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The bold rush to the Internet

Aug 2000 | Association Management pgs. 130-146 | by Carole Schweitzer,

START REFERRING TO ASSOCIATIONS AS "roadkill" (as Greg Dalton did in his February 7, 2000, article "Trade Groups: The Next Roadkill" in The Industry Standard)-and you'd better stand back. While Dalton posits that venture-capital-backed Internet exchanges "could make traditional industry associations the next roadkill of the new economy," a number of associations are moving quickly to. turn competition to advantage on the Internet playing field. Internet companies are finding that associations display the kind of . community, content, and credibility that for-profits salivate over. Here you'll read about four associations that have launched effective new business models to build on those strengths.

At the same time, it's true that many are lagging behind. And Kathy Krajewski, president, Krajewski & Associates, Inc., Rockville, Maryland, wants to change that. "I would have to see the value of associations diminished," says Krajewski, who has worked for and consulted with associations during her entire 20-year career.

To tackle the new-economy challenges head-on, Krajewski invited association executives for whom the roadkill article resonated to join an e-community. By June 2000, 150 association executives were participating in the Future of Associations e-community, with Krajewski projecting an additional 50 to come on board by this month based on monthly growth trends. The group is abuzz with concerns, speculations, and ideas that members share via the list. While Krajewski has vowed total confidentiality of the participants in the chat, she agreed to talk to ASSOCIATION MANAGEMENT about the kinds of issues that association executives are discussing, the responses some are making, and the challenges her consulting company faces in assisting them with e-business strategy.

Determining your vulnerability quotient

"Anything I say in June may be outdated by August," warns Krajewski. The caveat is understandable. She was quoted in April 2000 from an interview in January during which she stated that "associations that offer unique services, such as certification or accreditation, have more time to strategically prepare for the inevitability of for-profit certification or accreditation agencies." By mid-May, one of Krajewski's clients-from a certification association-called to say his association already had two dot.com companies competing for its members.

"I don't think there is a category of nonprofit organization that is immune to competition from the Internet," Krajewski says. "It's no longer a matter of 'if or even 'when.' Everything is now."

She goes on to say that one important way to determine the vulnerability of your association is to take a look at the change that's going on within the industry or profession you represent. "If you are seeing the Internet impact your members significantly, then your association is obviously going to feel the results of that impact. Even groups that historically do not embrace technology-attorneys, for example-are seeing online offers for legal advice, free quote information, and wills that can be downloaded. There are a lot of do-it-yourself sites that can have a negative impact on your business and that of your members." Consequently, says Krajewski, "`What industry is going to be next?' is no longer a relevant question."

Interestingly, when Krajewski polled the Future of Associations participants about what organizations association executives perceived to be the biggest threat to their associations, other associations were seen to be nearly as threatening as for-profit Internet companies. (See sidebar "Citing the Competition.")

Deciding what to do

"Many organizations do not know and therefore cannot explicitly state-- their unique value proposition (what they offer that no one else does), and this is reflected in their Web sites," says Krajewski. "They are making their Web sites more cosmetically appealing, easier to navigate, and more content rich. But what they are not doing is adequately communicating their unique value proposition or identifying their audience. As a result of this lack of competitor analysis, marketing research, and membership profiling, they will waste a lot of money and time re-creating their Web sites. Organizations need to get into the trenches--pick up the phone, use marketing research techniques-- and get down to the consumer level to find out who their members are and what they want."

Krajewski suggests two roles that associations can take on to support members in the new economy. "First," she says, "associations need to educate their members about customer-relationship management. By gathering psychographic and demographic information on members and their customers, they'll be able to help members better understand why their customers are buying from them-and who their potential competitors might be. These days, technology can do a lot of that analysis for you." (See "Made-to-Order Marketing" in the March 2000 issue of ASSOCIATION MANAGEMENT for more information.)

Krajewski would also like to see associations take a more active role in being consultants to their members. "It's common sense to me," she explains, "for associations to offer some very specific educational opportunities to their members on how they can use technology, how they can enhance their Web sites, and what the front-runners are doing in their industries."

