

Conclusion — This article did a good job of making a one-sided case. A serious treatment of the subject of association outsourcing needs to span the entire range of options, explore the conditions and considerations of when one option is best for an organization’s individual needs versus others. I’m sure that 4,700 associations in this country cited by Associations Now in the July Supplement that are managed by AMCs can’t all be receiving inferior service, as implied by this article.

 

This is cross-posted at: Association Voices

Social Media – A Threat or Opportunity for Organizations?

Michael LoBue writes: :  Just back from the ASAE (American Society of Association Executives) Annual Meeting (aka:  annual gathering of the association faithful) and there were a fair number of breakout sessions on the various aspects of social media and the world of organizations.  In fact, I even co-presented one of the sessions with Jeff De Cagna of Principled Innovation.  Jeff is a self-described social media evangelist and thought leader on the subject. 

There seemed to be two general reactions, or schools of thought, about social media at the 2008 ASAE Annual Meeting.  One, proffered by a small number of evangelists is that we in the association world better understand and use social media – soon – or the consequences to our organizations will be dire.  I even heard the question:  “Will these social media tools render traditional organizations obsolete?”  The other school of thought seemed to be:  “Hmm?  Social media seems like a technology in search of a solution.”

I would argue that like most debates of this nature the truth lies somewhere in between and even at different points between the extremes for different organizations.  The important thing is for association leaders and executives to not loose, nor bury their heads over this situation.

I think the more interesting and useful domain in which to explore these tools is against the basic justification of an organization in the first place.  If organizations (or “firms” as the term was used in research on this subject in the early 20th Century) were formed because it was a more effective and efficient way to organize resources, including handling such overhead costs as communications and coordination, than the market, then it would be logical to understand how social media tools impact the “overhead” optimized by the organization itself when certain communications costs go to zero.

Clearly, communications is not the only element of overhead managed by the organization.  So, suggesting that social media tools will put organizations themselves out of business is na├»ve.  Conversely, it would be foolish to ignore the impact of social media tools on organizations.

Canaries in the Board Room – Early Warning Signs of Governance Dysfunction

Is there a “canary” in our organizations that succumbs to the lack of governance oxygen the way canaries were used in coal mines to warn miners that they were loosing oxygen while they still had time to take corrective measures?  The answer is “yes”!

What Is Governance-Oxygen?

At a minimum it’s time.  It’s time to focus on the organization’s future — that time beyond the current operational year and the plan and budget beyond the current year.

Two Such Canaries

First, is the condition of imbalance between the strength and functioning of board and chief staff officer (CSO).  In an upcoming issue of the Harvard Business Review, Robert M. Fisher, Ph.D. will have an article appear that, among other important topics, discusses the relationship of board and the chief staff officer (CSO) as a system.  Fisher discusses in his article the characteristics of strong and weak boards and CSOs and what can be done under the various combinations of these characteristics.

I mention Fisher’s article to recognize his important notion of the “system” that the board and CSO comprise, but to also emphasize that while governance is the domain of the board of directors, the board’s ability to provide governance can be severely compromised if a weak CSO is present.

So, the first canary I’d like to identify is an imbalance between board and CSO, specifically where there’s a strong board and weak CSO.  I do not mention weak board and strong CSO, or weak board and weak CSO because it should be obvious that a weak board, regardless the condition of the CSO, is simply not capable of providing governance.

At the risk of oversimplifying Fisher’s point, he discussed the board-CSO system in terms of stability.  Obviously, where both parts of the system are equal, there’s high stability.  The strong-strong balance having positive stability and the weak-weak balance having the kind of stability more akin to rigor mortis.

The fact that a strong board would have hired a weak CSO is itself a warning sign that the board’s critical decisions do not result in success.  What more important decision can a governing board make than hiring the right chief of staff?  The byproduct of this first mistake should be obvious — a board can be no more effective at governance with a weak CSO than a bicycle can have a smooth and reasonably effortless ride with one flat tire (or at least in need of air).

The second canary is how the board actually spends its time.  An audit of board agendas and meeting minutes might be very revealing.  How much time does a board spend on history vs. the future?

History –

Board meetings are often devoted to reviewing reports about:

  • Finances and financial performance
  • Program activity reports
  • Meeting attendance and participation
  • Membership trends about new and non-renewing members

This is appropriate for oversight.  But if the reports are merely an accounting of numbers with no analysis for the future, then these reports are simply reporting history.  These reports should be prepared and submitted, but they may be more appropriate for reading before a meeting for background and not to take up valuable board time during a meeting to discuss what can be clearly stated in written reports.

