The rough economy has forced many associations to make tough decisions. But how will those decisions, and others, play out over the long term? A group of association finance experts weigh in on what changes may be in store.
In the past year, the economy has forced many associations to make tough decisions—spending down reserves, laying off staff, relocating offices, or closing them altogether, just to name a few. We've all seen the immediate impact. But how will those decisions, and others, play out over the long term?
In the conversation captured below, a continuation of the roundtable presented in the January 2010 Associations Now feature article "Navigating the New Economy," Andrew S. Lang of LangCPA Consulting and a select group of association finance experts discuss how they think ongoing fallout from the recession will affect associations and nonprofit organizations, as well as other big changes that could be looming on the horizon for the entire sector.
Efficiency and Governance
Andrew S. Lang, LangCPA Consulting, LLC: Are you seeing associations making reductions in governance structures, and if so, is it in order to save money or for other reasons?
Ted Browning, Johnson Lambert & Co.: I'm not sure it's driven exclusively financially. I think it's driven by associations realizing their structures are unwieldy.
John Langan, LarsonAllen LLP: I believe it's in large part a byproduct of the passage of Sarbanes-Oxley.
Joan Schweizer, Deloitte & Touche LLP: But it's not directly related to the economy.
Ted Browning: I have several clients that can no longer get a volunteer to serve as treasurer. When this happens and the member declines to accept the position, the association has had to use a senior staff member in this officer position. I'm talking about national associations that are made up of sophisticated businesspeople who are saying, "I don't need the responsibility of being treasurer," because of the perceived risk.
Andrew Lang: Associations are cutting staff when they have to and back-office staff is not infrequently a target; are you seeing more or less efficiency as a result?
Charles Tate, Tate & Tryon: Unfortunately, efficiency was not always a priority until the economic downturn. Staff reductions are forcing associations to consider more efficient processes by leveraging technology with skilled individuals. I believe there are significant opportunities to reduce costs while increasing efficiency and controls, but it will require people who can use the technology.
John Langan: We're seeing [reductions in force], but we're not seeing increases in efficiency. Therein lies the concern over controls. We go in and ask the question: "Has the change in staff, either in finance or in the programs, reduced controls?" We can usually, at least from my perspective, get comfortable that they have addressed it in some way, but there's only so many hours in the day. They can only look at so much.
Joan Schweizer: Where organizations have had money and have started investment in technology, they are more efficient. I'm seeing a lot more clients that [previously invested] money [in technology]; they're doing everything electronically now, and they are much more efficient. But fewer associations are investing money in technology today. The ones that started changing their technology a year or two ago are much more efficient now.
Ted Browning: Several clients have learned that this is a great time to contract for IT projects. One of our large clients indicated that, "This gives us an opportunity to upgrade our systems." Those organizations are able to take advantage of the thin market for systems consultants to invest in major systems. The IT consulting firms are willing to provide price concessions during this slow time.
Andrew Lang: For years now, I have heard a variety of comments on the benefits versus the detriments of financial, human resource, and IT outsourcing. Are you seeing an increase in outsourcing based on the economy, and where are the best results coming from?
Tom Raffa, RAFFA PC: We are certainly seeing an increase in all types of outsourcing, including accounting, HR, and technology.
At the same time, some of the larger outsourcing clients are looking at outsourcing arrangements, since they are often big line items, and asking, "Is it better to bring it in house?" The right answer to that question depends on the circumstances, but I think if it's been operating very smoothly and cost efficiently, they should seriously consider leaving matters as they stand—this is an important time to have a dependable flow of information.
John Langan: I'm seeing an uptick in our outsourcing business, as well. I see it more as a competency issue in the finance shop, because they're so reliant now on getting timely, accurate, good numbers. They need that finance step now more than ever.
Andrew Lang: So it's more about the quality and reliability of the data than it is about the cost savings, even in the current economy. Are there no areas of outsourcing where we're seeing significant cost savings?
Tom Raffa: If the technology within an organization is lagging operations, then moving to an outsourcing model with a firm that will put in new systems as a part of the transition to outsourced accounting, technology, or HR will absolutely save dollars. Another advantage when outsourcing is the organization's ability to "dial down" their needs from any of the service offerings quickly and without the problems we all know come with formal staff reductions.
Responding to the New 990
"Many [boards] were thinking about tax returns as privileged information. I don't think they really made that connection about the importance of the [Form] 990 as a public disclosure document until recently."
Andrew Lang: What percentage of your clients made changes to their policies and procedures based on the revised 990s?
Ted Browning: I'd say a high percentage, but they were minor changes. For example, I don't know anybody that didn't say, "We have to distribute our 990 before we file it." I don't know anybody that was doing that formally before, but I also didn't see that as a big deal.
Tom Raffa: I think the most important thing was just awareness. At a board level there wasn't really an awareness of the 990 and what it represented. If you're talking about the board members of a professional or a trade association, many were thinking about tax returns as privileged information. I don't think they really made that connection about the importance of the 990 as a public disclosure document until recently.
Charles Tate: Most of our clients had policies and procedures in place even though may not have been formally documented. The new Form 990 provides an opportunity to take an outside look at how the public sees the organization and to better document how it operates.
Andrew Lang: Are you seeing concern on the part of clients regarding potential member, third-party, or press questions about the compensation details that are now revealed in the 990?
John Langan: Certainly they are seriously considering the (c)(6) additional disclosure relative to compensation—that's been a substantial issue.
Andrew Lang: How are we educating them for the increased disclosure, and what they should be aware of?
