by Steven Hacker | May 01, 2015

What do you suppose might happen if your association intentionally diversified its membership to provide a hedge against financial crises? What if project management was required for every new product or project you launched? What if your annual budget was routinely built from the bottom up rather than from the top down? Some associations have already addressed such questions, sparking a new and improved direction when it comes to their organization’s growth. It’s not always an easy process—or a quick one—but the results benefit both members and the group as a whole, positioning everyone for a stronger future within their respective industries.

A Common-sense Model. Houston-based NACE International, the Worldwide Corrosion Authority, was organized by 11 oil pipeline engineers in 1943 and today serves almost 35,000 members in 116 countries. NACE has averaged 10 percent growth every year in the last decade except for 2008, when the Great Recession struck and it broke even. However, in recent years, the group has been especially prosperous, growing 14 percent both in 2013 and 2014.

Bob Chalker, the CEO of NACE, said his recipe for growth is a model of simple common sense. When NACE was organized, its exclusive focus was on corrosion prevention issues within the oil industry but now its members are spread across four different sectors: oil, natural gas, marine and infrastructure. This kind of membership diversity provides a level of revenue stability that is the envy of most associations.

NACE’s impressive performance is also due to how its budget and programs are managed each year. “Every new product or project that has significant potential financial implications or human-resources impact must be managed using a project management system that includes milestones, regular oversight and reporting,” said Chalker. This system was installed three years ago and includes a senior staff member whose primary function is to serve as a project management coach.

Chalker’s commitment to market research is another reason for NACE’s growth. Before a new program can be launched, a comprehensive analysis of the market and the program’s potential takes place. Chalker said that about 60 percent of the group’s revenue is derived from education programs, so it is constantly developing new offerings. And new ideas require additional staff oversight. “The folks who are driving our current programs are far too busy to focus properly on the creation of new programs,” Chalker explained. “That work is reserved for a product development manager who works closely with operations staff but whose focus is on developing new offerings that are likely to align with the needs of our different member types.”

NACE is also unique because its lowest-ranking managers are the ones who initiate the annual six-month-long budget process. Then, said Chalker, once the board of directors has adopted the strategic plan, department heads determine where their functions fit into the plan. “This is also when we ask the department heads to identify ideas for new programs that might align with the board’s strategy,” he said. “This year we received 60 ideas, and through a very rigorous and exhausting process, whittled that down to 15 final new projects we think we can support properly.

“Our project management system is a lengthy and meticulous process,” he continued, “but at the end we know that everyone’s priorities are aligned and the programs we have selected are on a course for success.”

A New Ballgame. When Charles “Chip” Deale was named the new executive director of the National Press Photographers Association last January, he made the leap from the CFA Institute, a global association of investment professionals where he was head of society relations. The move proved to be a study in contrasts. The CFA Institute is a large association whose members are among the nation’s foremost investment professionals, and it works with an annual revenue in excess of $200 million. The NPPA is a relatively small association made up of photographers, most working for the nation’s news media. Their profession is under enormous stress, with many publications in decline and the survivors cutting staff, a recent example being the Chicago Sun-Times, which laid off all staff photographers in 2013 and is now relying on a network of freelance photojournalists and readers who capture and share news images on their smartphones.

Deale believes many associations can relate to the photographers in the Sun-Times scenario.“They are still in survival mode. This is especially true of organizations that depend upon membership dues to fuel 50 percent or more of their operations,” he said. As a result, Deale and his board are working intensely to reposition the NPPA’s flow of revenue and expense. In January, the association announced its relocation from Durham, North Carolina, to the University of Georgia in Athens and its new partnership with the university’s Grady College of Journalism & Mass Communication.

Deale said the move “effectively positions the association for a vibrant future and one that is of great relevance to visual journalists.” The NPPA will collaborate with the school’s faculty and staff on a daily basis and members will benefit from the vast resources of the college at its disposal, said Deale, “The NPPA will be an even stronger voice for the profession. The association will better be able to develop and deliver member-specific services that strengthen their skills as photojournalists and their ability to survive and thrive in a constantly evolving marketplace.”

The association’s actions demonstrate how a truly innovative strategy can materially impact an organization’s financial future. Its recent moves allow the NPPA to free up substantial resources by selling its former headquarters building and taking advantage of new revenue opportunities using University of Georgia graduate students and interns to write grant requests and assist with projects. It is a significant shift in thinking and strategy.

Weighing Financial Approaches. When Dan Borschke joined the Chicago-based National Association of Concessionaires (NAC) in 2011, the association was in serious financial distress with virtually no reserves. The international trade association, for which he serves as executive vice-president, has nearly 600 members serving the recreational, theater, entertainment, event, automatic merchandising, university, sport and convention center markets. In his four years with the group, Borschke has led quite a spectacular financial turnaround. He mused that at a recent board meeting he was lambasted by some of the association’s directors because he proposed budgeting only a 10 percent increase in NAC’s reserve fund. “Some directors thought we should have budgeted a 20 percent increase. Quite a change in attitude in only three and a half years!” he said.

Borschke thinks that managing reserve funds can be problematic for several reasons. Some boards become so focused on building their organization’s reserves that they lose sight of the fact that those reserves are primarily a hedge if revenue becomes impaired due to unforeseen circumstances. Conventional thinking holds that accruing the equivalent of six months of operating expense is adequate for this purpose.

Chalker of NACE International agreed but takes a somewhat different approach. “Although we do maintain reserves, averaging approximately 25 percent to 30 percent of revenue, we believe it is a misuse of funds to build extremely large reserves,” Chalker said. “We have made the decision that we would rather invest in ourselves than gamble in the markets. What this means is that we regularly allocate the proceeds from our operations and will occasionally dip in to reserves to fund new projects.”

At the other end of the spectrum are associations who don’t understand the need to establish ample reserves. Borschke suggests that groups build reserves by including a line item of expense dedicated to that purpose in the annual operating budget. In other words, an annual contribution to reserves should be treated with as much importance as one would for line items such as salaries, rent and postage. How much is allocated to reserves in any one year will vary, but what counts is that the association make some sort of contribution to its reserves every year.

Another common budgeting error is that most associations do not allocate any money for what is commonly identified by for-profit corporations as “research and development”—money set aside that empowers the staff to investigate and experiment with producing new products and/or services. The absence of research and development budgets is a major reason why so many associations continue to thrash about trying to find some new magic source of non-dues revenue.

Directors will understand the wisdom of drawing against an R&D expense-line item a lot quicker than they might agree to take money out of precious reserves. Once an R&D line item is created, the only debate is how much to allocate each year.

Budgets as a Cornerstone of Growth. Building budgets designed to promote association growth is not only a fundamentally sound financial management strategy, it’s indispensable in today’s supercharged financial environment. It also opens the door to strengthening member engagement and loyalty because members will appreciate the foresight and planning that is emblematic of budgets that meet these new stress tests.