WHAT GETS MEASURED "IS MORE LIKELY" TO GET DONE
If someone asks about your bowling average, golf handicap, or U.S. Tennis Association rating, and you're an avid participant in any of these sports, you respond almost immediately with a number. Right away, the questioner has a good idea of your skill level if they follow the sport. Most sports have particular numbers or statistics that provide insight into performance and strategies to improve (3). Many coaches, professionals, and teachers have built a career on improving performance based on such statistical data. Over time, with a well-developed system for data capture and reporting, such numbers become "benchmarks" for success at both the amateur and professional levels. For example, an amateur golfer with a low single digit handicap, a bowler with a 220 average, or a professional baseball player with a lifetime batting average of .300 or better are all placed in a special category of achievement compared with their peers. This works because for many years, these statistics have developed wide acceptance among coaches, sportswriters, fans, and players because of careful data capture, reporting, and analysis that correlate to the level of skill involved.
This same type of numerical relationship also applies to the health and fitness industry, although getting at "the number" may be somewhat more involved. When I was a new manager many years ago, one of our clients was the owner of a local ice cream shop. We were comparing notes on our businesses one day, and he easily rattled off his salary cost as a percentage of total revenue, the average number of scoops per tub of ice cream, and revenue per square foot. I was immediately impressed and responded with the statistics we collected at the time: court utilization, total memberships, and membership retention. Many years and numbers later, the medical fitness industry has evolved to the point where we are measuring all sorts of things. Some of the measures may be leading indicators that have impact on our financial results, some are financial outcomes, and others may or may not be directly correlated to business outcomes. A few key statistics have gained universal acceptance as relevant to bottom line results, whereas others have not.
For the past 7 years, I have had the opportunity of conducting a survey of 30 hospital health and fitness centers for Southeastern Hospital Health and Fitness Alliance (SEHFA) - the southeastern regional affiliate of the Medical Fitness Association (MFA). During this time, we have tracked and reported statistics that we think are likely to drive financial performance. These statistics are not unique to our business; in fact, many of the statistics are the same as the ones used by the owner of the ice cream shop - minus the scoops.
The statistics that seem to be most accepted are ratios related to revenues, retention, growth rate, and certain costs as a percentage of revenues. Using ratios makes it easier to compare facilities of different sizes. Although expense data are collected and reported, there are significant differences in the cost structure of our various not-for-profit centers, even with adjustments. For example, some centers are charged an allocation for administrative overhead, and some are not. Some centers pay the market rate for rent, and some are simply charged depreciation that is amortized during the life of the building or asset. These differences can amount to hundreds of thousands of dollars per year. Despite these differences, it is important to compare numbers in our effort to improve performance.
Each spring, we collect the data in a survey distributed to SEHFA members and present the results from all participating centers at our annual conference. It is important to note that although industry averages are reported and often become the benchmark, there may be a wide disparity in the data, so "average" shouldn't be the target in many cases. The benchmark should be the number achieved by top performing centers.
Some of the more useful benchmarks that drive financial performance include the following:
REVENUE PER SQUARE FOOT
This measurement is the total annual revenue for the center divided by the amount of rentable square feet. This includes storage and common areas but not any space subleased to other tenants such as food service, salons, or clinics unless revenue from those tenants is included in the total revenue. The top performing centers in the Southeast are in the $60 to $70 per square foot range for this measure. The MFA average is $49.70 overall and $74.80 for the top 25% (1).
REVENUE PER MEMBERSHIP
This number is total revenue divided by the number of membership accounts, not individuals. So a family account would be one membership. The top performing centers exceed $800 per membership, and some are approaching $1,000 per membership per year. A key strategy for achieving higher revenue per membership is to maximize the amount of revenue generated by nondues revenue.
REVENUE GROWTH RATE
In this uncertain economic time, revenue growth can be a challenge, especially in a competitive market. Despite economic and market factors, the top five SEHFA centers grew by almost 7% last year, down from more than 13% in 2008.
When someone asks, "what amount of revenue growth is good?," my response these days is "any amount."
MEMBERSHIP ATTRITION OR RETENTION
Attrition is the percentage of members you lose per year as a percentage of the average number of memberships, and retention is the converse number - the percentage you keep. I prefer to count retention, and this glass should be well more than half full. Attrition is calculated by taking the total annual terminations and dividing that number by the average enrollment for the year. To get retention, subtract the attrition percentage from 100%. Top performing centers achieve retention rates of more than 80%, and the Southeastern average has steadily climbed from 64% in 2003 to 75% in 2009. Much of this improvement can be attributed to an increase in the diversity of programming efforts to keep members involved and continued efforts to improve service. We have seen a close correlation in our centers between the percentage of members who are active and the retention rate. In the most recent MFA benchmark survey, the retention rate dropped nationally from 71% in 2008 to 67% in 2010 (1).
