Return on Management.... Is Your Team Worth Your Board's Investment

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As this past year ended and my review by my Board of Trustees was upon me, I contemplated a number of metrics I could provide them that could share in the big picture what our management team’s value has meant to the association over time.  I needed a number that quantitatively could, in the big picture, sum everything up, and that everything pointed to:

• Was membership growing or declining?
• How was our management cost in relation to other associations our size?
• Were members participating in programs?
• How was the net worth of the association performing?
• Were association expenses in line?
• Was meeting attendance growing or declining?

It was too much to push through and show metric after metric.   I didn’t want to show tons of trends.  I needed one metric, one trend line that everything pointed back to….a metric that every number, and all activities led to.

Meet the Geeks!

Then it hit me.  If we were to judge an investment such as a mutual fund, we would ask ourselves annually, for the amount of money we invest in the stock, how much is it worth at the end of the year?  That gives us a return on investment or ROI.  Looking at this number at the end of each year over time provides you a trend analysis of whether you should continue to invest or make an adjustment in your portfolio.

As I thought this through, I realized that we could provide the very same analysis for the management of an association.  We call it Return on Management (ROM).  ROM shows for every dollar invested annually into the management of your association, how much money is your association worth.  The calculation is an easy one to perform:

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.

We mapped it out for our association and here is what it looked like:

In 1990, our association had $1.40 for every $1 it invested in management costs.  From there, they started a slow gradual decline to .25 cents in net worth for every $1 invested in management costs in 2005.  A 73-year old organization almost wiped out its reserves and didn't see it coming.   If staff and board members had seen this graph annually starting in 1990, I would venture to say that somewhere along the way, early in the 1990’s, change would have been considered.

Fortunately dramatic change happened in 2006, and as you can see, the ROM has turned around and has dramatically risen, and it's now over $2.

I challenge all associations to internally perform this metric on a trend line for the last 10 to 15 years and share it with your staff.    The direction of the line will quickly share with your team, if they are delivering value towards the financial strength of the organization.  It also is a great visual if it's rising, to provide your board a historical perspective on the value of the management team.  Sometimes it's easy for them to forget that value.

Summary is simple….if ROM is trending up, pats on the back, we are on the right path.  If ROM is trending down, change needs to happen...and now.   What is your ROM Trend?