In our last blog we opened the discussion about avoiding going to RFP (the nuclear option) with your Association Management Company. To recap briefly, this is useful in a situation when an RFP is unwarranted (you don’t actually want a new partner), but you need some assurance that you are getting good value for your members.
For all of us that have seen an RFP process for a new AMC, it is to be avoided if possible. The new bidders can almost never fully appreciate the intricacies of the engagement and through design or lack of full comprehension, they will often under price their proposal. The board is then encouraged to choose a new bidder over the incumbent and faces a painful learning curve that leads to higher prices in the future. Absolutely no one wins. If the incumbent AMC was doing a poor job, all the pain will be worth it. We are focused on situations when the incumbent is doing a good job.
So what can a board do? Hire an independent 3rd party to do a full and fair audit. Our strategy and planning partner Peter Wright at The Planning Group gave us an overview of how they do these very audits for their association clients. They dig deeply into the association’s financials and practices to answer 2 critical questions:
- Is your AMC running overall operations effectively?
- Is your AMC charging you a comparable amount for administration compared to alternatives?
To do this, The Planning Group follows a comprehensive process that includes:
- Complete analysis of association financials. This is not at all like a financial audit. This is more of a breakdown of financials to key ratios for comparison to others.
- Compare key ratios to standard association benchmarks. This is usually a 1:1 comparison of association ratios to the ASAE bench-marking survey for associations of similar sizes and compositions.The key benchmark categories are usually operational effectiveness, compensation and expenses.
- Compare key ratios to AMC benchmarks. It is critical to not just compare efficacy as an association overall but help the client board understand how they stack up to typical AMC benchmarks like total percentage of expenditures spent on their AMC.
- Confidentially speak to other AMC’s. This is a tricky thing that only a 3rd party can do. The Planning Group speaks to principals of other AMC’s and without disclosing their client association (or their AMC) they get a “smell test” on the costs and terms.
- Deep dive comparison with 2-3 similar associations. It is critical to have multiple data points and this one is key. The auditor does in depth interviews and financial analysis of associations that are similar in size and make-up to the target. This can also only be done by a 3rd party that is deeply trusted in the association world because the comparator associations do not know who the target is and the client associations do not know who the specific comparators are. Size, association type and often region or at least city size are disclosed, but not association names. It is also critical here that at least one comparator is association run and one is staff run.
All the secrecy is imperative, because the nuclear option is being avoided. If other AMC’s or other associations know that the client board is “kicking tires” they may as well just go to RFP. Ultimately the audit will help the board understand if the association is being run well in relative terms, if they could run it better without an AMC and if another AMC could likely run it more effectively. With good results in place, the association and their AMC can sign a contract renewal with faith and comfort. If the outcome is poor, the board can move to an RFP to find a new AMC.