My Weblog

Are AMC-Managed Organizations Recession Resistant?

Michael LoBue writes: I just completed writing a report on a research project examining how the current economic climate affected AMC-managed and standalone organizations. Based on analyzing two comparable groups of membership-based associations, AMC-managed organizations appeared to be avoid the harsh aspects of the economy, whereas standalone organizations were hit very hard.

Standalone organizations employ their own personnel, shoulder the full costs of occupancy (own or rent office space) and spend their scarce revenue on capital goods.

The study examined whether organizations ended their fiscal years in surpluses or deficits. The fiscal years examined were 2006, 2007 and 2008 — fiscal year ending December 31.

The results were quite compelling — standalone organizations were nearly twice as likely as AMC-managed organizations to have ended 2008 with deficits. The chart below displays the three-year comparison of the two groups of organizations based on these two management models:

For an overview of the article and a link to the full report click here….

AMC-Managed vs. Standalone Organizations - 'No brag, just facts'

Michael LoBue writes: In a soon to be published white paper, that I authored, comparing the profiles of AMC-managed and standalone organizations, two major conclusions are clear.

First, there is no difference between the types or organizations managed by AMCs and those that "own their resources". An organization that owns its own resources is one that employs its own staff, leases (or owns) its own office space and spends its scarce revenue on capital goods (e.g., furniture, furnishings, IT resources, etc.).

Second, AMC-managed organizations out perform standalone organizations across conventional operating metrics like:

• Operating Efficiency
• Net Profitability
• Leverage (a measure of risk)

Oh, and let's not forget that standalone organizations pay, on average, a 50% premium to "own" those resources that, on average, produce lesser results! How this translates into "fiduciary responsibility" is lost on me...

The white paper will be posted on the AMC Institute website for downloading, but I would also be happy to email a copy of it to anyone that is interested. Just send me an email request at: LoBue@LM-Mgmt.com.

This is not to suggest that all standalone organizations up to $5M in annual revenue, the threshold up to which the comparisons were done, are irresponsible for using the standalone model of management. But, we now have hard data that governing boards and management can use to ask: "Is the premium we're paying for our management model providing the right return for our unique needs?"

The real value of the comparisons in the white paper is that organizations can begin to explore this question beyond half-truths or simply because the standalone model is what they've been use to.

The comparisons in the white paper do not give us the most important analysis all organizations need to conduct, which is how an organization's programs connect to the impacts outside the organization that each was formed in the first place to have. But, it's a start!

AMCs More Like Agents Than Partners

Michael LoBue writes: An all too common characterization of the relationship between an AMC and its client organizations is that of a “partnership”. As “feel good” a notion as this may be, I contend that it is fantasy more than anything else. There’s a danger being too literal when borrowing a concept — after a fashion we begin to believe our own spin. I admit that our firm has used it before, but always with some discomfort; we won’t make this mistake again.

Partnerships
A partnership is defined as:

“A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested.”
(Wikipedia)

There’s nothing about the relationship between an AMC and its client organization that meets the above definition. AMCs don’t cover the risky ventures and bad debts of a client organization, anymore than a client organization co-signs on leases or capital improvement projects of its AMC. We certainly shouldn’t share in the earnings of client organizations.

Clearly both parties in the AMC-client relationship have risks and rewards resulting from the provider-client relationship, but aside from enhanced reputations, there isn’t anything they really share. And, shouldn’t that be enough? AMCs certainly value their reputations as much as any other business asset. An organization can grow, but there’s no guarantee that this growth represents expanded revenue for the AMC — it all depends on the nature of the growth and whether it increases demand for the AMC’s particular offerings.

Before someone interprets this position as: “he’s saying there’s nothing in the AMC-client relationship that leads to common goals”, let me be clear — there’s plenty to bind the two parties together for mutual benefit, but we should not kid ourselves into thinking it directly involves shared investments and returns. If I’m right and this relationship is not a partnership, characterizing it as such can lull both parties into thinking it is and inevitably lead to making lesser choices over the course of the relationship.

An Agent Relationship
A more likely candidate is that of an agent relationship. AMCs work on behalf of their client organizations to find and take advantage of opportunities for the clients. If the AMC is successful in this role the client benefits by having more impact in its profession or market, revenue continues to flow to the AMC, perhaps even increasing from the client’s successes, and the firm’s reputation is enhanced as a trustworthy and results-driven AMC.

There’s one other aspect of “agency” that I like; I think it’s more likely to focus on finding the client organization real successes — ones that make an impact in the organization’s profession or market segment, than merely generating busy work.

More on 'AMC Clients Measuring Up...'

Michael LoBue writes: Last month I shared the comparative analysis between AMC-managed clients and standalone organizations in terms of key performance indicators. This post contains a slightly more refined grouping of the standalone organizations — the following will be included in a soon-to-be released white paper discussing about 13 different comparisons.

Net Profitability
Figure 5 below reveals that in the case of organizations up to $1M in annual revenue, AMC-managed organizations enjoyed a nearly 10-fold increase in their profitability vs. organizations under the standalone model, which was barely profitable at a half of a percent. This gap closes considerably for organizations between $1M and $5M in annual revenue, but AMC-managed organizations still enjoy a 33% greater rate of profitability at 8.4% vs. standalone organizations at 6.3%.

Operating Efficiency
Operating Efficiency is charted in Figure 6 below. According to the ASAE Operating Ratio 13th Edition, this ratio “tell us how many dollars in revenue are being generated by each dollar of assets employed in running the organization.” This comparison reveals that in the case of organizations up to $1M in annual revenue, the operating efficiency ratios are comparable between the two management models. However, in the case of for organizations between $1M and $5M in annual revenue, AMC-managed organizations at 1.3% are enjoying a 38% better level of efficiency than standalone organizations at .94%.

