Article Abstract

“One of the more prevalent corporate objectives in the credit union community is to elevate the number of products per member/household. The thinking goes that if a credit union defines an objective to improve that number it will result in an institutional “sales” focus, which in turn will drive greater product penetration, usage, etc. As far as big corporate objectives go, this one fails not only to inspire the sales effort but also to drive the level of desired member engagement.”

The full text of the article can be found on cuinsight.com.

About CU Insight

CUinsight.com is an independent source connecting the credit union community to industry news, press, career opportunities, posts, vendors, and each other.

Here is the white paper’s executive summary:

Continued uncertainty in the financial services industry makes the need for accurate, insightful, and agile forecasting and planning greater than ever. However, in what seems like an ever- changing environment, good forecasting can be challenging. Credit union CFOs should be especially vigilant given a hypercompetitive marketplace and the growing regulatory burden in the industry.

This white paper identifies the issues credit unions face in producing good forecasts in volatile times and highlights several strategies/best practices. CFOs and industry consultants contributing to this virtual financial roundtable discussion share how to remain agile, be more efficient, cope with all the competitive and regulatory changes in the industry and focus on what the numbers mean rather than just what the numbers are. Specifically, this white paper presents:

• A strategy for laying the proper foundations for forecasting and analysis;
• The need to forecast a likely range of possible futures;
• Strategies to develop accurate and useful forecasts that address key financial risks, organizational performance and profitability, pricing, competitive analysis, and cost controls;
• The impact of new regulatory requirements and guidance; and
• The role of the CFO as a strategic leader.

The white paper can be purchased via the CUNA CFO Council website at:

http://www.cunacfocouncil.org/tools/research.html

• Ensuring the basis for an effective corporate governance framework
• Preserving the rights of member/owners and key ownership functions
• Ensuring the equitable treatment of member/owners
• Preserving the role of stakeholders in corporate governance
• Ensuring and engaging in disclosure and transparency
• Carrying out the functional responsibilities of the board, which include:
  • Managing an effective board composition
  • Evaluating board and CEO effectiveness
  • Managing CEO compensation/oversight
  • Strategic planning
  • Establishing and maintaining board procedures
  • Engaging in board interaction
  • Reading and understanding board information
  • Establishing and maintaining organizational policies

Beyond the responsibilities required by regulation, rules, and policy, boards also have responsibilities related to the framework of board values and culture.

Because values and culture are unique to individual institutions, there is no “common” list of board values/culture responsibilities. This presents a major challenge to board effectiveness mainly because as values and culture are not easily identified, many boards do not fully understand (or cannot clearly communicate) the responsibilities associated with their culture. As a result, new board members are often chosen because of their skills relative to legal or regulatory requirements, but without much regard to the “cultural” skills they possess (or don’t possess, as the case may be).

For boards to be truly effective, board members must have skills that support the institution’s cultural requirements as well as legal and regulatory requirements.

When nominating candidates to run for available seats on the board of directors, a board must clearly communicate to all potential candidates during the nominating process or during regular credit union updates not only the skills required to live up to formal (legal/regulatory) board requirements, but also informal (values/cultural) requirements.

As a general rule, then, to ensure leadership continuity, a board must:

• Clearly define the board’s values and culture;
• Clearly define required formal and informal board skills;
• Ensure that the nominating committee both knows the required skills and is capable of evaluating candidate qualifications in light of such skills;
• Ensure that nomination criteria are regularly and effectively communicated to the membership.

The process Glatt Consulting recommends, outlined above, ensure two outcomes. First, the board of directors will develop a clearly defined catalog of the formal and informal skills required to be a functional, fully-engaged board member.

Second, the board itself will have a better understanding of its values and culture, an understanding intuitively known by long-serving board members but that is not formally documented in a way that makes for effective communication to potential board members and members of the nominating committee.

The following section includes additional information designed to guide boards through the succession plan decision-making process.

Succession Plan Decision Points

Board Values/Culture

Culture is defined as the “attitudes and behavior characteristic of a particular group.” Values is defined as “one’s judgement of what is important in life.” It is the shared values of the members of a group that combine to define the group’s culture.

Most boards have a unique culture, evolved over many years through the collective decisions made by its members. It is critical that a credit union board formally define, to the extent it can, what truly makes up this cultural.

