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Diversified revenues spell success.

Diversified Revenues Spell Success

Tapping several sources has brought financial solvency to the American Correctional Association. Can it do the same for you?

It probably was the best thing that could have happened to us, but at the time it sure didn't seem like it. Overnight, the American Correctional Association (ACA), Laurel, Maryland, unexpectedly lost 55 percent of its gross revenue when the group's major source of funding was cut off. The loss, occurring in 1980, totaled almost $500,000.

The agony of dependency

Charged with promoting the professional development of people working in all areas of corrections and shaping national correctional policy, ACA serves nearly 24,000 members. In 1980 the federal government disbanded the Law Enforcement Assistance Administration (LEAA) of the Department of Justice, which ACA depended on for indirect cost reimbursement fees associated with federal grants. Unfortunately, ACA had several of these grants with LEAA. Unlike many other nonprofit organizations that rely heavily on dues revenue, ACA to this point had relied heavily on indirect cost reimbursement. In fact, at least half of the approximately 40 staff members working at ACA in 1980 worked solely on grants, rather than on association activities.

With our major funding source gone, we faced agonizing decisions and immediate staff and expense cutbacks. For two years, the going was tough, and ACA lost a lot of money.

But this difficult situation accomplished one important thing. It forced us to produce alternative revenue sources in order to survive. ACA leaders, in keeping with the association's long-range plan, decided that no single revenue source would exceed 25 percent of gross revenues. In 1990 we met that goal. The association's gross-revenue budget increased from less than $1 million in 1979 to more than $7 million in 1990. In addition, indirect cost reimbursement revenues now represent less than 5 percent of gross revenues. And the staff size has actually grown. Today, most of our 85 staff members work on diverse association activities, while only about 10 do grants work. Because of a strategic plan that stressed innovation and diversity, ACA had turned disaster into financial solvency through a variety of successful member programs and services.

The planning mechanism

A key tool in our turnaround has been our planning mechanism, an integral part of ACA's budget and budget-monitoring process.

The planning process encourages the association's five department directors to think creatively when submitting their initial budget proposals. This is because new revenue sources and creative ways to market existing sources diversify and increase ACA's overall revenues. During the 1980 crisis, ACA's survival depended on such innovative planning to raise funds and cut expenses. During that time, ACA's leaders investigated and improved eight specific areas of the association's operations to ensure adequate diversification of revenue sources. By doing so, we hoped to avoid a recurrence of 1980's financial problems. What follows summarizes the successful outcome of those efforts.

Insurance. As part of its member benefits package, prior to 1980 ACA had insured individual members for $6,000 in accidental death and dismemberment insurance. In 1979 the premium cost ACA $2.20 per member, or about $24,000 per year, but a claims review indicated that the association was averaging only zero or one claim per year. This claims history allowed us to self-insure with a $24,000 stop-loss policy, an arrangement under which ACA would be responsible for the first four claims per year, after which our insurance company would be liable. As a result, our premiums were reduced 86 percent to 30 cents per member. Even with an occasional claim, ACA's expense for this benefit was reduced by $1.90 per member, for an average savings of $32,000 per year or about $300,000 over the past 10 years.

Correspondence courses. During the 1980s, one of our directors felt strongly that selling correspondence courses would be a successful means to earn money. Indeed, ACA surveys and market analysis indicated a clear need in the corrections field for inexpensive, ongoing training, particularly for line, or nonmanagerial, staff. In response, we produced the first correctional-officer's correspondence course in 1983.

Our sales of the course were just under $37,000, which allowed us to break even on our investment that year. Since then, we have developed and marketed nine additional courses in other correctional disciplines. The courses have been so successful that in fiscal year 1990 alone, our gross sales of them exceeded $400,000.

Dues. Another financial problem we faced in the 1980s was an unusual one: The percentage of dues in relation to the rest of our budget was actually too low. Surprisingly, by 1989, the situation had worsened, with dues constituting less than 10 percent of gross revenues, down from 26 percent in 1980. Increasing dues has been much harder than increasing revenue from other sources. Adding member benefits was necessary to justify even the small $10-per-member dues increase we needed last year.

Consequently, in 1990, we included in the dues increase two new insurance benefits that our competitors did not offer: assault insurance and captivity insurance. We offered the first to members who supervise clients by court order and the second to members who work in an institutional environment.

With these new benefits, we encountered almost no resistance to the dues increase and increased our dues revenues 20.1 percent in 1990.

Our merger. Prior to May 1986, ACA had a relationship with an autonomous, professional affiliate called the Commission on Accreditation for Corrections. In short, ACA promulgated operating standards for correctional agencies, while the commission was responsible for auditing and reporting on the agencies' adherence to those standards.

Over the years, it became obvious to both organizations that a merger should be considered because they could benefit from an economy of scale. Thus, in May 1986, the commission became a self-governing, autonomous group within ACA.

