Questions businesses and clubs should never stop asking Part III
ECLUB NEWS |
Over the March and April issues of this newsletter, several questions first posed by a Forbes columnist for consideration by businesses were applied to the private club industry. In this third and final installment in the series, the remaining questions businesses must never stop asking themselves are put in context, as well. And questions 7 through 10 can lead to some rather awkward or challenging conversations for both management and members.
As a reminder, the original list of questions was:
- What is our purpose for existing?
- Who is our target customer?
- Why does anyone need what we're selling?
- If a need exists, is it enough to support a profitable business?
- What are our competitors up to?
- Can you reduce expenses without harming the product or brand?
- Do we have the right leadership and structure?
- Do we have the right employees?
- How will we continue to drive revenue?
- How are your employees holding up?
Do we have the right leadership and structure?
With so many changes in the industry occurring over the last few years, it is surprising that this topic has been discussed so infrequently. While operating practices and performance were scrutinized to the "nth" degree during the recession, clubs have not applied the same level of analytical precision to boardroom practices and committees. While volunteer leadership is a core component of any vibrant club, rarely is the leadership structure reviewed and evaluated in the manner as that of a corporate entity. Consider how often the method for identifying board members is reviewed, and whether the best people shy away from serving because the election process resembles a popularity contest. Evolving best practices suggest that an effective nominating committee, which can offer a slate of candidates equal to the number of open slots on the board is a more effective way to ensure those who are most adequately equipped to guide the club like a business are the people who ultimately do so.
As for committees, consider whether this necessary part of any club or a focus group has become out of control. When the well-known line said by Michael Douglas's character in Wall Street is recounted, most recall the sentence about greed. What is often forgotten is an earlier part of the speech.
Gordon Gekko (played by Douglas): "Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can't figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I'll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents."
Comments are often made by valued and highly respected professionals at clubs who are exasperated by the volume of work created by committees. Hopefully, this work does not total anywhere near $110 million, but it is nonetheless a significant amount of labor. More and more clubs are taking a hard look at the cost of their governance infrastructure. While numbers do not always tell the whole story, they can help direct clubs to the right probing questions worth asking. For example, one club with fewer than 700 members recently quantified the time staff spent working on committees at more than $70,000. While the nature and extent of committees would have been accepted as business as usual in years gone by, this club is not rationally evaluating whether members are receiving at least $70,000 worth of benefit from the work of its committees.
Do we have the right employees?
While many in the industry might feel this question has been the focus of intense scrutiny over the last several years, still many shy away from applying truly businesslike practices in evaluating employees. This means ensuring employees are evaluated using the right criteria. Consider also whether most employees have even been told what the criteria are. A Balanced Scorecard approach to management would help identify the areas that should be measured, in order to deliver on a club's strategic plan – key performance indicators (KPIs). If clubs have yet to identify those measurements, then how can they evaluate their people effectively?
In the January 2012 issue of Chartered Global Management Accountant Magazine, David Parmenter identified seven characteristics of a Winning KPI. According to Parmenter, winning KPIs:
- Are nonfinancial measures; therefore, they cannot be expressed in dollars, yen, pounds or Euros
- Are, in many cases, frequently measured 24/7, daily, or weekly
- Are acted on by the CEO and senior management team
- Clearly indicate what action is required by staff, so that staff can understand the measures and know what to fix
- Are measures that tie responsibility down to a team, allowing the CEO, for example, to call a team leader, who can take the necessary action
- Have a significant impact on the organization, affecting more than one Balanced Score Card perspective
- Encourage appropriate action, having been tested to ensure they have a positive impact on performance and that their downside is minimal
If these are not descriptions of KPIs that have been identified or, worse yet, no KPIs have been identified at a club, consider how managers will know whether they have the right team members on their staff.
How will we continue to drive revenue?
Several thoughts on this issue were highlighted in the recent article titled, Private Clubs: To be or not to be - a business? (Source: January 2012 issue of eClub News). As this point is of such a critical nature, consider this excerpt from that piece.
Given that most private clubs are non-profit organizations, their economic model is by definition rather different than a typical business model. As with all non-profits, clubs exist because a group of people came together with a mission—to socialize, golf, play tennis, etc. Non-profit, thus club economics begin with the determination of this mission aligned to the wishes of members. Once that mission has been defined, costs can be outlined and a budget built to accomplish this mission. This thought warrants emphasis. Budgets are built from the bottom with costs, not from the top with revenue. Once the cost of achieving the mission (e.g. to have the best golf course, tennis program or dining facility in the area), members need to decide the desired method of financing—dues or user fees. The goal for non-profit clubs cannot be to drive revenue unless the club changes its mission by adding more services or increasing the quality of existing services. Those changes would, in turn, increase costs, which would then require more revenue from the members.