Examples of board cultural identity defined by other Glatt Consulting clients include:

• Ethical behavior
• Consensus seeking (versus unanimity)
• Professional skill diversity
• Concern for members
• Moral values

For clients, these types of cultural touchstones were further explained in one or two paragraphs to ensure clarity of meaning for both active board members and potential board recruits.

Board Skills

The board as a whole body must posses certain skills to be effective in carrying out its many responsibilities. Some skills are required by regulatory authorities, while other skills are specifically related to the unique values and culture of the organization.

It is important to note that every member does not necessarily have to possess each skill directly. Rather, it is the combined skill set of individual members that must equate to the full skill set required for effective governance.

Boards must identify the high-level skills that the board as a body must possess to be effective at governing, and to live up to both regulatory and cultural requirements.

Examples of board skill requirements defined by other Glatt Consulting clients include:

• Prudence
• Business Sense/Business Practices
• Financial Knowledge
• Interpersonal Excellence
• Adaptability to Change
• Critical/Analytical Thinking
• Listening Skills
• Political Savvy/Advocacy

As with elements defining cultural identity, these types of skill requirements were further explained in one or two paragraphs to ensure clarity of meaning for both active board members and potential board recruits.

Individual Board Member Skills

Individual board member skills can be classified into two categories. The first is generic governance skill, defined as the skill-set required for a board member’s active participation in credit union governance processes. The second is functional skill, defined as skill in a specific discipline that benefits or enhances the board’s overall capabilities. Each category is further defined below.

Generic Skills

Generic skills are those skills required for active participation in credit union governance processes, meaning skills or experience that every board member should possess.

Examples of individual generic skills/experience defined by other Glatt Consulting client’s include:

• Experience in or knowledge of credit union business model/philosophy/history
• Proficiency in general financial statement analysis

With regard to financial statement proficiency, most clients define that while it is preferable for prospective board members to possess required financial knowledge at the time of nomination, financial knowledge/skills for new directors will usually be trained during new board member orientation processes.

Functional Skills

Functional skills are a reflection of the skills from the previously-referenced listing of board skills that the board believes need reinforcement, or are necessary to further enrich the board, at the time of nomination of new board members. For example, if a board has defined Political Advocacy as a critical skill-set and at some point finds that no one on the board has defined experience in the inner-workings of political advocacy, then it will determine that the board’s collective knowledge is not as strong as it should be. The functional skills required, then, during the nomination process could be “current or past experience in political advocacy.”

Examples of functional skills other Glatt Consulting clients have deemed necessary to have represented by at least one board member include:

• Human Resource Management
• Finance
• Business Management
• Negotiation
• Strategic Planning/Visioning
• Political Relationship Development/Lobbying

Supplemental Factors

In addition to the cultural and skill components defined as critical requirements for board service, many Glatt Consulting clients also define other factors that might be used to supplement the evaluation and nomination process when multiple candidates are equally qualified according to the cultural and skill requirements defined above. These factors have included:

• Board member geographic distribution;
• Board demographic diversity;
• Diversity reflective of the field of membership.

Boards must be careful in their implementation of such factors, and work to ensure inadvertent discrimination does not occur due to such factors. 

Recruitment, Nomination & Orientation

Recruitment

Boards can engage in board member recruitment in a number of ways. The most common way credit union boards call for nominees is to issue a broad request for candidates. This process, however, tends to result in few, if any, candidates. When no one responds, boards tend to come to the belief that there are no willing volunteers within the membership ranks. When candidates do respond to such a broad call, they often lack appropriate or relevant skills – leading to the belief that the only choice is to maintain incumbent board members and/or approach “friends” of board members for service.

A more targeted, thoughtful approach to locating and nurturing potential board candidates does exist. Rather than issue broad calls for candidates, a board can maintain active awareness of, and documentation on, a broad listing of suitable candidates, and turn to these candidates for nomination to open board seats. In the interim, during such times when no board seats are open, these same individuals can be engaged with special projects and other advisory responsibilities as opportunities arise.