Since the merger, our revenues have increased by more than 25 percent, and our operating expenses have actually decreased as a result of our elimination of duplicate expenses such as staff positions and rent.

Staff benefits. To attract and keep employees in the past decade, the association faced the challenge of providing a competitive fringe-benefits package while at the same time controlling costs.

ACA's studies clearly showed two problems existed: The association was not allocating fringe-benefit dollars wisely or fairly among employees, and health insurance premiums were off the charts.

Association leaders spent months analyzing the problems and evaluating solutions. Eventually, ACA switched from a standard fringe-benefits package to a cafeteria plan and at the same time decided to self-insure the staff's health-insurance benefit.

The cafeteria plan allows individual employees to choose the fringe benefits they need. Under the plan, employees earn credits, based on their salary and tenure with ACA, which they can apply to the specific benefits they want. In addition to health insurance, those benefits include dental insurance, life insurance, long- and short-term disability insurance, reimbursement for day-care expenses, and extra vacation days. Employees who do not need ACA's health insurance, for example, can instead apply their credits toward additional vacation days or increase the amount of life insurance they hold, and so forth. Understandably, ACA's cafeteria plan has increased employee morale and significantly decreased turnover.

Also, self-insuring health insurance has produced a very substantial cost savings for ACA. A long-term history is not yet available, but in the first six months of 1990 we realized a savings of $45,000 over the same period in 1989, when premiums were remitted to a health-insurance provider. This occurred even though we increased staff benefits, adding vision and prescription plans.

Our relocation. Looking still further for ways to save money, in the late 1980s we considered relocating from our rented office space in College Park, Maryland. The building there was old, the location was inconvenient, and employee productivity and morale were low. With our lease commitment set to expire in December 1988, we requested a proposal from our landlord on space requirements, tenant improvements, and expected per-square-foot costs. After receiving the proposal, ACA leaders conducted an investigation to study possible alternatives. It quickly became evident that commercial real estate was soft in the area, and it was a buyer's market. As a result, we were able to move into a brand-new building in Laurel, Maryland, with more floor space and the following advantages over the old building:

* We saved $350,000 in rent during the six-year term of the lease, compared with the same square footage in the old building. * Our association's name is prominently displayed on the new building, since ACA is its primary tenant. Thus, the structure is officially known as the American Correctional Association Building. * The move was free. Our new landlord paid our expenses.

Conferences. ACA hosts two conferences a year: a congress every August and a winter conference every January.

In 1979 the congress, which is comparable to a convention, featured an exhibit hall, workshops, banquet, and other typical convention activities and generated less than $164,000 in revenues. The earlier winter conference was actually just a board meeting with no exhibits or other convention activities and consequently, no source of revenue.

After many years of discussion, ACA leaders felt our industry would support two national conferences a year and decided to take a chance. We added programs to the winter conference in 1980 and 1981 and introduced exhibits at the 1982 conference.

By 1990 revenues from the congress reached $1.255 million and monies from the winter conference totaled $637,000, for a net increase in total conference revenues of $1.728 million since 1979.

Publications. Finally, ACA analyzed its publications output as another means to earn revenue. In 1979 we published our annual directory and a mere handful of other publications. Gross sales were only $82,000.

We committed ourselves to making the sale of directories and other publications a major revenue source. Manuscript acquisition and publishing efforts were enhanced. Marketing efforts were rethought. Now, instead of concentrating on expensive, individual brochures, we rely on less costly but more effective methods, such as telemarketing, catalog sales, and exhibiting at outside conferences.

The result? In 1990 we increased our inventory of publications to more than 175. Gross sales exceeded $700,000, for an increase of more than 750 percent since 1979.

The lesson learned

Without a doubt, the major setback we faced 10 years ago forced us to change for the better. It made us diversify our sources of revenues, which in turn brought about a flow of new ideas and new services to benefit ACA's members. In weathering the crisis, ACA became financially solvent and never again will have to rely on only one source of revenue to stay above water.

In addition, as part of our planning mechanism at ACA, we closely examine the association's financial statements. Senior staff members analyze the reports at regularly scheduled meetings and act to correct any significantly unfavorable variances.

Yet, simply thinking creatively and generating innovations has not made every ACA project successful. It would be remiss to say the association has not experienced its share of failures in the last decade. Fortunately, however, they have not been disasters, and we have been able to recover fully.

Looking back on our past successes is enjoyable, but we have no intention of resting on our laurels. The future holds a lot of work, and ACA is confident that its upcoming projects will be even more exciting and challenging. Currently we are pursuing videos and computerization activities to improve our association. But success in these endeavors is not guaranteed, so we are prepared to seek still other ways to perpetuate a diversified revenue base.

Edward J. McMillan is the director of finance and membership for the American Correctional Association, Laurel, Maryland.
COPYRIGHT 1991 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:McMillan, Edward J.
Publication:Association Management
Date:Feb 1, 1991
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