[ConcernedOwners] Fee Reduction, "Direct-Hire" Meeting, Breakin/Entry Alert, Garage Sale, and Pricing Policies

[Concerned Owners]

In this issue:

Maintenance Fee Reduction
"Direct-Hire" Meeting
Breakin/Entry Alert
Spring Garage Sale and Flea Market
Cost Analysis and Pricing Policies


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Maintenance Fee Reduction

In case everyone hasn't already noticed, at the March board meeting the board narrowly approved the 2008 maintenance fee reduction.
The fees have been reduced to $180/month for regular units and $60/month for affordable units, effective April 2008. This fee
reduction has been in the works for over two years - ever since the $14/month wing-wall special assessment came of in January of
2006 and the fees really should have dropped to $180. You may recall that was the $5/month "reduction", which was really a $9/month
increase - $14 off, but then $9 right back on, for a net "reduction" of $5.

Oddly, it has been amazingly difficult to reduce the fees. I can't tell you how many times I've heard the line "we would like to see
the fees reduced too, but...". I understand there are still some people opposed to the reduction. The Association will be more than
happy to take donations, if anyone still feels that strongly about it :)

Although it may seem like putting the cart in front of the horse, the first step in controlling cost is to reduce the revenue - if
we waited and tried to do it the other way around the reality is it would never happen. This will give the board and the management
some additional incentive to keep costs under control and find other ways of reducing costs even further.


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"Direct-Hire" Meeting

I am planning to hold a meeting on Monday, April 7th, 7:00 pm to finally present my talk on "Maintenance and Snow Removal Cost
Analysis". The latest version of the talk, along with some corrections pointed out to me by Ms. Jurczak, is still available at:

http://societyhillpiscataway.com/Board/DH/CostAnalysis.pdf

Some of the earlier numbers have changed a little but the results remain the same. I also changed the "Rezkom vs. 1 Equivalent
Employee" comparison by adding a few thousand dollars to our cost to contract with a handyman to cover vacation and sick days, and
provide additional manpower for 2 person work. This makes it more of an apples-to-apples comparison. Additional comparisons have
also been added following the receipt of another proposal from Rezkom for a second maintenance worker. The results remain the same -
we are paying a high "convenience cost" with a contractor. You will notice that I improved the "Pricing Policies" slide, and added a
second one. These two slides are critical for understanding how contractors price their services, and are discussed in detail
further below. By the way, Rezkom will not entertain the request to expand the scope of maintenance worker responsibility to include
siding repair, roof repair, gutter repair, etc., and instead wants these to remain as "extra" outside-the-contract items (and this
extra work is not cheap).

Following the talk will be questions and general discussion on the direct-hire issue. Depending on the turn-out at this meeting, I
may also duplicate some or all of the talk at the April board meeting on the 14th. I see the debate is going to now center around
how many people it takes to maintain the buildings and remove the snow. On the snow removal, realize that the snow contractors are
servicing other customers, and therefore have a bigger crew so they can do it faster and get to all their customers. I'm sure one
person, given enough time and the right equipment, could plow the snow. The question will be how many people are required to do the
job in a reasonable amount of time, and what is that time. If we had our own crew, they could start work almost immediately, so it
is important to account for this. A contractor servicing other associations won't be able to get here right away, on average, so
that adds to the contractors time required, even though they may get it done quicker when they do arrive.

The concerns over workers comp and liability insurance in a direct hire configuration are exaggerated. Done right, the risks are
minimal. The cost of such coverage, as mentioned earlier, is not high - $6 per $100 of payroll for maintenance workers, and a 10% to
15% cost above premium (amounting to between $10k and $15k for us) for the liability coverage. There are other associations that
have employees, and eventually I will talk to some of them, as they seem to be managing with this "problem". And believe me, we are
paying for this insurance even with contractors - yes, indirectly - but the contractors are not going to provide this for free and
will cover it in their price somewhere. They have no economies of scale on the workers comp coverage, as that is payroll cost based.
I asked our insurance agent if they have economies of scale on the liability coverage, but didn't really get a clear feeling on
this. I did understand that their premium would be higher, obviously, as they have considerably more employees and thus more risk.