Process Steps

In order to maintain such a broad, informative listing of suitable board candidates, boards should engage in the following activities on a regular basis:

• Regularly communicate clear expectations regarding board service to the membership, including include the basic components of board culture, required skills, and specific job responsibilities.
• Regularly identify/solicit potential candidates.
• Develop and maintain candidate/volunteer dossiers.
• Regularly update candidate dossiers, amend candidate listing as necessary.

Process Responsibilities

A board must decide how to assign general recruitment responsibilities. For most Glatt Consulting clients, the following groups have some degree of process responsibility:

• Credit Union Staff
• Board of Directors
• Nominating Committee

It is important to clearly delineate process responsibilities to ensure the process runs smoothly. In addition, boards will be wise to not over-delegate board member recruitment responsibilities to staff.

Nomination

At any given moment, and for many reasons, a board may be faced with an open board seat. The challenge for all boards and nominating committees in this situation is to ensure that the position is not only filled by an individual possessing the many skills required for service, but by an individual who is equipped to interact with the boards culture in positive, constructive ways.

If a board has defined the variety of skills and cultural requirements unique to the credit union’s board, and if it has also defined a methodology for maintaining broad knowledge of qualified candidates, then the board will be in position to use its knowledge to ensure that the best candidate(s) is nominated to serve when a seat on the board becomes available.

The following defines an effective nomination process, with consideration to utilizing the recruitment processes defined in the prior section:

Process Steps

• Define skills required to fill outstanding board skill requirements. This step ensures that nominated candidates possess the appropriate/needed skills required for the board to function at its highest level. It involves having the board define for the nominating committee the functional skills the board requires at the exact moment new directors are to be nominated.
• Review candidate dossiers (and unsolicited bids for board seats) to identify candidates possessing required skills. This step involves reviewing the up-to-date dossiers on potential candidates, seeking those with skill-sets that best match those defined in the prior step.
• Schedule and hold interviews with prospective candidates to gauge interest, cultural fit, etc. This step involves discussing with potential candidates their interest and experience, as well as the credit union’s own expectations regarding board service.
• Nominate candidates for board position(s)/engage in ballot process (utilize current credit union balloting procedures).

Process Responsibilities

A board must decide how to assign nomination process responsibilities. For most Glatt Consulting clients, the following groups have some degree of process responsibility:

• Board of Directors
• Nominating Committee

Nomination Scenarios

The responsibilities defined above are general, and not necessarily reflective of the “flow” of a nomination through the process. Nominations for board seats and other volunteer positions come about either through “normal” means, such as the end of a board member’s term or the creation of a new ad hoc committee, or through unexpected circumstances such as a sudden resignation. The flow of a volunteer candidate’s nomination for each scenario can be managed as follows:

• Normal…
  • Board: The board recognizes the opening(s), defines its current functional skill requirements, and then informs the Nominating Committee of the opening and the Board skill requirements.
  • Nominating Committee: The Nominating Committee reviews the position skill requirements, and pulls from its dossier of candidates those that match the skill requirements.The Nominating Committee evaluates candidates, selecting the candidate(s) suited for the open position. The candidate(s) are then submitted to the Membership for review and vote.
  • Membership: The membership votes for the candidate(s).
• Unexpected/Interim…
  • Board: The board recognizes the opening(s), defines its current functional skill requirements, and then informs the Nominating Committee of Board skill requirements.
  • Nominating Committee: The Nominating Committee reviews the position skill requirements, and pulls from its dossier of candidates those that match the skill requirements. Candidates are then passed back to the Board for review.
  • Board: The Board reviews and selects a candidate to serve as an interim member of the board until the end of the term/annual meeting. At that time, the interim member is incorporated into the “normal” nomination process.

Bylaws should be consulted to ensure this process is in accordance with credit union requirements.

Orientation

Though this process defined above will likely result in the selection of a board member already suited to the board’s cultural and skill-set requirements, it is nonetheless critical that incoming board members be formally acquainted with the board’s cultural and skill-set expectations/requirements.

Other Glatt Consulting client efforts have ranged from a simple meeting between the new member and the Chairman of the Board to more elaborate orientation programs that include some degree of training on financial statement analysis. In most cases, clients have wisely decided against delegating orientation to credit union staff. 