The Future –

Boards that do not discuss and debate the significance of current reports on the organization’s future are starving themselves of governance-oxygen.  For example:

Finances and Financial Performance — Does the current financial report contain implications for the future.  If there are unexpected trends in revenue or expenses does the board know what’s causing them?  Do these deviations point to risks or opportunities for next year and beyond?

rogram Activity Reports — Are programs being supported as expected?  If not, might this suggest some fundamental departure from a program’s basic assumptions for success?  Are there mid-term adjustments that should be made and what impacts might those adjustments have on next year’s performance of these programs?

Meeting Attendance and Participation — Are there more or less attendees at meetings than anticipated?  If so, why the deviations?  Are meeting appraisals being collected from attendees and do these appraisals provide any insights to what members may want in future meetings?

Membership Trends — Often there’s more concern about membership attrition than about growth.  Both deviations are important to understand.  Boards should certainly understand why members are leaving.  Is it because of some external factor in a trade association’s market segment or in a society’s profession, or because the organization’s actual or perceived value-proposition is outdated or not being communicated effectively?

What Can Be Done to Increase Governance-Oxygen?

The right balance for a particular board and organization between current and future time may be unique to each organization.  I would suggest that over the course of a year a board should spend at least 50% of its time on the future.  That will vary from meeting to meeting, and whether an organization is in start-up mode vs. a more mature state.  It would also be affected by whether or not an organization is facing a crisis at the moment.

Perhaps the following questions are the most useful to ask about how your board spends its time:

 

  • Are we regularly dealing with a crisis?
  • Does the board feel that it has to make decisions with less information or understanding about a situation than it would like?
  • Is valuable board meeting time spent listening to reports and analysis that could be captured in written reports and reviewed in advance of the meeting?
  • If written reports are prepared and distributed in advance, do they contain assessments about the potential impacts in the future?
  • Does board meeting time include identification of learning that the board needs to undertake to be prepared to make future decisions with a sufficient amount of information?

Board time is a non-renewable resource — waste it and it’s gone forever.

Is Your AMC Committed to Mediocrity or Excellence?

Michael LoBue writes: —   I just returned from the AMC Institute 2008 Annual Meeting in New Orleans, LA.  Once again, this “gathering of the AMC faithful” did not disappoint.  There were many topics discussed and ideas generated from the rich interactions with the AMC members, as well as with all of the high quality associate members who provide a wide range of services AMCs utilize to support the successes of their client organizations (e.g., meeting venues, convention and visitors bureaus, printers, technology providers, insurance services, etc.)

The one topic that never ceases to interest me is how AMCs articulate the value of being a member of the Institute and being an AMC Institute accredited firm.  Clearly, the Institute members see the value or they wouldn’t spend the time and the hard cash on hotel, meals, airfare, etc. to attend these meetings.  We certainly have more than ample opportunity to travel to a wide variety of fine locations on behalf of our clients and their meetings, so it’s not that we need an excuse to get out of the office.

While the reasons may vary by firm for the investment of time and profits into this activity, I think there’s one universal reason why this type of investment is of value to our clients.  The clients of AMC Institute members benefit by our membership because membership and active participation in the Institute is a clear and tangible investment to provide the highest quality and value services.  It’s the difference between good intentions and taking concrete actions to produce a positive result.

Let’s face it — the principals of every firm providing association management services don’t open their offices every morning with the thought:  “Wow, I’m really looking forward to another great day of providing our clients with mediocre service.”  Of course not, we all believe we’re providing the very best services possible.

However, there’s a difference between providing “our” very best services and “the” very best services possible.  Members of the AMC Institute are in a very tangible way investing their time and capital to learn what “the” very best services are, and how to provide them.

So, it matters to an organization that an AMC is at least a member of the AMC Institute because it’s a tangible sign of the firm’s investment in staying abreast of what constitutes “the” very best association management services — because the definition of “the very best services” is a moving target — and Institute members are investing in staying abreast of this moving target.  And for those organizations seeking the “gold standard” in service providers, there are the almost 40 AMC Institute Accredited AMCs, which not only practice these standards, but drive best practices to ever higher ground.

Besides, doesn’t it seem odd that a self-respecting association would higher a firm to provide association management services that is not a member of the AMC Institute?  Isn’t that a bit like going to a minister for religious guidance who didn’t attend a seminary, doesn’t belong to an organized church, or perhaps doesn’t even believe in god?