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Breakin/Entry Alert

A few days ago I received an e-mail from an owner alerting us to a problem they are having with their unit. They asked me to pass
this on to the list. If you happen to notice any action at the unit in question, especially on the weekends, please contact the
police. 


"INTRUDER ALERT...

There are young persons entering 485 Townsend Court who should not be there.  They have broken the entry door on two occasions, and
vandalized the premises.   Some arrive in cars.  They may be residents of SHP or the immediate surrounding neighborhoods.  They are
not tenants or owners.  We do not know them to be dangerous, but there is criminal vandalism and evidence of use of alcohol and
drugs.

Any activity there should be reported immediately to the Piscataway Police.

Anyone with information about the intruders is encouraged to notify us or the Piscataway Police or the SHP governing body or Taylor
Management, anonymously if need be.
 
Friday and Saturday nights are most active for them.  When inside, they mainly occupy the rear 2nd floor bedroom to avoid detection,
and so will be most visible the rear windows of the Vernon Court properties opposite.  They light only the bathroom and hallway
light.

We would appreciate the Neighborhood watch to include the premises on their nightly patrol.  The front door, if tested, should not
open with a mere push.


Robert and Deborah Hackett, Owners
485 Townsend Court
Telephone: 973.697.3022"


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Spring Garage Sale and Flea Market

It looks like we will be doing the spring garage sale this year. Currently, the event is set for Saturday May 17th. This is about 7
weeks from now. The format will probably be similar to last time (2 years ago). If you would like to participate, please contact the
management office or the recreation committee (recreation at societyhillpiscataway.com).


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Cost Analysis and Pricing Policies

The March board meeting ran way longer than expected and I only had time to show the last slide of my "Maintenance and Snow Removal
Cost Analysis" talk. The rest of the slides are important too, but the whole talk could really be summarized with just that one
slide anyway. Although I think I explained it reasonably well at the meeting, I am not certain the true impact of what I was trying
to say really hit home, so I would like to explain it here in writing as well. The pricing policy slides (there are now two of them)
summarize the whole situation from a higher level perspective by showing the forces driving the price contractors charge for their
services, and exposing how that pricing can possibly be manipulated. You may recall hearing or reading about the condominium
industry's trade association - the "CAI" (Community Associations Institute) - which essentially networks the various condominium
service contractors together though a variety of social events, seminars, and services. Although it may seem more like a social club
and educational source, it has another less obvious role in this story.

I need to begin with a brief explanation of pricing policies. If you have a service you are trying to sell, you have several choices
in the way you can price your service in the market. Specifically, there are three pricing policies of interest for this discussion:

1- "Cost-Based Pricing" - in this pricing policy, the price of the service is calculated by adding up all the costs associated with
delivering that service, and then adding on the desired profit margin, say 5 or 10 percent. If it's a landscaping contractor, then
it's the salaries, the payroll taxes, the insurance, the benefits, the lawnmowers, the gasoline, the service on the mowers, truck to
haul the mowers around, and so on, plus some additional percentage of that total as the profit.

2- "Competition-Based Pricing" - in this policy, the price of a service is determined by what other service providers competing in
the market charge for the same or similar service. The idea of "competitive bidding" and awarding the contract to the lowest bidder,
under the assumption of equivalent service quality, is an excellent example of competition-based pricing. In an open market, the
consumer can be reasonably confident that they are paying a fair market price for the service, as the service providers are
continually under market pressure to provide those services as efficiently and inexpensively as possible.

3- "Value-Based Pricing" - in this policy, the price of the service is a reflection of the customer's perceived value of the
service. In other words, it's like asking the customer, "So, what is this worth to you??", and then charging them that. The
service's value will depend on a number of factors, including the customer's cost of providing that service for themselves, the
"cost" (lost revenues or opportunities) of not obtaining that service at all, or the cost of obtaining that service from another
provider with a differing value proposition. A value-based pricing model can be difficult to sustain in a free market, because
competitors will be trying to get business by reducing their price below the value-based level and competition-based pricing will
quickly ensue. Value-based pricing is typically only feasible in exclusive markets or with exclusive products or services that no
one else can or is willing to provide. However, if a service provider can find some way of creating such exclusivity, or at least
the illusion of exclusivity, they stand to reap profits greater that those obtainable under the first two pricing policies.