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Glatt Consulting offers assistance to boards interested in establishing the process and procedures defined in this document. Most often this assistance involves facilitating the discussions that lead to key decisions regarding culture and skill requirements, and documenting these decisions in a board policy format. In some cases, we will also assist credit union boards by managing the initial process of collecting and cataloging credit union member dossier submissions.

Fees are based on the scope of our assistance.

For additional information contact Glatt Consulting at (888) 217-5988 or via our online contact form.

(1): The principles outlined in the document are excerpted from the Organisation for Economic Cooperation and Development’s Principles of Effective Governance

The articles can be found here :

http://www.cutimes.com/2012/05/11/twos-good-company-in-dual-ceo-turnaround-at-point?ref=hp

The Problem with the CEO Evaluation Process

We have been asked on numerous occasions to work with boards to evaluate and fix existing CEO performance evaluation programs. Most often these programs have been designed by an HR consultant or specialist of some kind, and involve all sorts of “complicated” formulas designed to elicit board feedback on performance criteria, determine a score, and reflect that score back to the CEO as a measure of their performance. We are asked to “fix” these programs because boards find them too complicated to carry out and are confused by (or disagree with) the scoring systems.

A common theme from client to client is that the systems in place rely on opinion-based performance analysis, and are set up to survey board members with regard to CEO performance using a scale. Typically the scale ranges from 0 meaning strongly disagree, to 5 meaning strongly agree. Now, think about evaluating the performance illustrated below using the all-too-familiar 0-5 scale:

Return on Assets: Goal: .5, Actual: .25

Or, how about evaluating performance against this common “subjective” question, again using the 0-5 scale:

The Credit Union is operating in a manner that is consistent with our mission and vision under the leadership of the CEO.

Rather than go into great detail explaining the scoring methodology, I’ll simply get right to the crux of a common problem. This method of performance evaluation is too much like the “What shade of blue is the sky?” question above. It is too vague, and leaves a proper response to the imagination of individual board members. Put another way, it is like the famous comment from Supreme Court Justice Potter Stewart regarding pornography. He said…”I know it when I see it…”

A More Effective Methodology

Now some things can be left to the eye of the beholder to determine whether “it is” or “it isn’t”, but with regard to CEO performance there is a path to a better means of performance assessment than such subjective methodologies. Again, consider this particular CEO objective:

The Credit Union is operating in a manner that is consistent with our mission and vision under the leadership of the CEO.

To begin with, a board would do well to throw out the 0-5 scale of assessing CEO performance in this area and simply turn it into a “yes” or “no” question. The CEO either did operate the credit union in an appropriate manner or did not. Yes…or no.

Now, in looking at answering this question with such limited options – only two! – a particular problem with the evaluation criteria itself emerges. Even yes or no responses are left to a great deal of subjective interpretation. This should lead to an “a ha” moment. The question itself is shown as too vague to hold a CEO accountable to it, not to mention base their compensation, bonus, etc. upon it.

When we begin talking with boards about improving their CEO performance evaluation programs, one of the first things we try to nail down are the specific sets of performance criteria to which they want to hold their CEO accountable. The statement above is a good start, but we would drive boards to further clarification. Rather than let a board get by with a vague connection between operations and mission/vision, we encourage them spell it out. For example, what specifically will the credit union be doing if it is operating in a manner consistent with its mission/vision? That is our question to boards, and their specific responses begin to form the real basis for CEO performance evaluation.

Why is this kind of specificity important? For starters, consider this fact in light of the example of evaluation criteria listed above: board members don’t live credit union mission and vision every day. The obscure reference, then, to mission and vision in the performance evaluation criteria is sure to be met with an interpretation during the once-a-year evaluation – an interpretation not only of whether the CEO is meeting the mission/vision but an interpretation of what the mission/vision statements actually say. Far better for board members to be clear about the specifics of their expectations than to have to interpret their expectations. Not only will more specific criteria greatly strengthen their evaluation of performance, CEOs themselves will be much clearer on board expectations.

An interesting side note to this last point. You would think that any CEO involved in this kind of vague, subjective assessment process would be pulling their hair out because the evaluations are not based on specific performance goals. Why, then, don’t we have more short-haired credit union CEOs? Because the more vague the performance criteria, the more likely the CEO will receive a slew of “Agree” and “Strongly Agree” responses. In other words, the existing evaluation process more often than not leads to a false consensus suggesting the CEO is doing a great job. If I am a CEO who year after year “reaches” for the same subjective performance evaluation goals, and successfully attains them, why change the process!?

