One of the best parts about not having a real job (don’t let anybody fool you into thinking that “industry analyst” is a real job) is that I occasionally get to go to really cool events and happenings. God only knows why I get invited, but hey, I’m not going to turn down these opportunities.
I got one of those opportunities this week, when I was invited to attend Filene Research Institute’s Credit Union Sustainability Colloquium held at Harvard. Presenters included a couple of Harvard professors, a McKinsey partner, and the SVP of Strategy and Planning from CUNA Mutual. Attendees were mostly credit union senior execs, although there were a few directors there.
Peter Tufano from Harvard kicked off the session with a mostly academic discussion of the DuPont model, and a discussion of ROA and ROE using a case study that has been used at the Harvard Business School. To be honest, for me it was way too academic, but since the majority of CU attendees consider themselves to be finance people (Tufano asked them), it was probably a good refresher for them, and a lot more interesting to them than to me.
John Lass from CUNA Mutual followed this discussion by taking the conversation right into the heart of the credit union industry with a discussion of industry trends in ROA and membership growth, calling into the question of the sustainability of these trends. Until I get a copy of the slides, I’m not going to comment much on Lass’ presentation.
Following lunch was the presentation that engaged me the most. Harvard professor Frances Frei’s session was titled “Driving Excellence (and Sustainability) in Credit Union Operations.” Frei shared the four obstacles to service excellence:
1. Organizations that don’t have stomach to be bad at anything. Frei’s point was that while many firms profess to have strengths that they believe differentiate them or enable them to create competitive advantage, most firms don’t consciously decide what they shouldn’t be good at. In other words, what they shouldn’t invest as heavily in.
My take: In a report that will we published by Filene in the next couple of months on the Future of Member Facing Technologies, I argued that figuring what technologies will be coming down the pike is easy. Figuring out which technologies to invest in — and which ones to not invest in, or to invest less in — is going to be the hard part for many credit unions.
It’s reminiscent of the Peter Drucker view on strategy: That strategy is as much about figuring out what not to do as it is what to do. That led me to define a corollary to this: That firms that don’t decide what not to do, find themselves in a lot of doo-doo. For some reason, my corollary hasn’t caught on as much as Drucker’s definition.
2. Giving stuff to customers for free. Frei maintains hat a firm can’t sustain excellence if gives away too much free stuff (i.e., gratuitous service), because it needs a “funding mechanism.” Her point was that firms often delude themselves into thinking that additional “free” services help drive retention and loyalty, when, in effect, what it does is prevents the firm from generating income that’s need to invest in service improvements.
My take: The financial services industry is a poster child for this problem. Pat Swannick, who used to run the online channel group at KeyBank, once said to me “if every project that we invest in the name of improving customer retention actually delivered on its promise, we’d be at 800% retention.”
The past 10-15 years has seen a seemingly never-ending stream of “services” that banks and credit unions have had to determine whether to charge for or give them away: Online banking, online bill pay, e-statements, and more recently, PFM.
What was missing in this discussion, however, was the bigger issue. This isn’t simply a matter of “giving too much for free” and not being able to invest in service improvement.
It’s a fundamental business model problem. It’s the problem, or challenge, of aligning what you charge for with the value you provide to customers. And focusing on those things that are you going to make you the most money.
Frei did a great job of showing examples of the tradeoffs that a couple of firms have made in determining what to charge for/what to invest in. The problem for most organizations — especially credit unions — is that identifying and defining those tradeoffs is not an easy task, let alone making the tradeoff itself.
3. Great organizations design systems that enable typical employees — and not just the best ones — to achieve excellence. Frei pointed to Commerce Bank (now TD Commerce) as an example of this. By hiring for attitude — not aptitude — they were able to hire people who could deliver good customer service. But that wasn’t sufficient. By keeping their product set very simple, and by being upfront that they wouldn’t or couldn’t match the better rates offered by competitors, their employees didn’t need to have strong aptitude.
4. Firms have to get customers to behave differently — and keep customers liking them even more. Frei’s example of this was Starbucks who has, over time, trained customers (or tried to train them) on how to place their orders in an attempt to improve service efficiency.
My take: Again, another example where financial services could be the poster child. For years, FIs have been trying to get customers to transact and self-service online.
While Frei presented a good example of what one firm is doing, she didn’t present a framework for how credit unions should go about doing it. It’s something I’ve been calling “right-channeling” for the past ten years: The process by which you determine which behaviors need to be changed and how to go about changing those behaviors. I’ve written about this on this blog and on my prior one.
Following Frei on the agenda was Dorian Stone from McKinsey with an excellent presentation on Service Design Innovation (side note: why do so many consultants think it’s important to cram every little bit of information they have on something into every damn slide of their presentation?). Concluding the day was a discussion panel involving the speakers.
Overall, the colloquium was excellent, and hats off to Filene for doing this, and my thanks to them for letting me attend. I’m sure the other attendees felt it was well worth their time and effort to attend, and I have to believe they came away with a lot of fodder for thought regarding the question of credit union sustainability.
To the broader topic of sustainability, however, I do want to share this thought/impression that I came away with: That many people in the industry (not to mention academia) suffer from Functional Vision.