Previously, I had been working under the assumption that all contractors will enjoy certain "economies of scale" due to their size
and specialization, that would otherwise be unavailable to us as an individual association trying to provide the same service, and
thus leading to either a cost-based or competition-based pricing policy. While no doubt this should and may very well be the case, I
have come to realize that it is also necessary to question the underlying assumption and consider the case in which our cost is
actually LESS than the contractor's cost of providing the same service. Two things have lead me to doubt the underlying assumption -
three contractors over the last few years have complained to me, either directly on indirectly, that their profit margins are very
small - and secondly, the numbers in the specific case of maintenance services still don't really check out as expected. Our cost of
duplicating maintenance services seems too low in comparison to the contractor's cost to justify the value-based pricing policy we
seem to be under. This either means the contractors are exploiting the situation and making excessive profits, or their costs are
much higher than expected and they have almost no profit. Whatever the case, the two possibilities are now considered below.

A. OUR COST MORE THAN CONTRACTOR'S COST

Referring now to slide 55 (Pricing Policies - Our Cost More Than Contractor Cost), the stack of blocks represent the relative costs
and prices of a hypothetical service provided by a contractor - could be lawn mowing, snow plowing, maintenance, or whatever. The
cost is on the left, and price is on the right, zero dollars is at the bottom, with cost/price rising as you go up. The top of the
orange box represents the contractor's cost of providing the hypothetical service, and includes all those things inside the box such
as salaries, payroll tax, benefits, insurance, equipment, and so forth.

Now suppose we were trying to provide the same service to ourselves by hiring staff, buying equipment, and so on. Since we are
smaller and have few if any "economies of scale" our cost is going to be higher, as shown by the top of the green box.

Along the right side of the stack of boxes is the price the contractor charges for the service depending on which pricing policy is
in effect. Under a cost-based policy, the price, as described above, will be the contractor's cost plus some profit - the grey box.
Under a competitive pricing policy, the price will be somewhere in the grey, green, or blue boxes, as determined by the market. If
competition is fierce, the market will set a lower price, possibly eating in to the profit. If the competition is light, the market
will support a higher price, possibly even above the cost of us providing the service ourselves.

Finally, and most importantly, under a value-based pricing model, the price will now rise above our cost of providing the service
ourselves, as shown by the blue box. The reason for this is that the contractor now gets to charge us for the added "convenience"
that they are providing to us by relieving us of the burden of having to deal with all the messy little details associated with
providing the service ourselves - advertising for employees, interviewing them, motivating them, reviewing them, terminating them,
covering for sick/vacation days, sick leave, the risk of an employee calling out sick or even quitting on short notice, the
aggravation of making a mistake on one of the state/federal filings, the risk of an accident or a workers comp claim, the more
direct liability exposure, and on and on. Under this pricing policy, note that the contractor is no longer competing against other
contractors, rather, he is in essence competing against US and OUR cost of providing the service!

Now, if you're a contractor and you're looking at this stack of blocks, and that tiny little grey "profit" block, and the range of
prices you can charge under the various pricing policies, it won't be long before you say "I'll take value-based pricing please".
Then, everything from the top of the orange block on up is profit! The trick though, is to get your market to support value-based
pricing, because remember, all it takes is one competitor to slip in a bid lower than yours and the party is over.

If it was possible to create some form of "exclusivity", either real or perceived, then it might be possible to leapfrog over the
cost-based and competition-based pricing levels right to value-based pricing. Such a feat may be achievable in a couple of ways.
First, by advertising and emphasizing the added convenience, or value, of the contractor's service, while concurrently emphasizing
the added inconvenience, or "cost", of not using the contractor's service. Second, and slightly more deviously, contractors in the
same industry can band together in an effort to better control their market by funneling customers to a particular group of
cooperating service providers. This is where a trade organization such as the CAI enters the story.