For really effective CEOs and/or attuned boards, however, performance evaluation subjectivity is a frustrating thing to endure. I recall one meeting where a CEO, fed up with the vagaries of board expectations, nearly shouted, “I just want to know what YOU want!” I’ve seen boards express similar frustrations, but with the vagaries of the performance evaluation process itself.

So back to the simplicity of the “yes” or “no” question. Boards, and this is most surely an activity to be driven by boards (though CEO involvement is recommended), must begin looking at the criteria they currently hold CEOs accountable to, and asking whether the evaluation of the CEO’s performance in light of this criteria can be assessed via a yes/no response. If “maybe” pops up an an optional response in addition to yes or no, then the criteria is not specific enough and the board will need to dig to greater depths in order to uncover its root expectations.

While there is more to the process, the important point is that effective CEO performance evaluations all begin with establishing the simple ability to say “yes, the CEO did” or “no, the CEO did not” in the context of clear, and instructive performance criteria.

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Glatt Consulting helps credit unions answer important strategic questions. We especially excel at answering questions concerning corporate direction, financial objectives/expectations, merger, succession, CEO compensation and performance evaluation, branding, growth, execution and budgeting, efficiency, workflow, and vendor selection. Contact us at (888) 217-5988 to talk about how we might help your credit union.

In 1985 Harvard professor Michael Porter wrote a book called Competitive Advantage in which he illustrated concepts called the value chain and value system.

The basic idea of the value chain is that the categories of activities in which an institution engages to deliver its products or services link together, one category to another, like a chain. The better and stronger the chain, the more efficient the organization will be in delivering value to its customers and ultimately in extracting a greater margin from its activities. A value chain illustration is shown in the image below.

Value Chain



The value system, as Porter envisions, encapsulates the institution’s own value chain in something bigger – a whole system of institutional value chains designed to feed and support the value of the connected parts. A value system illustration is shown in the image below.

Value System



Vendors, Value Chains and Value Systems

As illustrated in the value system diagram, credit union members have their own value chain that credit unions must support via relevant products and services (i.e., via the “value” a credit union provides). If what is offered by the credit union is not strongly connected to the value members desire, then the link between credit union and member will be weak and easily broken. Furthermore, if a credit union’s VENDORS have a similarly weak link to the value the credit union hopes to deliver, then those vendors may actually weaken the credit union’s ability to link to and support member value chains.

Credit union vendors are part of the broad infrastructure that drives the delivery of products and services to members. Vendors that properly support credit union strategy will strengthen the infrastructure, greatly enhance the credit union’s competitive ability, and help make credit union members happy. Vendors that do not match credit union strategies will weaken the credit union, leading to poor service delivery, competitive disadvantage, and broad member dissatisfaction.

The Importance of a Defined Value

How, then, is a credit union to ensure that its current vendors, and any vendor it selects for that matter, offer positive contributions to the credit union’s value chain? With a value-based method of vendor analysis, a method that starts with establishing an institutional ability to answer this important strategic question:

How do we know if a vendor is right for us?

A credit union will know if a vendor is “right” if that vendor enhances the institution’s ability to deliver its value proposition, plain and simple. However, most credit unions answer this question in a practical, operational or tactical way rather than a strategic way. For example, most credit unions would respond to a question of, “How do we know if an e-statement vendor is right for us?” by stating that the vendor offers e-statements, and that the e-statement platform integrates with the core system, etc.

The proper approach to this question is from a broad strategic perspective. Consider this basic response:

We know if a vendor is right for us if it supports the value we hope to offer our members.

The reason most credit unions address the “vendor fit” question from a tactical perspective is because many can’t answer the question from a strategic, value-driven perspective. Why? Many have no articulated, defined value proposition, and if there is no defined value proposition offered to members, there is no defined value to use for analyzing vendors.

Credit unions with an in-depth knowledge of the value they wish to deliver to members will make more effective decisions with regard to vendor selection because the decisions will be based on vendor ability to strengthen the value chain and, ultimately, the broader value system. Vendor features certainly matter, but perhaps not nearly as much as vendor support for the promises a credit union is making to its membership.

