CAM Leadership Institute’s CEO Adam Balkcom had the opportunity to sit down with Matthew Davidson, COO of Action Management, for an upcoming CEO Group Mastermind training. When discussing management company profitability, he made a statement that resonated deeply: “Profits in this industry are like threading a needle. They are thin.” To achieve long-term success, every driver of revenue and expense must be carefully managed with precision. The era of loosely run operations yielding steady profits is behind us.
Can Management Fees Stand Alone?
A key discussion within our CEO groups has been whether it is still possible to remain profitable on base management fees alone. Have we reached a point where these fees are merely loss leaders, with true profitability relying on ancillary revenue streams?
After speaking with more than 100 management company owners and executives—along with leaders from some of the largest independent firms—I have come to a clear conclusion: profitability today is a balancing act. Success requires threading the needle between revenue generation and cost control.
The Hard Truth About Base Fees
One of the key metrics we have begun tracking with our members is the payroll-to-management-fee revenue ratio. This metric provides a clear assessment of whether base fees alone are covering operational costs. To get an accurate picture, we exclude revenue from ancillary sources and remove payroll expenses that are not directly tied to delivering management services.
Our findings have been revealing. The highest-performing companies operate with a payroll-to-management-fee ratio of 90% to 95%, while most fall at or above 100%. In other words, base fees alone do not cover the payroll costs required to provide services. This puts management companies in a precarious position, leaving them reliant on ancillary revenue streams that can fluctuate based on market conditions—such as closing fees and earnings credits.
The Key to Profitability: Mastering Revenue and Expense Drivers
Successful management companies do not leave their profitability to chance. They rigorously analyze and refine the key drivers of both revenue and expenses, making them competitive and sustainable.
Private equity firms investing in the industry are aggressively optimizing these factors. To compete effectively, independent firms must adopt the same level of strategic discipline.
Revenue Drivers: The Increasing Necessity of Ancillary Revenue
The reality is clear—ancillary revenue is no longer optional; it is a fundamental component of financial sustainability. However, this does not mean we should abandon efforts to maintain or, where possible, increase our management fees. As the industry becomes increasingly commoditized, differentiation is critical to sustaining strong fee structures.
Take Action Management, for example. They have done an excellent job establishing a strong brand presence, consistently placing in the mid-to-high range of board bid selections. However, even with a well-differentiated brand, they have found that boards remain hesitant to pay beyond market norms.
The Waterfall Approach: Prioritize, Then Expand
A concept I frequently emphasize is the “Waterfall Approach” to profitability. This strategy focuses on starting at the top—maximizing the value provided to communities and reinforcing a company’s unique positioning within the market. Only after this foundation is firmly in place should management companies shift their focus to developing and optimizing ancillary revenue streams.
Many ancillary revenue sources are susceptible to external market influences, making them inherently unpredictable. A strong foundation of well-structured management fees provides stability and resilience against economic fluctuations.
That said, companies that successfully build multiple revenue streams create additional safeguards, making them more resilient when market conditions shift.
Expense Management: A Strategic Approach to Cost Reduction
Controlling costs is just as vital as increasing revenue. Given that payroll represents the largest expense in our industry, it must be a primary focus for optimization.
The Role of AI and Remote Teams
Artificial intelligence is generating significant discussion within the industry, with the potential to streamline operations and reduce payroll expenses. While it is not yet fully developed, it remains a space to watch closely. In the meantime, companies must be strategic in how they structure their teams and determine optimal staffing solutions.
One trend gaining renewed attention is the integration of remote team members from international markets. While this concept gained initial traction two years ago, we are now seeing concrete evidence of its effectiveness. Early adopters are expanding their remote operations, while late adopters are finally beginning to embrace the model. As a result, this approach is quickly becoming a critical tool for reducing costs while maintaining service quality.
The Inevitable Shift: Preparing for the Future
The downward pressure on management fees is unlikely to subside. While we should continue advocating for higher fees and maintaining professionalism within the industry, we must also recognize that resistance alone is not a sustainable strategy.
The companies that will thrive in the coming years are those that master the delicate balance of threading the needle—carefully managing revenue streams, optimizing expenses, and adapting to market realities with precision and discipline.
Those who do this successfully will not merely survive—they will emerge as industry leaders.