ASSOCIATION MANAGEMENT COMPANY SERVICES: SHOPPING FOR SHOPPING'S SAKE IS NOT PRUDENT
C. Michael Deese, Esq.
Howe & Hutton, Ltd.
Washington, D.C.
Do associations managed by employed staff routinely "shop around" for a new executive director when the current executive is performing well? Is it common for a board of directors to explain to its chief staff executive that, although his or her performance is entirely satisfactory or even exemplary, the board wants to "test the waters" to see if there is someone else out there who is better or cheaper?
If the obvious answer to these questions is "no," then why do boards of associations managed satisfactorily by association management companies feel that "shopping around" for management services is an acceptable practice? Is it because consultants (who are often engaged to assist in a management company search process) have been known to advise that issuing a request for proposal (RFP) for management services ought to be done every so often, even if the association is happy with its management, because part of the board's fiduciary duty to the association includes always being on the lookout for a less expensive provider of management services? Do boards with hidden agendas intentionally use the RFP process when there are no management performance issues because they know that the process almost inevitably leads to a change in management?
This writer submits that "shopping around" for association management services, just for the sake of shopping around, erodes the trust relationship that should exist between volunteer leadership and staff and is virtually never in the best interest of the association. If the association board's concern is to know better whether the organization is getting good value from a management company, putting out an RFP will most likely not give the board the answer to that question. There is always a management company willing to offer to fulfill the association's professional management needs for less than the cost of current management. More importantly, however, because the consequences of initiating an RFP process are immediate, significant and most often adverse, both for the management company and for the association, undertaking such a process should be a choice of last resort, one to be considered when an existing management relationship has been determined through a formal evaluation to be unsatisfactory and efforts to resuscitate that relationship have failed.
What Happens When The RFP Is Issued?
Association boards of directors need to be aware of the effect that a decision to issue an RFP for management services can and most likely will have upon their current management. Just as the executive director who learns that others are being interviewed for his or her position is likely to begin looking for another opportunity, so too will an association management company and its employees read between the lines when an RFP is issued. Particularly in situations involving smaller management companies with fewer employees and clients, or management companies of all sizes with employees "dedicated" to a particular association, an association's decision to seek proposals from other management companies will cause AMC employees to feel that their job security is threatened.
When the management company is unwilling or unable to guarantee continued employment if the association client leaves, as will be the case when new clients are not on the immediate horizon or existing clients are not immediately in need of the affected employees' services, those employees are likely to begin job searches immediately. Faced with uncertainty regarding their jobs, the most experienced, and therefore the most valuable, AMC employees will leave the management company's employ as soon as they find a new position, rather than waiting to learn the association's decision regarding future management.
AMCs losing key employees due to a client's decision to initiate an AMC process often are not in a position to maintain satisfactory performance because they will be unable to attract qualified replacement employees. Those AMC employees who do remain, whether of their own volition or due to their inability to find alternative employment, are, quite naturally, going to view their relationships with the association in a different, less trusting, light. The result is that the very decision to "shop" often will produce less satisfactory management performance, even when the AMC's management services were fully acceptable prior to the board decision to issue an RFP.
Boards believing that this adverse effect on management company employee retention and performance can be overcome by including the incumbent management company in the RFP process are engaging in wishful thinking. Although no statistics are available, experience suggests that, once a decision has been made to "shop around," the incumbent management company rarely retains the client. The "excitement" of a potential new management relationship and the promises which undoubtedly will be made by potential management company partners, not to mention the tendency of many bidders to underestimate the volume of work and therefore to underbid the business, particularly when combined with a deterioration in management service resulting from the very decision to "shop," often produces a change in management. Because the RFP process, when undertaken in a proper manner, is both time-consuming and expensive, many boards may even feel compelled to justify the decision to "shop" by finding a "better" management company, even when one does not exist.
How May An AMC's Pricing Be Evaluated?
If a board of directors is satisfied with an AMC's performance, but has questions regarding whether too much is being paid for that performance, issuing an RFP for management services is neither a prudent course of action nor mandated by directors' fiduciary duty to the association. There are, however, people and tools that an association can utilize to determine whether it is being overcharged.
First, unless the board of directors is relatively small in number, a committee of the board, perhaps the executive committee if one exists, should be assigned the task of conducting the management cost evaluation and reporting back to the full board pursuant to a reasonable but defined time line. To the extent that the association's advisors, be they outside attorneys or accountants, possess relevant expertise, they may be involved in the process. Serious consideration should be given to engaging a professional consultant with special expertise in associations operated by management companies to assist with, or even to guide, the process. Finally, and most importantly, if the ultimate goal of the evaluation process is, as it should be, to determine whether the association is being well-served at a competitive price, rather than to create a reason to terminate the relationship with the current management company, the AMC's ownership or designated senior staff should participate in the process.
A valuable tool available to the committee and any consultant will be the most recent edition of the ASAE Operating Ratio Report published by the American Society of Association Executives. The Report, a compilation of statistics from the financial statements of hundreds of associations, contains benchmarking information regarding the cost of association operations, broken down by expense category, for organizations which vary based on tax status, revenue size, membership type, location and type of organization. While the Report does not present separate information for associations operated by management companies, with the assistance of the right consultant the committee should be able to compare the association's operating and administrative expenses with those reported in the ASAE Report to reach a conclusion regarding the value provided by the current management company.
Conclusion
If an association board of directors determines that its current management company is not performing satisfactorily, the appropriate response is to undertake a thorough performance evaluation designed to correct performance failures. If sufficient improvement is not made, the solution is to seek new management through an RFP process.
When, however, a board is satisfied with management's performance but wants to confirm that the association is not paying too much for that performance, the answer lies not in issuing an RFP for management services, for the RFP process itself is unlikely to provide an answer regarding the AMC's value, but is likely to result in a breach of trust and, perhaps, a change of management, a change which will be costly and often not in the association's best interest. Once a management cost analysis is deemed necessary, the prudent association board will engage a consultant to work with a committee of directors, staff and the association's other trusted advisors to determine, using all available measurement tools, whether the management services already deemed to be satisfactory are being provided in a cost effective manner.
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