In fact, it’s probably not much of a stretch at all the generally define an association management company as to whether or not that firm is a member of the Institute.  Membership in the AMC Institute constitutes the basic definition of being an AMC at all; AMC Institute Accreditation confers the gold standard for an AMC.

Governance vs. Management

Michael LoBue writes:  “Governance” and “management” are terms used so often by organizations that they’ve become nearly meaningless as useful distinctions for roles and responsibilities.

This first post in this category is intended to merely set a general direction for future posts and to establish several themes to help bring meaning back to these words for organizations.

First, general definitions of each:

Governance is responsible for “determining the right things” for organizations to do.

Management is reponsible for “doing things the right way”.

Perhaps a useful distinction here is that governance is responsible for answering the organization’s “what questions” and management is responsible for the organization’s “how questions”.

Future posts under this category will explore the practical aspects of these general definitions and distinctions, which would include:

  • Early warning signs of governance / management dysfunction
  • Governance planning – who’s responsible?
  • Management’s role in planning
  • Sound practices for healthy governance
  • The different time-horizons for governance and management

Selection Criteria

Michael LoBue writes:  Selecting the right AMC is very similar to selecting the right employee.  It’s all about right fit and that is the result of several important process steps.  The one step in the process this post is concerned with is having a well developed selection criteria for the choice.

While this seems like a blinding glimpse of the obvious, it is surprising how many organizations go out to bid without having their selection criterial established until the selection committee sits down to have their first discussion about the proposals they just received.

One of the reasons for this critical omission is that the selection committee is often tired just getting the request for proposal (rfp) material together.  This is understandable as a high quality rfp package involves a great deal of work; the type of work that boards do not normally spend their time doing.

Another reason selection criteria are omitted is that they don’t really seem necessary once the rfp material has been developed because the rfp material seems so complete.  The fact of the matter is — selection criteria are very different from the other elements in an rfp.  Selection criteria can be (should be) included in the rfp material, but when the criteria are not spelled out the chances of selecting the right fit becomes more of a chance-game than a deliberate outcome of the process.

There’s no generic selection criteria that fit all situations.  The right selection criteria contain those characteristics that are discernable, if not measureable, and will allow the selection committee to observe differences between proposing firms.  They might include:

  • Experience in the organization’s line of business or profession
  • Some threshold of capacity to accomplish the work
  • Experience in some service area that is new to the organization, representing new services and
          organizational opportunities
  • Certain business process practices, perhaps certification for key staff and/or accreditation to industry standards for the firm
  • The ability to serve as a public spokesperson for the organization

Once the selection committee has developed the criteria, the criteria should be provided to the bidders.  It’s okay to adjust the criteria as the selection committee goes about their work.   In fact, it would be surprising if the criteria didn’t drift a bit because this is typically a learning experience for the committee members.  If those criteria do drift a bit, those changes should be communicated to the bidding firms.

No, it is not sef-serving for a bidding firm to ask for criteria up front, although it is beneficial to the firm in developing their proposal.  The reason the bidders should establish their selection criteria ahead of time is because it will increase the likelihood of finding that right firm.   Not to tell the bidders means that the bidders have to engage in guess-work about what is most important to the selection committee.

Manage the risk inherent in searching for a new management firm by being clear about what is most important in the selection.  First, spend the time up front deciding the basis for your selections; second tell the bidding firms so they can present their skills and experience in terms that matter most to you and your organization.

What is an AMC?

Michael LoBue writes: An association management company (AMC) is a for-profit service firm that provides professional management and administrative services to associations.   Perhaps the best way to understand the services is to list the benefits AMC client organizations receive from the relationship:

  • highly experienced personnel who often support more than one client organization at one time, thus able to bring rich and diverse problem solving skills to each client they support;
  • highly efficient use of resources and economies of scale as no client organization shoulders the full burder of occupancy and related fixed-costs of operations; and
  • because all staff are employees of the AMC, the association avoids all the obligations associated with being an employer

AMCs are viable solutions for organizations of all sizes; whether engaging an AMC for full management and operations, or for specific services to complement hired staff.

Quality AMCs also invest in staff development in training in ways that many associations with their own staff are simply not able to afford.  One way to identify quality AMCs is whether or not the firms support professional certification like the Certified Association Executive program from the ASAE, or firm accreditation from the AMC Institute.