Another method to increase revenue at clubs exists that does not involve changing the amount or quality of services—to increase the number of people willing to pay for those services. This can be the result of an enlarged membership or the opening of the doors to non-members (i.e. a semi-private club). Notwithstanding potential tax, legal and privacy issues around non-member use of the facilities, the primary concern to emerge from the latter modification would be the reaction of current members who will wonder why they joined a private club and paid an initiation fee and monthly dues when a non-member has access to the same amenities. While this is a precarious path for clubs to consider, it is one that has become an economic necessity for many. Concepts, such as yield management, have crept into the club world. Borrowed largely from the hotel and airline industries, yield management addresses filling capacity by setting prices that will attract increased market interest at any given time. A number of clubs have worked this into their golf management philosophy in an attempt to determine the number of rounds courses can handle and what the general public will pay. Companies, such as Boxgroove, have emerged as facilitators in this market space and it has been common practice for management companies at public golf facilities for years. Nonetheless, private clubs must be prepared to respond to the concerns of members when non-members start to appear in the locker room.
As witnessed recently, many for-profit businesses react to a tumultuous financial climate with drastic price reductions intended to attract increasingly scarce disposable income dollars. While many companies will not express much concern when customers who typically shop at low-end outlets are suddenly able to frequent and purchase from high-end retailers, private clubs must consider long-term effects of such occurrences. Clubs have wrestled with the idea of lowering initiation fees, and even dues, in recent years. Desperate to retain dues dollars and members, many resorted to removing financial barriers that were historically a primary mechanism to protect the mission of the club and preserving standards. Lowering admittance standards, and thus provoking members to question whether the club mission is still the one into which they bought, is a very real concern for clubs today. It can certainly seem a Catch-22 scenario. Decrease entrance barriers (economic or other) to maintain revenue because of the resignation of some long-term members and run the risk of alienating many more members. Maintain standards at a level that requires long-term members to pay more individually to offset the rising cost of exclusivity with a diminishing member base and be prepared for onslaught of complaints. If ever there was a time for open and honest economic communication with members, now is the time.
How are your employees holding up?
The McGladrey team recently completed an operational review for a club client. While often such projects result in suggested operational changes and efficiency enhancements, the final report in this case focused on a very different issue – morale. Consider these findings:
- Morale among senior staff is not conducive to meeting member lifestyle expectations
- Numbers-management appears to be the focus of the general manager, at the expense of membership experiences
- Board and committee messaging does not appear to be strengthening brand identity at club level or motivating club managers
- Staffing cuts appear to be at a level where membership experience is adversely affected
- Strategic direction of board is not known to club staff
- Elimination of training programs adversely affecting staff progression and morale
- Lack of capital investment in facilities and equipment is not conducive to membership sales targets being achieved
What became clear in this project was that employees were being asked to "sell a lifestyle without guidance." What this conveys is that the value of a strategic plan is undermined when employees do not feel empowered, valued or rewarded. Jack Welch, former CEO of General Electric, believed that the heads of the human resource function of a company, whether called director, vice presidents, or managers, have the most important role in the success of companies. He was known to have said that CEOs should value these colleagues as much as, if not more than, chief financial officers. How many club leaders would support this viewpoint and provide appropriate funding to support it?
Perhaps the ten questions at the center of this series of articles should be realigned to focus on the importance of this final last discussion point.
- What is our purpose for existing if our employees are demoralized?
- Is identifying a target customer important if our employees are unclear about their futures?
- Why does anyone need what we are selling if our employees are not empowered to deliver it?
- How can we have a profitable business if our employees are not motivated?
- What are our competitors up to in their efforts to lure away our best and unappreciated employees?
- Can we reduce payroll expenses without harming the product or brand if payroll makes up more than 50 percent of our costs?
- Do we have the right leadership and structure so our employees are inspired to perform?
- Do we know we have the right employees if we cannot measure what is important to them or for them?
- How will we continue to drive revenue if our employees are not engaged?
- How are your employees holding up? A question that clubs should certainly never stop asking if they are operating like businesses.
The need for clubs to operate like businesses is of the upmost importance for their long-term viability and success. While many factors make this industry and this organizational model unique, the reality is that a club is a business. Both clubs and commercial enterprises have missions and a need to deliver on their value propositions. A proposition is hollow without results. Both traditional businesses and clubs are dependent on their markets and their people to achieve their goals. Ultimately, both must create and both must adapt to stay relevant. The hope is that this series of articles has provided some guidance and food for thought on what running like a business really means for a club, and that it offers some guidance on applying this thought process in an ever-changing and challenging environment.