Embracing new business models

When it comes to strategy, Krajewski says that there is no one formula for competing in the new economy. While some associations have banded together to fend off for-profit competition--as did the American Medical Association, Chicago, and six other nonprofit medical societies by collaborating on a for-profit Internet company called Medem (www.medem.com)Krajewski cautions that "no smart association is going to depend on any one model. Instead, it will develop its own business model by leveraging its unique value proposition with the best e-business models. For example," she says, "a model might be based on advocacy, e-commerce, education, partnerships, or networks. So while an association might deliver specialized content through distance learning (a feature of the education model), it can also add issues management (a capability of the advocacy model) to its Web site. Knowing your audience and delivering your unique value proposition through the e-business model that is most appropriate creates the Web site that is sticky-members come back because they can't find what you offer anywhere else."

A number of associations felt the heat of the Internet flame early on-- some viewing it as competition, others identifying it as a vast new opportunity. Here's what they're doing.

Going vertical

The leadership of Associated Equipment Distributors, Oak Brook, Illinois, realized quickly "that the Internet was an opportunity to add member value," says Toby Mack, AED's executive vice president. "Our primary membership category," he says, "is heavy construction equipment dealers. With 1,100 member companies in the U.S. and Canada, AED's mission includes public policy advocacy, networking, issue and thought leadership, market channel optimization, and education and workforce development. More recently, we've added e-commerce leadership and standardization as another key piece of our value proposition."

Early decisions. Some of the groundwork for AED's e-commerce activities was laid during the time when associations were launching their first Web sites. Mack says, "Rather than outsource the work, we did all of our Web site development internally, building an infrastructure that could host our site and integrate it with our business systerns. It's been a good investment and a good way to get ahead of the learning curve."

It wasn't long before AED began to promote, build, and host Web sites for member companies, adding both value and revenue. "In the last three years," says Mack, "we've created approximately 70 Web sites that are up and running on our Web server." And while 20 percent of AED's staff of 35 is dedicated to information technology, he says, "two of them work exclusively on building and maintaining member sites."

Prompt adoption of e-commerce. Mack and his team soon recognized additional Internet opportunity. "Even before the e-commerce craze took off," says Mack, "we thought it would be great to set up a listing service where our member companies could post information about used equipment they had for sale. The used equipment market is an important piece of our market channel, and by setting up a searchable database, distributors could list, describe, and even post pictures of their used equipment inventory. While MachineMart started out as a free member service and developed rather slowly, the site now boasts nearly 15,000 machines for sale by approximately 300 companies." AED continues to build both e-commerce and value-added modules to the site, most recently integrating a business wire news feed. "An electronic news clipping service screens 30-40 different commercial news sources, filtering out articles that are pertinent to our industry," Mack explains. "We then pop them up on our site daily and include them in an e-mail newsletter with links to articles on the Web site."

Turning the tables on the dot.coms. "In early 1999, when the frenzy of new dot.com B2B exchange start-ups hit," recalls Mack, "representatives starting lining up at our door. They saw our large, rich product sector that sells close to $100 billion a year in the U.S. They were offering everything from classic Internet auctions to a full smorgasbord of formats for buying and selling products." Mack says that AED was an attractive partner prospect because of a couple of key assets: the MachineMart database and the fact that AED has become "an e-commerce savvy organization." AED has just concluded negotiations for an exclusive five-year partnership with an undisclosed company. The partnership includes a licensing agreement for MachineMart, which will remain a value-added component of AED but will expand the reach of the database and equipment sold from the partner site and result in a success fee to the e-commerce company paid by the dealer. "We think the entire arrangement has lots of benefits for AED and our members-and there's a lot of upside potential in the event that we are successful." (See sidebar, "Screening Partners," for AED's checklist for evaluating potential partners.)

Pulling partners to your site

James Kaitz first spied the barbarians at the gates of the Association for Financial Professionals, Bethesda, Maryland, in the guise of competitive Web sites. As AFP president and CEO, Kaitz saw the competition "not so much from other associations, but from a number of venture-backed Web sites targeting segments of our membership. In fact," Kaitz recalls, "some of them were specifically calling on our members to participate in the kinds of communities that associations have been providing for years."

