How to Handle Risk at Risky Moments
News of economic weakness shouldn't unsettle associations---it should prompt them to think more about what's worth investing in to weather the storm.
When economic times are tight, does it make more sense to take a risk or is it time to circle the wagons?
To be clear, times aren’t tight according to the broad economic indicators—yet. The U.S. GDP is still positive, but it’s slowing; the unemployment rate is low, but so is the labor force participation rate. And according to a recent report by McKinley Advisors, association leaders are generally upbeat, but a growing proportion is more concerned about what the near future holds for their organizations. As Associations Now reported last week, 13 percent of respondents said they experienced a worse year financially than they expected, and 13 percent said they were “very pessimistic” about their association in 2016.
Time to panic? Nah. But those are higher numbers on the doom-and-gloom side of the ledger than McKinley’s report has delivered in a few years, so it’s worth starting the conversation about how associations can lead through the next economic rough patch.
The immediate tension that arises in such situations boils down to investment. Looking into new markets or revenue opportunities can give associations a cushion in a downturn, but boards can stop short of investing in new ideas if the economic picture isn’t sunny. “Most boards are real risk averse,” says McKinley Advisors’ Jay Younger, FASAE. “And they don’t want to have events unravel on their watch.”
But Younger says there’s a potential missed opportunity for association to begin considering what strategies might or might not work in the next few years. “You don’t have to have iron-clad plans,” he says. “But what assumptions are we making about our business that we might want to question?” The upside for many associations is that they’re well positioned to do that questioning, given how well reserve portfolios have performed in recent years. And though you’re planning for bad times, the vision can still be optimistic. “You need to be thinking about not only the kind of more negative scenarios that might unfold, but also what can we do now that we’re in this strong position to really make something meaningful happen on behalf of our members or our mission,” Younger says.
There are some hints in the McKinley report that associations are already thinking this way. Five years ago, according to the study, the bulk of associations’ organizational priorities were on member acquisition and retention. Now, however, no one goal dominates, and associations have ambitions beyond those standbys: “Generating nondues revenue” (26 percent), “Developing new methods for member engagement” (25 percent), and “diversifying membership/attracting new audiences” (19 percent) are also part of the mix now. And two-thirds of respondents say that they will or are likely to expand programs and services.
But if associations seem to recognize that planting your head in the sand and doing nothing is a nonstarter as a business strategy, unconsidered investments aren’t a bright idea either. As a hint of how to think about managing that issue, a brief history less might be helpful. In 2009 and 2010, as the country was just pulling out of the Great Recession, ASAE conducted a series of surveys of association leaders about how they responded to the downturn. One thing the studies looked at were associations’ predictive power in terms of which programs would succeed and struggle.
For nuts-and-bolts association activities that leaders had long experience in, the predictions tended to work out well—for instance, the proportion of leaders who expected publication revenues to slacken matched the proportion who actually experienced that slackening. But those same leaders could be overly optimistic about new tools like online education and meetings—in 2009 60 percent of respondents said they’d expected a revenue boost from virtual get-togethers, but in 2010 only a third actually experienced it.
That’s not to say online education is a bad idea—six years later, it’s de rigueur at a lot of associations. But in difficult times, it can be tempting to overestimate the economic boost of a new idea. Associations can survive a downturn just fine, but not through one magic bullet. Planning ahead of economic worst-case scenarios (or even bad-case scenarios) is always wise, and it’s worth taking a chance on a new idea. But those moves should also be driven by a frank discussion about what your expertise is, and what counts as a realistic expectation for the success of your efforts.
What does your association do to plan ahead of financial trouble, and how do you discuss risk management in your planning? Share your experiences in the comments.