The key player in the scheme is the property managers, whose companies are also members of the club. They are aided by passive,
management supportive boards, who unwittingly select service providers from a preferred list of "highly qualified specialists" in
the condominium service providers industry. I wouldn't have believed this would ever work had I not seen it with my own eyes - not
as much recently, but definitely in the past. Although it varies from manager to manager, some go out of their way to make sure the
board selects from the preferred list, thereby in effect creating a closed market and allowing contractors to compete against their
customer's cost rather than compete against other contractors. I assume it goes without saying that closed markets are not a good
thing, and in some way I think this played a role in the declining quality of service and increasing costs we saw for several years
here. 

On another front, social events are organized which allow board members to meet club-member contractors. Several of our past
contractors - the prior landscaper, prior snow removal company, prior irrigation company, prior attorney, and current maintenance
contractor - came to us though one of these two channels. This social connection also tends to personalize the relationship between
the service providers and the board - a relationship that should really remain on a professional level. Boards are then quickly and
easily lured into hiring contractors from this "social circle", thus unwittingly aiding in closing the market even further.

If all this is sounding vaguely familiar - it is, because this isn't the first time I or others have brought it up. Mr. Machyowsky
has also been very concerned about the impact of the CAI on our services and our costs, and this analysis finally puts a little bit
of theoretical backing to the concerns. It also exposes the underlying motivation of a trade organization such as the CAI, and
clearly demonstrates their role in the story. It's a brilliant idea really, and may actually be quite effective in controlling the
market just enough to enable a value-based pricing model. 

But all this is based on the fundamental assumption that the contractor's cost of providing the service is less than our cost of
providing that same service. The numbers, though, are calling that assumption into question. For instance, as far as I can
determine, it would cost us about $62,000 a year to essentially duplicate the service currently delivered by our maintenance
contractor. The contract price is around $80,500, plus another $5,500 in tax, for at total of $86,000. We are paying about $24,000
in "convenience cost" for maintenance services, and that's a conservative number (we're probably paying more - my cost estimate is
deliberately high). Is it worth that? Why is the contract price over $20k above our cost? Is the contractor laughing all the way to
the bank, or is that what he really has to charge to keep his business afloat?? Is a value-based pricing policy a luxury, or a
necessity?

B. OUR COST *LESS* THAN CONTRACTOR'S COST

Suppose for a moment that the underlying assumption is false, and for some reason the contractor's cost is actually HIGHER than our
cost of providing the same service. This situation is shown in slide 56 (Pricing Policies - Our Cost Less Than Contractor Cost). The
top of the orange box is now OUR cost of providing the service, with the contractor's cost up one notch in the middle of the blue
box. In the particular situation depicted, note that the contractor's cost plus a reasonable profit is actually ABOVE the
value-based pricing level. In other words, our cost, plus what we would consider a reasonable price to pay for convenience, is now
LESS than what the contractor would like to charge, therefore eating in to his profit. As the situation gets worse - as either the
contractors cost continue to rise or our perceived convenience of his services drops - the contractor's profit decreases further. 

>From the contractor's perspective it is easy to understand the importance of creating the perception of added-value beyond the basic
service provided. The higher that perceived value, the more they can charge and the more money they can make. If things are right on
the edge, that added-value could be the difference between the life or death of their business. If this is the case, then creating a
contractor club is no longer a matter of maximizing profits, but a matter of survival. If the complaints I hear from some
contractors are to be believed, then this may very well be the case.

While I can't be certain of the contractor's costs relative to our costs, I can be certain of one thing - neither situation looks
very good for the contractors! In the one case we are being taken advantage of and they are making more of a profit than necessary.
In the other case their cost is actually HIGHER than our cost and they are barely making a profit, and all the arguments about how
contractors are fundamentally cheaper go right out the window. In both cases, we could do it ourselves for less money, which is the
final conclusion of all this analysis.

Kevin