AFP was not intimidated. Rather, the organization believed it operated from the strong position of a 20-year history, a loyal membership, and a built-in community-and could compete with for-profit companies if they adopted some new business models. Expanding reach. Kaitz says AFP immediately conducted a gap analysis, comparing current membership to the target market and surveying member needs compared to the content and support AFP was delivering. "We involved members in a big way," says Kaitz. "We wanted to know where they were in their careers, what kind of support they required, and how our current programs filled those needs. Additionally one of the first things we did was to change the name of our organization from the Treasury Management Association to the Association for Financial Professionals. This broadened our mandate with a new name and brand."

The gap analysis also identified interest categories into which AFP needed to drive content and value. "We wanted to build whatever we decided to do around a community concept," says Kaitz, "rather than around the traditional categories of conferences, personal development, and so forth. We came up with a value-bundling concept (see Figure 1), whereby we could provide a whole range of products and services within each of these communities."

To do this, Kaitz and his team first looked at every financial professional from entry level all the way up to chief financial officer. "Then we inventoried," says Kaitz, "all the products and services that we already provided in each one of these functional areas such as treasury and cash management. We categorized them by whatever method was used to deliver them: conferences, publications, communication, and so on. It was only then that we considered what else it was that the financial professional might need."

Filling in the blanks. "We knew," says Kaitz, "that we'd never have all the resources we needed, so we began to seek out strategic alliances, joint-venture partners, companies, and people we could work with who recognized AFP as a hub for the financial professionals market. Through each one of our communities we could drive a lot more relevant content through a new business model that incorporated the strategic alliance process."

That's how the relationship with MoneyLine Network, Inc., began. AFP's survey showed that members wanted to access on AFP's site financial market data that was updated every 15 minutes. "We found a strong brand in MoneyLine, and we've since sought others," says Kaitz.

As a result of the partnership process, AFP has created a new position, director of strategic alliances. "It is this individual's job," explains Kaitz, "to manage these alliances both internally and externally." The director chairs the alliance solicitation group and the alliance implementation group, which is a cross-functional team formed to respond to the reality that each new partner relationship affects every part of the organization.

Bigger and better negotiating

"You can't put people and processes in place on an ad hoc basis," cautions Kaitz. "During the first six months that we were reviewing potential alliances, we developed an 11-step partner audit process (see Figure 2), not only to screen business partners but to satisfy the board that we've done the due diligence required to analyze all aspects of a potential business arrangement."

"Our number one priority by far," says Kaitz, "is member value. We've got to give them something that they can't get anywhere else, whether it's an exclusive benefit or an exclusive discount. We negotiate for things the partner will not provide to any of our competitors." Other parts of AFP's term sheet are more flexible. And while some customized products are strictly for member value, Kaitz says there are some revenue models from which AFP derives a percentage of a shared transaction. "But revenue is not our first consideration," says Kaitz: "We want to drive people to join AFP; that's our primary goal."

Kaitz would agree with AED's Mack about something else: that it is important for the overall association community to realize that associations can be powerful forces in the marketplace if they position their brands correctly. "For-profit businesses will line up outside your door," says Kaitz, "if you create the right business processes and dedicate the resources to create a hot site."

Buy rather than build

The Association of PeriOperative Registered Nurses, Denver, got an earlier wake-up call than most associations. "When the Balanced Budget Act started affecting health care reform," recalls Peter J. Derschang, AORN's executive vice president, "it really shook up the industry. A lot of companies started cutting back and implementing a lot of cost controls. We suddenly realized that we couldn't have all of our eggs in one basket, so we started looking into diversification."

"We talked through the make-or-- buy analysis," says Derschang, "and decided that in the area of providing education, the barrier to entry to the market can be fairly high in terms of costs and risks. We happened to know of a company that marketed continuing medical education programs to doctors, nurses, and pharmacists. But since their programs are sponsored by the medical industry, there's little risk when it comes to getting sufficient attendance. When a company in the medical device industry, for example, wants to put on a program, our company (Education Design) will control that program, while the medical device company provides the grant funding, which reduces Education Design's risk. Companies work through us because we are an accredited provider-and we are very good at developing programs. So it's a valueadded proposition both ways. When we approached the company about purchasing, the founders were actually thinking of an exit strategy, so it turned out to be a good fit."