Value-Driven Vendor Assessment – An Example

Suppose a group of friends decide they want to open a company that sells good coffee. At the moment they make that decision, they have established a specific expectation of the value their company will offer consumers – good coffee.

Think about the impact of that strategic decision on vendor selection. The source of their coffee beans must have a similar commitment to quality. Poor-quality coffee beans make for poor-tasting coffee, so they cannot choose a provider of low-quality coffee beans as a vendor lest they violate their own value proposition.

Let’s carry the strategic decision-making a step further. Not only do they decide to sell good coffee, but they want to sell that coffee to consumers in their own store rather than via 3rd parties (through diners and doughnut shops). With regard to the store, they decide that they want consumers to sit, sip and enjoy rather than to carry out, and that they want them to do this in comfortable chairs and couches rather than at booths and counters.

We can develop an extreme number of sample decisions, but let’s stop here. The totality of the decisions above define the value of the coffee shop (good coffee enjoyed in living-room comfort). Our fictional coffee shop knows a vendor is right if that vendor supports/elevates/enables the shop’s ability to offer good coffee enjoyed in living-room comfort.

Credit Union Value Propositions and Vendor Evaluation

Consider the following examples of credit union value proposition:

• Rate/price leader
• Location convenience
• High-tech convenience
• Personal service

Any one of these value propositions defines specific types of vendor evaluation/selection criteria. If you are a rate/price leader, for example, then any vendor you utilize should help you offer the best rates and prices through more efficient and cost-effective operations. If your value is based on locational convenience, then any vendor you utilize should allow you to expand your locational convenience more efficiently and cost-effectively. So on, and so forth.

Of course the actual evaluation and/or selection of a vendor is more complicated than this, so let’s explore the minutia by looking at a vendor evaluation scenario for a credit union with “price leadership” (highly-competitive rates on all products) as its value proposition.

Again, the first question to address is vendor fit with regard to the value proposition. For a “price leader” credit union whose value proposition is highly-competitive rates, a vendor is first judged by its support of the credit union’s ability to offer highly-competitive rates. Vendors that cannot illustrate at least surface-level support of the value proposition are excluded from further consideration.

Once the basic vendor connection to credit union value is established, the next task in vendor evaluation is to separate the degrees to which various vendors support the value. The only way to do that is to have an institutional understanding of the key components that make up the value proposition. For a price-leader credit union these components might include:

• Operations costs;
• Staffing (costs and level requirements);
• Systems/process efficiencies;
• Equipment requirements.

Vendor evaluation and selection is a process of determining which vendor has the highest degree of support for the value proposition (we say highest degree because we know there are no perfect vendors in the world). In any case, determining the degree of fit requires that the vendor(s) in question be evaluated for their ability to support the components making up the value proposition.

This last paragraph illustrates a key difference between proper vendor evaluation and selection vs. the practices that are pervasive in the credit union community. Most credit unions make decisions on vendors (performance evaluation, selection, etc.) based on the features of the vendor’s offering – or as I said earlier, from a tactical or operational perspective. For example, credit unions concerned with cost, but without a value-driven connection between cost and value proposition, often choose the low-cost provider rather than the provider that helps them offer the lowest costs. There is a BIG difference between these two points of analysis!

Conducting the Vendor Analysis

Getting back to our fictional price-leader credit union, we have identified the key components that drive its price-leader value proposition, which the credit union can then use as a basis for vendor evaluation and/or selection. Now let’s suppose the credit union has decided to offer a home banking platform that allows credit union members to conduct a variety of transactions online, and that the credit union made this decision because they want to minimize the growth of branch costs with the hope that operating expenses decrease enough to drive even more competitive rates.

The credit union must, of course, collect a listing of providers that offer such a platform. Once the listing is complete, evaluation is the next activity. Again, we are evaluating not on product features, but on the fit of the vendor (company + product) with the credit union’s value proposition.