MEMBERSHIP GROWTH RATE
Because membership revenue accounts for 70% or more of our annual revenue, it's important to grow membership (space permitting). Membership growth has slowed in the Southeast to the low single digits in the past 2 years. This can be attributed to economic factors and also to the fact that some centers are approaching capacity for membership. Once capacity is realized, additional revenue can be obtained only with rate increases or generating additional nondues revenue. Most of us have chosen the second option during this economy because of the price sensitivity of memberships.
PERCENT PEOPLE COSTS
Although there may be disparity between centers in what costs are allocated or not, this measure is key for several reasons. First of all, because of the labor intensiveness of our business, it's the largest single expense for almost every center. Second, it's important to have enough people to generate revenue and provide adequate service; however, there is a point where there are not additional dollars generated for each additional salary dollar spent. Controlling this expense requires constant management, including timely reporting of hours worked and adjustments when the number of hours worked doesn't match the revenue produced. Because many of our positions are full-time, the adjustments that can be made are limited to reducing part-time hours, avoiding back filling hours when coworkers take a vacation or leave, avoiding overtime, and carefully evaluating whether to fill vacant positions. The average for SEHFA centers has hovered around 50% of total revenue since 2003. Better performing centers are averaging 45% or less, which is measured as total labor cost including benefits, divided by total revenue. The MFA average for people costs has increased from 47% in 2008 to 55% in 2010 (1). It is important to note that benefit costs tend to run significantly higher in hospital-owned centers than those in the commercial sector. While calculating labor costs, be sure to include contract labor, such as housekeeping, that performs duties that would otherwise be performed by employees.
Simply stated, productivity is the measure of output per hour worked. As an industry, we do a very good job of measuring memberships and visits. Either of those numbers could be considered output; however, membership numbers tell only part of the story and visits may or may not be directly correlated to revenue. The concept we are using is "billable units." One month's dues are considered a billable unit for membership. In a center that has 2,000 memberships, the monthly billable units (2,000) are multiplied by 12 months to get annual billable units of 24,000. Add the number of personal training sessions, nutrition or coaching consults, massage therapy sessions, screening sessions, health promotion classes, and other services to get the total annual billable units. Another way to look at units is if you can itemize the service on a bill, it's a billable unit. When the total billable units are added together and divided by the number of hours worked for the period, there is an interesting number that emerges - the number one, or very close to it. Centers that are more highly productive achieve a number greater than one, which means that more than one unit is generated per hour worked. Less productive centers produce less than one unit per hour worked.
As mentioned previously, nondues revenue has become increasingly important as centers approach membership capacity and economic conditions prevent us from routinely passing along the increased cost of doing business in the form of a rate increase. Nondues revenue at top performing centers account for 30% or more of their total annual revenue.
SO WHAT DOES IT ALL MEAN?
Without acting on results and using the information to make improvements in performance, the survey would be just an empirical exercise in statistics. In Jack Stack's book, The Great Game of Business, he states, "In business, you watch the numbers, and the numbers establish a pattern. The benchmarks tell you where you are in a particular pattern. You get to the point where you can sense when something is wrong. It comes from having routines, from seeing the patterns. When something is out of the pattern, you react immediately (2)."
Managers at each center use the results of the survey to measure their performance against regional norms and make adjustments in operations and budgets to improve performance. We have more than 50% of centers participating each year and have begun to see favorable trends with several key categories.
* Revenue per membership has increased from $527 to $588
* Revenue per square foot has increased from $34 to $50
* Revenue per full-time employee (FTE) has increased from $67,000 to $87,000
* People costs have held steady at 51% to 52% of revenues
* Membership retention has increased from 63.5% to 74%
SEHFA Financial Benc...Image Tools
SEHFA Top Five Cente...Image Tools
There are obstacles to completing a study of this nature. The results are as good as the quality of the data and the level of participation. Participants are reassured that the results for individual centers are kept confidential and that only aggregate data will be reported to the public. After 7 years of conducting this survey, we have achieved a significant level of comfort with the reporting process and have observed an increased level of confidence among participants.
Going forward, it is our regional goal to increase the level of participation with the financial benchmarking survey and to expand the audience to include other regions. We also need to improve our data collection methods so that we can get more timely data capture and feedback. As the medical fitness industry matures, this should become a valuable tool for managers to measure the financial performance of their operations, even better than an ice cream shop.
CONDENSED VERSION AND BOTTOM LINE
Since 2003, more than 30 hospital health and fitness centers have participated in an annual financial benchmarking survey for SEHFA - the southeastern regional affiliate of the Medical Fitness Association. During this time, statistics have been tracked and reported that are likely to drive financial performance. The measures that seem to be most accepted are ratios related to revenues, retention, growth rate, and certain costs as a percentage of revenues. Using ratios makes it easier to compare facilities of different sizes. Managers at each participating center use the results of the survey to measure their performance against regional norms and make adjustments in budgets and operations to improve performance.