Leverage
The last metric in this series of key performance ratios is Leverage. This is often used when evaluating an organization’s need and/or ability to borrow funds. Given that most associations would not seek to acquire debt to support operations, like a profit-driven organization might, leverage then can be a useful proxy for general operating risk. In this case, a lower ratio is probably more desirable. This ratio is derived from dividing total liabilities by total fund balance; thus, the higher the ratio, the less able the organization is cover its commitments.

Figure 7 below reveals that for organizations between $1M and $5M in annual revenue, those AMC-managed organizations enjoy a slight, but probably insignificant edge over standalone organizations. Whereas, for organizations under $1M in annual revenue, those managed by AMCs appear to operate with 25% lower risk profile than organizations using the standalone model (.25% vs. .40%).

Clients of AMCs Measure Up Just Fine

Michael LoBue writes: Recently I’ve been comparing the “performance indicators” between AMC-managed organizations to standalone organizations. The comparison is between certain common indicators found in the ASAE’s 13^th Edition of the Operating Ratio Report (ORR — 2006-2007 data) and the AMC Institute’s Client Operating and Financial Benchmarking Survey Report of 2007. While not all of the data are in complete alignment across the two studies, I think three of the indicators do lend themselves to valid comparisons.

The Data:

Those familiar with ASAE’s ORR know the organizations were studied by type (e.g., trades vs. societies — as were the AMC-managed organizations) and by revenue size (e.g., <$1M, $1M - $2M, $2M - $5M, etc.). The Institute’s study involving 311 AMC-managed organizations is divided into smaller ranges. The comparisons below are between the 71 >$1M AMC-managed organizations to the 73 standalone organizations between $1M and $2M in annual revenue.

Key Performance Ratios	ASAE $1M - $2M (73)	AMCI > $1M (71)
Net Profitability (Total Revenue minus Total Expenses as a % of Total Revenue)	4.8%	8.4%
Operating Efficiency Ratio (Total Revenue divided by Total Assets)	1.3%	1.3%
Leverage (Total Liabilities divided by Total Fund Balance)	0.8	0.3

Conclusion:

• Net Profitability — AMC-managed organizations are almost twice as profitable as standalone organizations (also more profitable for AMC-managed organizations <$1M in annual revenue);
• Operating Efficiency Ratio — AMC-managed organizations are just as efficient as standalone organizations across all revenue sizes compared;
• Leverage — Standalone organizations are almost twice as leveraged as AMC-managed organizations for all revenue sizes compared (leverage in this sense translates into operating risks).

Why Does This Matter?
I think this matters because it brings into focus for association leaders real data that they can use to determine if they are being as prudent as possible in the governance and stewardship of their organizations. This data support what so many of the thousands of association leaders with direct experience using the AMC-model already know — that the model is not just cost efficient, it’s also effective!

This is also cross-posted on Association Voices blog site….

AMC Fee Averages — The World is Flat Argument

Michael LoBue writes: The most preposterous debate within the AMC community in 2008, in my opinion, centers around the average fee AMC-managed organizations pay for the collection of services they receive from their AMCs.

Of course, this issue of the AMC economies of scale value is perhaps the least interesting and least valuable of the benefits enjoyed by using an AMC, but it is the easiest to understand and quite possibly the benefit that will be most sought in 2009 while the economy is in the tank.

As recently as December 23^rd a highly respected member of the AMC community wrote the following response to a question asked on the ASAE AMC List Serv:

Question: Could you please give us an idea of what the average percent of an association budget is the typical management company contract fee?
 
Answer: Frankly, I don't think there is such a thing as average in this business. The range of services, output and work product are so varied in terms of necessary resources , human and otherwise as to make association management aggregated cost data fundamentally flawed when used to establish "average" . Even the ASAE ORR (with a fairly broad sample) falls apart as you slice and dice within scope and organization type. It really is like taking a chain saw to do brain surgery. You can look at subsets of organizational activity such as membership development but the useful analytics are, in the end, more about ROI, dollar based or otherwise. I think seeking average is the lazy way to avoid doing the hard work of establishing value.

First off, the above answer is an excerpt of the entire response, but it captures the respondent’s two major points:

1. the average doesn’t exist
2. even if it did, it would be too toxic for mere mortals to even posses, let alone use

Of Course An Average Exists!
The first point about the average not existing has to be an emotionally charged over-statement by an otherwise intelligent and highly responsible professional simply very concerned that an important piece of information will be misused, resulting in harm, much like his metaphor of using a chain saw to do brain surgery. Of course the average exists, even if proper sampling was not conducted to know the value, it doesn’t mean that it doesn’t exist.

This is where The Flat Earth Society comparison enters. According to recorded history, Aristotle was the first to present evidence that earth was a sphere (around 330 BC). Around a 100 years later Eratosthenes provided the first calculation of the earth’s circumference (Wikipedia).

Here’s my point, to deny the existence of something that so obviously exists is to look no less silly than about 3,000 people who align themselves TODAY with an organization that continues to deny a fact that was essentially settled science more than TWENTY FIVE CENTURIES AGO!

Wouldn’t it be more productive to collect useful information, disseminate it and educate practitioners about the accurate use of such data? Then, based on what’s learned, ask a new round of questions, go back to real organizations to collect more data to answer those questions, and so on? Last month I posted on what is lacking from ASAE’s Operating Ration Report (click here…).

We can do better than having debates about the shape of our industry; we should collect data to help define its boundaries and contours and learn to improve it.

This is cross posted at: www.AssociationVoices.org

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

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.

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.