In the table below I have illustrated such an evaluation, comparing two vendors against the value proposition components for our fictional credit union (click for larger image):

Vendor Evaluation Matrix

I will go into a more detailed description of the table components shortly, but consider the results of the analysis. The bottom row lists the weighted score for each vendor. The higher the score, the better the vendor supports the totality of the elements making up the value proposition. What is interesting about the comparison of the two vendors is that the vendor with the best cost score (Vendor A) is not the best overall fit for the cost-leader value proposition (Vendor B). The bottom line is that Vendor B has the higher degree of support for the credit union’s value proposition, and therefore would be the best strategic choice even though it is not the low-cost solution.

Deconstructing the Table

So how does this table work? How is the analysis conducted?

Lets start with the components column. Again, the listed components reflect the core components making up the price-leader value proposition of our sample credit union. To start, your credit union must know what components drive the value your credit union offers members.

Once you have your component listing, know that all evaluation categories are not necessarily equal. For our sample credit union, considering it’s price leader value proposition, the cost implications of any particular vendor are more important than other components. This is reflected in the weighting column, where cost is allocated 40% of the total weight. You will need to define the weighting for the components making up your credit union’s value proposition.

The next column to consider is the rate column. The scale we use in the sample is 0-5, with 5 being the best. You can use any scale you choose, but we find that 0-5 provides enough flexibility to properly rate a vendor’s support of specific components. As an aside, doing this analysis is the most challenging part of the process. Rating a vendor a 5 versus a 4 on any one component can make a big difference in the vendor’s score, so being sure on your scale measurements is very important – both in establishing the scale (what it takes to receive a 5 vs a 4 for example) and in using it for vendor evaluation.

The final column is the score column, which is simply the result of the rating given the vendor multiplied by the component’s weight. These columns are then totaled to determine each vendor’s weighted score, which is a reflection of each vendor’s degree of support for the credit union’s value proposition. The total score is shown in the last row of the table, and again, the higher the score the greater degree of support for the credit union’s value proposition.

A side note: In some respects the features of a vendor’s offering are incorporated into the analysis process. For example, in our scenario one home banking platform might be offered by the core system provider and another offered by a 3rd party that requires its own hardware. The impact on the scores for staffing and equipment would reflect the differences between vendors. That said, it is still useful to compare features of competing vendors, but as supplemental information to the value-based analysis. Call this a “score+features” analysis, where the score is given the greater consideration.

A Little Pushback on the Process

Some credit union executives I have discussed the process with believe that the process itself is too simple to be usable in decision making. My response is always that the effort involved in determining the score to give a vendor for the various categories of analysis is masked by the simplicity of the table and process description. Yes, the calculation of a weighted score is a simple concept, but truly knowing and understanding the elements that make up a value proposition and using those elements to analyze, in depth, a vendor’s impact on the value proposition, is quite a complex endeavor – especially for mission-critical vendor selection projects such as choosing a core system.

This leads me to a discussion I had once with a credit union CEO about their core system. The credit union had decided that their value proposition was providing a high level of personalized financial service and support to members. As we talked about their value proposition, the CEO commented that the core system made it difficult to extract the data necessary to efficiently deliver the more personalized service they wished to offer. I asked when their contract was up, and she said they had just renewed the contract the month before.

From the year they decided on sticking with the status quo for their core system, their HealthScore, a measurement of credit union performance calculated by Glatt Consulting, went from generally stable to serious decline. As of this post their score is 1.727, substantially less than the industry average of 2.245.

The point I am making is that they made a major decision to (re)invest in a system at odds with the very value they wished to provide. My suspicion is that the more they pushed to offer better service, the harder their system made it for them to deliver. And to the members who were lured by the promise of a defined service benefit… they quickly found that the credit union could not live up to its promise. The credit union’s own value chain crumbled due do weakness in the connections between vendor and credit union, and credit union and member.

The big question is why the made the choice to stick with that particular core system? They felt that it was a better fit given their budget.

Had they done the more comprehensive vendor analysis outlined in this post, however, they would have found that while the budget-friendly features of the core system would have been a plus in favor of the vendor, they would have qualified its great weaknesses in other, critical areas making up the credit union’s service-oriented value proposition. Had they gone through the exercise they might have found a solution with attributes offering far greater support for the value proposition. Instead, they looked at licensing costs, plus conversion costs, and decided, because of cost, to stay put – to their unfortunate disadvantage.