Charles Tate: We are doing tons of education. The hottest issue is compensation reporting, which is one of the reasons many organizations are reluctant to provide the Form 990 to their full board. We also observed some organizations waiting until the very last day to file, hoping to find out how their peers were reporting.
John Langan: I'm interested to see what the membership and the staff will be saying when they see that public information. Be ready. Be ready when your CFO or someone else pulls the 990 of another association and sees what their peer is making.
Ted Browning: I'm also convinced that the new 990 issue will be more interesting when people begin to use new search and comparison tools to make comparisons among and between organizations to decide which ones are more efficient in providing service. The press knows how to get whatever information they want anyway; it's not a mystery to them. But it'll be really interesting when almost anyone can and will perform searches, make comparisons, and develop effectiveness ratios on their own.
Andrew Lang: Let's talk about some big questions. The government is running a vast deficit. It's getting bigger every day. Do you think they might revoke the tradeshow exemption from UBIT? What about changing other fundamental elements of tax-exempt status?
Charles Tate: I don't think they will.
John Langan: We as an industry need to get beyond controlling risk and say, "What is out there that could really transform associations?" And as you look at the encroachment—maybe that's a pejorative word—of government on making sure that everybody's held accountable, you have to look at the cost-benefit of exemption. The subsidy is in reserves performance and in tradeshow performance, because that typically is what's producing the profit that goes to the bottom line. If they really understand our model and where we're making money, look out.
Andrew Lang: Some people have argued that tax-exempt status for associations is not worth the administrative and public relations costs. Does anyone have a client who has given up their exempt status?
Tom Raffa: Yes. It is not as frequent a consideration as it might start to be with all the extensive disclosures on the new Form 990, but it is something we have evaluated for several clients … and the reasons vary. For one recent case, the association's alternative revenue streams (that were UBI) began to overtake their true exempt purpose.
Andrew Lang: Are you recommending that as a strategy?
Tom Raffa: No. What we are doing much more of specifically when we take the client into alternative revenue sources and explore new products and services for them that we think may be UBI, we're starting up LLCs and for-profit subsidiaries and paying the tax at the subsidiary level. But generally, I wouldn't see much value in giving up exemption.
Ted Browning: I am familiar with one organization that never was exempt, and in their case it was a good strategy. It had to do with the costs that offset unrelated revenues and the limited ability to cross-subsidize member services.
John Langan: I have not seen people walk away from their exempt status, but I would say, based on the education around what's required in the (c)(6)
community around the 990, they ask that question. We have to address that question. I would not recommend that they walk away, but I expect to get that question over the next two years.
But it also goes to the brand of that association. To revoke your own tax-exempt status because you don't want to disclose is just not a winner.
Ted Browning: I see more organizations that may be formed to act like associations that won't be exempt. I think there will be a commercial model that will be effective in competing with associations.
Andrew Lang: Speaking of commercial models, how much for-profit competition are you seeing directed against particular products that your associations have? Do you think it constitutes a threat? Or do you think it's eased up because of the recession?
Joan Schweizer: I'm not necessarily seeing that much more.
Ted Browning: I wouldn't say they're targeting the association. I think what they're playing off is their belief that they can deliver information better, quicker, faster.
John Langan: They're showing a competitive edge at delivering the information, probably using technology. What the associations still have going for them is volunteer-driven content that they don't have to pay for, that those competitors have to pay for. The big concern is open access and the fact that everybody wants it for nothing once it's on the web. If you can't protect it, show its value, and have it be relevant because of how you deliver it, then that's a business risk.
Andrew Lang: It may be because of my focus on maximizing nondues revenue, but I am regularly seeing commercial aggression against associations. I'm seeing people who say, "That product works, and we're going to build a competitor to it." I also see new and existing for-profit magazines targeting specific association advertisers, especially when the organization is weak.
Let me wrap this up with the biggest of the big questions: Assume you are now speaking to a room full of association CEOs, large budgets and small,
(c)(6)s and (c)(3)s. What would your best advice be for the 12 months ahead?
Ted Browning: Use this time requiring a hard look at how you do what you do best and prepare to take advantage of the need for your services when the economy turns around. Learn to be efficient while preparing to be valuable. You are in a unique position as a resource for your constituents; be ready for the good times.
John Langan: Changes that have been made at associations to address the recession were to some extent just tough business decisions that should be made in any economy. Adapt and prosper in the "new normal."
Tom Raffa: For those of us that have been around for awhile, we have seen much of this before. For the next year, margins will shrink for all businesses. The unique thing about this recession is the extent of government intervention. A true recovery will not occur until unemployment can be put in check. But before that happens we are likely to see more aggressive inflation, which will force the Fed to raise interest rates. All organizations need to consider their cost of money as this unfolds.
Charles Tate: Start with the financial component of the strategic plan. Look at new sources of revenue, dues restructuring, and personnel, which is the largest controllable cost. Emphasize process improvement and technology, and staff costs can be held in check.
Andrew S. Lang, CPA, is with LangCPA Consulting LLC in Potomac, Maryland. Email: [email protected]
Online Extra: Next Steps
Joan Schweizer: We are starting to see some recovery in the economy. As a result, the focus on resources is starting to change. Associations should continue to maintain lean and efficient organizations; we have all learned from this recession how much we can really cut and save, and we should continue to monitor spending. Organizations should focus on their key people; as the economy recovers, more job opportunities will open, and talented people will have many more opportunities. Finally, organizations should focus on the quality of their programs. Competition has and will continue to be fierce, and those organizations that are top of class will be most successful.