Deciding on a for-profit subsidiary. When it came to setting up an independent organization or operating the company within AORN's nonprofit structure, Derschang consulted with AORN's certified public accountants. "They determined that the concept was not that far outside our mission," says Derschang, "but in the end we decided it was the safest course to set up a forprofit subsidiary. Since the company now brings in about 22 percent of our total revenue, it was a wise decision." The company has doubled in size since the acquisition, and while it began as live programs supplemented with study guides, Derschang says that like many associations, AORN is making a big push to get all the programs online in short order.

Combining cultures. The purchase of an existing company came with its share of growing pains. Derschang is candid when he says he'd do things differently. "Some of our problems stemmed from the personalities involved. Individual owners are used to making decisions without much interference-and our executive director at the time had an accommodating management style. So, there was no motivation to make a great deal of change. It took nearly the entire transition period of two years before we agreed that I could gain full control over the accounting of the business."

Derschang recommends that transition periods be no longer than six months and that care be given to selecting the person who will manage the forprofit company and deciding whether that person should come from within the association or from a more entrepreneurial environment. "There are pluses and minuses for each," says Derschang. "A person from your association will know the culture of the parent organization and can migrate some of that over to the acquired group. But you must also be careful that the person is qualified and has the capacity to manage a for-profit company."

Another concern was what role AORN would play in controlling the board of the for-profit company. "Since our board wanted some degree of oversight," says Dershang, "we decided to designate one board member slot on the for-profit company board to an existing AORN board member. It's a board liaison position, and that person reports back to the AORN board."

Participating on a for-profit's site

When the National Association of Home Builders, Washington, D.C., learned of the involvement of the National Association of Realtors, Chicago, with Homestore.com, "it certainly was a catalyst for us and lent a high degree of credibility to that company," says Robert Pflieger, NAHB's senior vice president of public affairs. "It was not a huge leap of faith on NAHB's part to acknowledge the benefits of a new electronic means for builders to reach consumers and showcase their properties.

"While we've invested both staff time and money in our own Web site," says Pflieger, "the Homestore.com relationship is by far the most significant initiative that NAHB has undertaken as far as using the Internet." The two organizations began discussions about developing a new Web site for new home listings on the Homestore.com site in 1997, a partnership agreement was signed in June 1998, and the HomeBuilder.com Web site was officially launched in September 1998.

Partnership goals. "On the consumer level," explains Pflieger, "Homestore. com is a time-saving mechanism. If an individual is moving across the city or to a different state, the listings on HomeBuilder.com (NAHB's official listing site on Homestore.com) provide an easy way for prospective buyers to conduct their preliminary research. The site helps define what type of home they want to buy, where they want to relocate, and what homes are available in their price range." For the builder, Homestore.com is an effective enhancement to marketing efforts, which traditionally have included newspaper, radio, and direct mail promotion. "Since builders have branded their company names and properties via these marketing means," says Pflieger, "when the consumer sees the brand again on the Internet, it supports the credibility of that builder."

Member involvement. In terms of assessing the Homestore.com relationship-and any other potential partnerships-NAHB's 200,000 members play a significant role. Says Pflieger, "NAHB is a member-driven federation, which includes 850 state and local associations across the country. We have a democratic and elaborate process for evaluating and approving strategic partnerships with outside business interests. In this case, we had the perfect match. Homestore.com had the experience, technical know-how, and financial resources to build a leading site on the Internet in the real estate category. NAHB's endorsement of the site gives Homestore.com instant credibility within the industry."

During the past eight months, NAHB has taken a hard look at next steps. "We have conducted a number of focus groups and talked to individual members in terms of what their needs are," says Pflieger. "When we ask how people see the Internet helping them," he says, "we have such a large and diverse membership that the responses cover the map. Certain pockets of the membership are just starting to utilize the Web, so there's a learning curve that we still have to tackle."