Vendors Must Add Value

Because there is no perfect vendor, the task for any credit union in evaluating vendors is to understand the degree of vendor support for the value a credit union hopes to offer its members. Only by evaluating vendor options from this value-based point of view can a credit union be reasonably sure vendors are actually adding value. While many credit unions have not had to think too much about vendors over the long history of the industry’s existence, the ever-increasing role vendors play in service delivery to members will require a much greater commitment to proper evaluation and selection in the future.

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Glatt Consulting helps credit unions answer important strategic questions. We especially excel at answering questions concerning corporate direction, financial objectives/expectations, merger, succession, CEO compensation and performance evaluation, branding, growth, execution and budgeting, efficiency, workflow, and vendor selection. Contact us at (888) 217-5988 to talk about how we might help your credit union.

We help credit unions answer important strategic questions. We especially excel at answering questions concerning corporate direction, financial objectives/expectations, merger, succession, CEO compensation and performance evaluation, branding, growth, execution and budgeting, efficiency, workflow, and vendor selection.

Download our latest About Glatt Consulting flyer to learn more.

The articles can be found here :

http://www.cutimes.com/2012/04/15/merger-world-is-topsy-turvy

The article can be found here:

http://www.cutimes.com/2012/04/13/camel-disclosures-would-cause-more-panic-among-man?ref=hp

The full text Mr. Williams’ essay, titled “Opening the Temple,” can be found on the San Francisco Fed’s website here:

http://www.frbsf.org/publications/federalreserve/annual/2011/2011_Annual_Report_Essay.pdf

Senior Loan Officer Opinion Survey on Bank Lending Practices: Net Percentage of Domestic Respondents Tightening Standards on Consumer Loans, Credit Cards

This chart, linked below, shows trends regarding consumer underwriting standards. If the net percentage is positive, then the majority of respondents are reporting that their institutions are tightening standards (i.e. making it harder to obtain loans). If the net percentage is negative, then the opposite is true – standards are being eased making it easier to obtain loans (easier being relative!). Currently, the chart is in negative territory, meaning that the majority of respondents are continuing down the path of easing standards. Does this mean competition will continue to heat up? If so, are you prepared? Keep an eye on this data – it is updated every quarter.

http://research.stlouisfed.org/fred2/series/DRTSCLCC?cid=32239

Delinquency Rate On Single-Family Residential Mortgages, Booked In Domestic Offices, All Commercial Banks

This chart, linked below, illustrates delinquency trends for single-family residential mortgages. Though this particular chart does not include credit unions, it is nonetheless illustrative of the challenges that still exist in the broader mortgage market. Though the numbers are down from the 2008-2009 high, the chart still shows quite a contrast between today’s reality and the performance history we became accustomed to. This data is also adjusted quarterly, and is great fodder for strategic and tactical discussions. What is your perspective? Where are the trends headed?

http://research.stlouisfed.org/fred2/series/DRSFRMACBS?cid=32440

Delinquency Rate On Credit Card Loans, All Commercial Banks

This chart, linked below, illustrates delinquency trends for credit cards. Again, credit unions are not in this particular data set, but as with mortgage delinquency trends it is useful to see the broader industry experience. The chart is an interesting contrast to the mortgage delinquency chart in terms of how quickly delinquencies dropped from their 2009 highs. This data is also adjusted quarterly (it comes from the same data set as mortgage delinquencies). Does the chart suggest it is time to go all in on “low risk” credit cards, or is the low rate of delinquencies abnormal? We have an opinion…what is yours?

http://research.stlouisfed.org/fred2/series/DRCCLACBS?cid=32440 

To add more fuel to this discussion, here is the charge-off data series for credit cards:

http://research.stlouisfed.org/fred2/series/CORCCACBS?cid=32439

Total Consumer Loans Owned by Credit Unions

This chart, linked below, illustrates the total outstanding amount of credit union consumer loans. We hear a lot about this in credit union trade press, in particular the challenges of growing loans over the last few years. This chart show a “dramatic” decline in total loans, but we sure have come a long way since 1940!

http://research.stlouisfed.org/fred2/series/TOTALTCU?cid=101

Your favorites?

Every now and then we will share additional resources, ones we utilize in preparing to facilitate client credit union planning session. Until then, let us know if you have a favorite resource…one that helps focus and/or enlighten strategic discussion. Use the comment option to share.