Taking the human factor out of business can cause problems. Big problems.

What’s Going On?

There’s been an interesting trend in recent years in the Washington Metropolitan area. DC has a significant and growing number of community associations with on-site managers. Often, boards of directors have control over their compensation. The manager may be an employee of the association or of the management company as a pass-through expense.

On-site manager salaries, on the whole, have risen fairly significantly. Many boards seem happy to increase their budgets for salary increases. They may award year-end bonuses to recognize excellent service. Historically, community association managers have been generally undercompensated as compared to commercial and “residential” (rental) managers. So this direction is welcome and will help to attract and keep talent.

Interestingly, those same boards may be considerably less inclined to negotiate meaningful increases in management company fees, even when they are pleased with the performance of their portfolio manager. They know that the market is very competitive. Cheaper services are almost always available. This is a major factor in the commoditization in the management industry. The race to the bottom of low price can easily result in the failure cycle described in a recent blog on the subject.

So What?

There is a disconnect here. How can a company adequately compensate their managers and other personnel when they are unable to collect fees sufficient to do so? Clients set themselves up for portfolio manager and support staff turnover and never see their role in the problem.

Another result of all this over time has been that that portfolio managers are often supervising on-site managers who are frequently better compensated than they are. Things are upside down.

I saw this play out first hand. While working for my last management company, I served a portfolio of clients. As memory serves, when I left last year, my shortest client relationship was a little over 10 years. During contract renewal negotiations, two of them required that I be named specifically in the management contract. Yet, in one of those cases, they successfully negotiated a three-year contract with no increase in year one, and minimal increases in years two and three. With another client, we had an annual ritual every budget season. The Budget Committee Chair would semi-humorously express shock and horror at the thought of any proposed increase in management fees. Then he would say it was the management company’s problem to find a way to give me a raise. Fortunately, my other clients did not follow suit and were happy to pay reasonable increases for quality work.

Make It Personal

The lesson is this: When a person gets paid, there’s a direct correlation to value. When a company gets paid, the correlation gets lost. It gets corporate and theoretical. It stops being personal.

This is why some associations and wise management companies migrate management on-site where possible. With enough brains on-site, an association may not need redundant services or additional supervision (a.k.a. “full service management”). In this business model, management companies may sometimes generate less gross income, but their exposure to uncontrollable workload is mitigated. So while gross income may be less, the percentage of net profit increases. Done well, these contractual relationships can last longer than stressful, low profit, full service arrangements. The clients have more resources to compensate great on-site personnel who can best serve them. The key word here? Relationships.

But What if Full-Time On-Site Management Isn’t an Option?

There are other ways to establish healthy relationships, make it personal, and reinforce the cost/value connection. It might take a paradigm change and some creative thinking.

Option 1 – Dedicated Single Site: If a community does not have the facilities for an on-site office but the workload justifies the attention of a full-time or near full-time manager, assign a single manager to the property. Establish an office at the management company or nearby location. Don’t let logistics get in the way. Mobile apps and laptops make it possible to do a decent amount of work without formal office space.

Option 2 – Hybrid Approach: If an association has the logistical capability for an on-site office but not the workload to require a full-time, on-site, consider a hybrid approach. This was the model I created when I managed my first clients. I had either three part-time, on-site arrangements. I worked out of either two or three on-site offices on a standard schedule, subject to change in cases of emergency. I had to track my time and activity so that the clients knew they were getting what was promised. Time dedicated to each client at a base of operation on-site created a relationship of trust and accountability that I could not have achieved as a portfolio manager operating from offsite office. That was 1991. Cloud computing and other technology should make this option more viable now.

Option 3 – Quantify Portfolio Work: There is a solution for smaller associations that do not justify exclusive personnel or an on-site office. In some areas of the country, there is a management contract model that helps to quantify the work and foster a respect for it. In this model, fees are split into two components. Base financial and administrative services are one component. The other component is based on an estimate of management and administrative time dedicated to the service of that client each month. Quantifying the workload creates dialogue and opportunity for adjustments as needed. Of course, this requires that affected management company personnel track their time accurately and communicate the results with the client. An annual review creates the groundwork for a healthy, working partnership.

Sometimes It’s Simple

There may be missed opportunities to help clients appreciate the value of a manager’s time within the typical, set price management contract model. All set price contracts are based on an estimate of workload and contain a set of specifications to match. A client would never hire a contractor to paint their house and expect them to throw in the garage for free after the deal was done. Yet, frequently managers do not charge for extra services outside the terms of a base management contract. Failing to recognize and charge for billable services will ensure a manager’s time and value are neither fully appreciated nor respected.

There are typically two reasons for this: (1) They are unaware of the terms of the contract, and (2) they fear they will anger the client if they charge. First, management companies need to make sure their managers are aware of contract terms and communicate them in advance with clients. Then, they may need to give managers the magic words and support to help the clients understand the rationale behind the contract model. Help them communicate that they are not trying to “nickel and dime” the client. They are simply charging for time and effort not anticipated in the base contract. The service has value.

Remember the Goal

Whatever the solution, the ultimate concept is simple: A client should get what they pay for and pay for what they get. That means they must have an understanding and appreciation for the value of services provided. There must be a connection between cost and value.

All enduring business relationships must be mutually beneficial. Zero sum games have a short half life.  If the status quo isn’t working, blow it up and find a better solution. In the end, everyone wins.