Principled Innovation LLC

Can We Make It the 45% Rule Instead?

August 13th, 2006

This is #3 on my list of favorite items from We Have Always Done It That Way: 101 Things About Associations We Must Change, the new book by Five Independent Thinkers.

The rule of thumb in our community is that an association should have an amount in reserves equal to 50% of its budget, just in case the organization’s financial position begins to deteriorate. So, for example, if I am the CEO of a $10 million association, I’m looking to accumulate $5 million in my reserve fund as expeditiously as possible. It makes complete sense, right?

Of course it does, and that’s why I can’t resist mucking things up by proposing a minor edit: Let’s make it 45% instead. And let’s invest the other 5% in the work of innovation for the future. After all, it’s a rule of thumb, not a requirement, regulation or law, so we can make it whatever we want it to be. And just imagine the extraordinary impact that 5% of your reserves would have on the pursuit of innovation in the community your association serves!

There are great reasons to pursue this alternative. First and foremost, by investing 5% in innovation, you will be making a powerful and appropriate statement that you value the creativity, energy and passion of the people who make up your association more than financial markets. Second, building a deep capacity for innovation creates tangible and intangible benefits for your association—new ideas, new capabilities, brand equity, member engagement and new revenue streams—that will never come about from even the most successful portfolio of investments. And finally, if your innovation efforts produce a winner, the financial upside to your future reserve fund investments could be quite considerable. Surely these attractive opportunities are worth an investment of 5%?

Well, I know what you’re going to say. “we don’t like to take risks.” So, you don’t think you’re taking risks in the market? Yes, I know you’re carefully managing your portfolio and doing the other stuff all smart investors do, but that isn’t the point. Risk is an element of today’s operating environment and present in every choice that leaders make. No amount of careful planning, smart implementation or wishful thinking will eliminate it altogether, nor do we want to eliminate it. Wouldn’t it be incredibly boring and routine to run an organization in an environment of zero risk? What would be the point? The issue isn’t whether your organization likes to take risks, but how much risk you’re willing to accept. And if you’re investing any of your reserves in the market, you’ve already decided that you will tolerate at least some degree of risk in exchange for a certain level of reward.

Unfortunately, you exercise absolutely no control over the rewards the market will bring you. But you do have levers you can pull when it comes to innovation. By taking a strategic approach to innovation, your organization can invest its 5% in ways that minimize and manage risk by limiting uncertainty and controlling financial exposure, while maximizing whatever upside a given idea may produce. You can’t get away from risk, so it is critical that you take steps to make it work for you. The pursuit of innovation in a systemic way should be one of those steps.

I’m thinking, therefore, that just about every organization in our community could make do with 45% in reserves instead of 50%. I’m also thinking that, in the long run, if your association allocates 5% of reserves to the work of innovation, it will turn out to be one of the most beneficial investments the organization has ever made.

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Entry Filed under: Principled Innovation Blog, What's New?, Social Media, Innovation, Associations, Extreme Makeover, The Association Innovator, We Have Always Done It That Way