If you know what tunnel vision is (constricted vision, narrow-mindedness) then you can easily guess what Functional Vision is: The inability to see beyond the construct of your own business function.
Both Tufano’s and Lass’ discussion of sustainability centered strictly on financial ratios. On a number of slides, Lass would present a negative trend in ratios, and ask “is this sustainable?” as if: 1) external factors regarding the overall health and direction of the financial services — not just CU — industry didn’t matter, and 2) the variation in individual CU performance comprising the industry trend didn’t matter.
My answer to his questions were “yes, they’re sustainable” because over time, the CUs that are dragging those overall ratios down are going to continue to disappear. At the end of the day, Lass shared a comment he made to a client in which he said “if we could design the CU scratch today, would we have 7,600 CUs, and 38 loan platforms…?” (he had some other stats that I failed to capture).
It’s a terrible question, and the completely wrong question to ask. It presumes or maybe even insinuates that we could design a system as complex as the credit union industry from scratch. Are you not familiar with the lessons from the USSR and Cuba? Planned economies don’t work. (Our current administration in Washington is learning this, the hard way).
So what would be better Mr. Lass? One loan platform that doesn’t meet the individual needs of every CU and forces everyone to do things one way? Should we have just five really large credit unions instead 7,605?
When you ask a question like “if we could do this from scratch, would we do it the same way?” you pose a theoretically interesting question, but a question better suited for a cocktail party with drinks than a boardroom discussion. We can always design something that’s more efficient, but — to Frei’s point about identifying tradeoffs — would it necessarily be more effective?
The ultimate question about credit union sustainability does not boil down to a couple of financial ratios. And I strongly suspect — although I admit to having absolutely no proof of this — that the CU execs who use downward trending industry-wide statistics to sound the alarm on CU sustainability are running the CUs that are underperforming the rest of the industry.
Fantastic blog post Ron! Thanks for not only the recap, but your insights as well. Love Swannick’s quote ““if every project that we invest in the name of improving customer retention actually delivered on its promise, we’d be at 800% retention.” You make a great point that everything you give away for free is costing the organization lost opportunity to do other things that might improve the firm and what it can deliver to its customers/members. There is an argument to be made for ‘freemium’ models, which is what we do at EverythingCU.com, but it has to be understood exactly what you are giving away for free, and why you are doing it. Everything else should/must be charged for.
I also completely agree that the old CU mantra/business model of “try to do everything that banks do so we can become more and more members’ PFI” is a relic of pre-internet days. With more choices than ever, FI’s need to focus on what they are great at, and make those tough choices about what to leave behind. They are so entrenched in the thought that the will lose members if they don’t do EVERYTHING, that they are held back by things they are not good at. What they don’t realize is that consumers ALREADY spread the word amongst themselves about which banks/CUs are better or worse at which things. (I have a friend who is a fishing enthusiast who knows EXACTLY which CU knows boats and does boat lending well, and tells his fishing buddies, just as an anecdote. He also tells these friends which banks/CUs to avoid if you are buying a boat. This kind of thing happens ALL the time in all sorts of different financial products, and social networking makes it happen more/faster.)
I hadn’t even considered that a smaller product set makes for happier, less confused employees, but that should never be overlooked in importance.
Also agree about the myopic view of looking at the CU’s nationwide overall trend. There are CUs that are kicking B#†† on a number of metrics. More important is to find out what they are doing and then see if the same success principles can be applied/adapted/repurposed to your own CU.
Great post! (Could use a better title though…) Thanks for the summary, and more importantly, for the analysis. I completely agree with everything you said except for one thing. There’s more to it than just “giving stuff to customers for free.”
I think the key isn’t to ask what should/shouldn’t we give away for free. The key is to find the right balance between free and fee. But that balance shouldn’t be driven by revenue alone.
The primary driver for determining whether to make a service free or fee should be the behavior that you want to encourage or discourage. You should encourage good member behavior with free services (online banking, self-service, anything that makes your operations more efficient) and discourage bad member behavior with fee services (late fees, overdraft fees, stupid question fees).
I think if you drive the right member behavior with free vs. fee then you can manage your operation to get the revenue you need because you’ll be attracting and retaining profitable members. But if you decide to make the wrong services fee services based on revenue alone, then your members will leave and take your revenue with them.
Evhen: Thx for your comment. I’m not sure what you’re disagreeing with me on. I think we’re in sync here, especially about finding the right balance. For me, the best example of this I know of is the Grateful Dead. Before them, no band dared let their fans record concerts and distribute the tapes freely. But by “giving away the music”, they made money where it mattered to them: In ticket sales and merchandise.
If giving away something helps to increase revenue from something else, then for chrissakes, give away a lot of it.
Where a lot of businesses get caught up, however — and banking is a prime example of this — is that they often delude themselves into thinking that what they’re giving away is driving revenue from other sources, where there’s no definitive proof or evidence of it.
Great post. Credit unions -as well as most other organizations – need the reminder that strategy is about choice, and you articulated that well.
You nailed it with this comment: “It’s the problem, or challenge, of aligning what you charge for with the value you provide to customers.” Perfect! I wish I’d said it 🙂
Thanks for the comment, Beth. And feel free to use the alignment comment as your own. I probably stole it from someone else. 🙂