Partnership particulars. In exchange for NAHB's endorsement of HomeBuilder.corn as its official listing site on the Internet, the association received a small equity position in the parent company. In addition, more than 125 local home builder associations have also endorsed the site and by doing so have qualified for a share of the revenue generated in their local markets from listing, Web sites, and banner ads.

"As for individual builders," says Pflieger, "more and more of them are choosing to market and list their homes on HomeBuilders.com at a low cost when compared to more traditional marketing tools such as direct mail, print ads, or local radio spots. The growth of the site has been phenomenal, with more than 17,000 builders on the site today." Pflieger admits that NAHB didn't know what to expect when it got involved with Homestore.com. "It's fair to say that it has been a terrific relationship that has added tremendous value for our members," he says. "The success of the relationship has certainly propelled NAHB to look more closely at the Internet as a channel to further our messages and enhance our community for our members."

Gearing up for high-speed governance

Clearly, for any of the business models discussed in this article-and any number of hybrids-traditional governance won't fly. In her work with associations, Kathy Krajewski is finding that the entrepreneurial staff eager to execute new programs doesn't have time to wait for the board to get together. "We're now seeing associations putting together ad hoc board meetings between the regularly scheduled ones," says Krajewski. "And association executives are taking a more aggressive role in educating certain members of their board to be advocates for change. Where boards may not have been motivated in the past, they are highly motivated today as they realize the speed with which some of these decisions must be made. The Achilles heel of associations has always been the length of time that it takes to make and implement decisions."

For the Association for Financial Professionals, the key has been to set up a formalized process that makes the board feel comfortable with the faster pace. "We've worked very hard to put our auditing process in place," says Kaitz. "Since our board members are senior financial professionals, they are very concerned with process, risk, and the legal issues that apply to these situations." Consequently, the final parts of the audit process call for signed contracts with all partners, a legal review by outside legal counsel, and a risk assessment conducted by AFP's insurance providers. "With this process in place," says Kaitz, "the board has given me the authority to negotiate contracts, and I give them a quarterly update on where we stand with the performance metrics we've written into each contract."

And how is Internet time changing the way consultants works Krajewski says there are some new rules for her as well. "We have become so conscious of timing," she says, "that we actually write in the date on which the e-business strategy document is delivered. We don't want people putting an ebusiness strategy that we develop on the shelf for six months before it is implemented-only to discover that, by waiting so long, they have lost their `first-to-market position."' Krajewski's firm has also added a confidentiality clause to its business contract, committing that staff will not discuss any association's value proposition or Internet strategy with anyone else outside the organization.

Perhaps Kaitz's comments apply to more than the association world when he says, "It's not just business models that we are changing, it's the way that our organization views itself. To quickly respond to external factors, we all need to move quickly and to accept the fact that we are working in a very entrepreneurial environment. This attitude must become part of the culture."

Sidebar
CITING THE COMPeTITION

What do you think is the greatest source of competition for your members?

28 PERCENT: For-profits in your membership industry or profession

21 PERCENT: Another association

12 PERCENT: Affiliates such as state or local chapters

18 PERCENT: For-profit companies outside your industry ar profession (such as VerticalNet)

9 PERCENT: Other

6 PERCENT: Publishing houses

3 PERCENT: Association members

3 PERCENT: Government

Source: Poll of the Future of Associations e-community, Apri 2000

Sidebar
SCReENING PARTNERS

When potential partners began lining up at its door, Associated Equipment Dealers, Oak Brook, Illinois, realized that it was time to develop criteria for selecting a partner. Toby Mack, AED's executive vice president, says the six points of evaluation the association has developed seem to be working.

Demonstrate adequate capital availability to get the job done and sufficient technical capability and infrastructure to build and maintain a large-scale e-commerce site.

Determine that the transaction model is designed to preserve and enhance the function of AED members.

Ensure that the agreement AED considers is not perceived as a detriment ar threat to members.

Confirm that AED is a significant participant in the revenue model.

Arrange to be a financial partner and to participate in the equity upside of a successful venture.

Establish an exclusivity lock such that the partner will not contract with any organization that AED might consider potentially competitive.

AuthorAffiliation
Carole Schweitzer is associate editor of ASSOCIATION MANAGEMENT. E-mail: cschweitzer@asaenet.org.