Fellow Members of the Naval Institute,
It has been a year since the Board asked Tom Wilkerson to assume the duties of CEO—a year of unprecedented change at the Naval Institute. With that we wanted to share with you, our valued members, the rationale for and the impact of these changes. Thus, in accordance with the Constitution, we are grateful to communicate this initial part of our annual report on the State of the Naval Institute in its 131st year of service. In January 2004 it was apparent that we were sailing into financial extremis. Since 2000, we had expended cash at the rate of almost $1M per yeara total of $4.3M in cash from our savings or portfolio, representing a 50% loss in total value. Without an immediate and dramatic course change, we were less than four years away from insolvency. We had not regularly posted a positive operating margin in either of our principal line units (Periodicals and the Naval Institute Press); our membership was in a 15-year decline; our last new product offering was 20 years ago; and our internal business processes were in need of transformation.
Outside Beach Hall, the publishing world was undergoing dramatic restructuring and consolidation, due mostly to fierce competition, shrinking margins, advances in technology, and profound changes in reading trends. The nonprofit world was undergoing similar changes; receiving more scrutiny from regulators and being pushed to become more professional. The competition for both corporate sponsorships and foundation support was becoming more intense and increasingly difficult-and we were not adequately prepared or structured to take on these challenges.
To adapt, to survive, we needed to make a significant course change. We re-embraced strategic business planning and the reality that we are what we measure. We leveraged our most valuable asset, a talented and devoted staff. And we recognized that there was little incentive for our staff to address these challenges head-on—to embrace the changes needed to overcome them. We had not paid a staff bonus since March 2000 for the 1999 business year.
We began to review and rework every facet of our businessour organization, our approach to membership and the marketplace, and how we provided resources to support the mission. We had to make difficult choices—to let go some staff, move others to new positions, and restructure our business process.
In 2004, we addressed four major goals—to stop the cash losses, to align expenses with revenues, to make the Foundation self-sustaining, and to position the Institute for future business growth. The results of our efforts follow:
I—Deliver a Cash Neutral Year: EXCEEDED TARGET . . . Our cash flow was a positive $596K, which represented a $1.2M positive swing from a negative $600K in 2003. Most important, we made no portfolio withdrawals in 2004, while we made $1M in withdrawals in 2003.
II—Hold Expenses to less than a 6% increase over 2003. EXCEEDED TARGET . . . Our operating Expenses were $12. IM against $12.2M in 2003—a drop of 1%—despite a one time charge of $730K for book inventory reduction which was necessary but not in the '04 Plan.
III—Make the Foundation self-sustaining. EXCEEDED TARGET . . . we gained $1.013M in new unrestricted cash gifts—25% over Plan of $809K. This allowed us to transfer $363K from cash to investments and $376K to USNI-paying all outstanding Foundation operating expenses for 04 and previous years.
IV—Reorganized the Institute to survive and grow in today's challenging nonprofit world. With your overwhelming support (95%), we have a new Constitution. It opens membership to all citizens who support the Mission of the Institute. It separates the Institute Board from the Editorial Board—recognizing that each Board requires different skill sets, experiences, and commitments. And it provides for stronger governance and fiduciary control by the Institute Board while maintaining our Sea Service heritage in both Boards.
Internally, we have established a business model built around "champions" who will lead the product groups that are at the epicenter of our business—Periodicals Group, Press Group, Conference Group, Member Services Group, and WEB Services Group. We have brought into the Institute new leaders with a wealth of experience in areas where we lacked critical expertise—book and periodicals production, market analysis, new product development, and fundraising. We have matched these business professionals with our staff professionals to gain the best from both worlds. Each champion has the responsibility, authority, and accountability needed to operate as a "business within a business" . . . and as an empowered leader focused upon clear goals. This concept of assigning full responsibility and accountability for discrete business units is a proven successful business model and ' one that will help the Institute maximize staff skills and teamwork to meet the challenges of the future.
Finally, we have reached outside our house to contract with business partners who can perform portions of the business process that are not core competencies of the Institute. Today, Marketing General, Inc. (MGI), is our partner in all membership marketing efforts. MGI offers a world-class resource in this critical area that we could not afford to acquire and support in-house. Likewise, we are partnering with Ware-Pak, Inc., to provide all warehouse storage and book shipping services.
This has been the most challenging year of change in the history of USNI. We have addressed every part of the business process and the Foundation fundraising model. We have established a new HR Performance Compensation Program, and we have outsourced portions of our business that are not core competencies. Our staff has endured layoffs and reorganization not seen in 13 years; yet they have risen to the challenge and met our goals in key areas.
We have been sustained in 2004 by several significant factors: A committed cadre of staff professionals; successful expense controls; a positive cash flow; a solid portfolio performance in a positive market year; and a strong increase in unrestricted giving to the Foundation. We are now positioned to undertake the most difficult tasks in this turnaround process-growing our membership, our revenues, and our fundraising.
We are grateful to you—our fellow members—for your continued strong support to the Institute as we transition through this critical period in our history. We have made a major course correction, and we believe our voyage planning is sound. But we cannot do this alone. We need your help. We are a member association, and we exist because of you. Help us to gain new members, especially in the active ranks; help us to provide better member services and products; and help us to tell the Sea Services' story to America. In short, commit as much of your time, your talent, and your treasure as you can to ensure this great icon of the Sea Services grows to serve succeeding generations of patriots in uniform. Contact us at [email protected]. We will keep the dialogue moving—the Independent Forum starts here.
Patrick M. Stillman
Rear Admiral, U.S. Coast Guard
Chairman of the Board
Thomas L. Wilkerson
Major General, U..S Marine Corps (Ret.)
Chief Executive Officer