This article was first written for the February Callahan Report Newsletter and made availible to CreditUnions.com audience readers the week of April 28th-May 4th. Ed's article had one of the highest "click-through rates" of the year and prompted some of the public discussion you see below. How do these ideas reflect your credit union's developing strategy? Let us know what you think.
We should never forget that we are in the credit union movement for the benefit of ordinary Americans who are members. The credit union movement was founded because ordinary Americans – most Americans – could not get a fair shake from America’s banks. They could not get good loans; they could not get good service. So they banded together in order to create value for themselves. These were people who worked hard, who wanted their savings to work hard for them, and who had to make borrowed money work just as hard as it could for them because they would have to pay that money back, plus interest.
A dollar was very important. It had to “have legs;” it had to have value.
This is still true. People join credit unions because they want their savings dollars and borrowed dollars to “have legs” and have high value. They know that this is more likely in an organization devoted to fellow members than it is to an organization devoted to stockholders.
The heart of credit unions is value to the member. Unless that value is better than can be had at a bank, there will soon no longer be a credit union movement.
The Inefficiency – Innovation Loop
Value for the member can only be had when a credit union is efficient. Every dollar of operating expenses has to work hard, harder than at a bank.
Every business has measures of efficiency. Anyone can look at expense-to-asset ratios and the like. But managers have to go behind such measures, see why those ratios are the way they are and then put into effect actions and investments that are going to make those ratios even better.
Sometimes it is difficult for a manager to see lack of efficiency in his or her credit union; he or she is just “too close to the action.” It sometimes is easier for an outsider to see inefficiencies. But whether it is an insider looking harder or an outsider with a fresh eye, there are usually inefficiencies to spot.
Very often this has to do with overcapacity in some manner. The credit union is able to do more of a certain kind of service than is being demanded. This may take the form of having too many tellers between 9:30 and 11:30 or it may take the form of more computing power than is needed. A good manager will spot issues such as these and make corrections. This may take the form of reducing capacity. Or it may take the form of increasing demand, which is the more beneficial of the two if the credit union is bent on growing.
So, let’s assume the manager works to increase demand. The demand increases, and ultimately it stresses the capacity of the service. Here is a point of efficiency, when demand is putting stress on the system, which is working with all its power to provide the service. This is where real member value is being produced for the member.
But generally, this is not a state that exists for long. Demand usually continues to grow, stressing the system even more. The system turns into a bottleneck.
The need is then for innovation, retooling the system so that it has more capacity than before, freeing any bottleneck. Once the innovation is in place, the system again has the capacity to handle all the demand, and maybe more so. Thus we are back to the first condition, more capacity than demand.
Every institution should look for ways to move to the point where systems are slightly stressed, where they are doing the maximum work, where they have to put in 101% in order to meet demand. Then they must look to innovate.
Thus the institution is on a loop. Overcapacity, undercapacity, innovation — overcapacity, undercapacity, innovation. Over and over again, and the institution grows all the while. And the real winners are the member/customers who because of innovations are getting more value out of the institution than ever before.
Looking back at my career – in education, state and national government, and credit union management – I can see that this is the kind of thing I was doing all along, spotting inefficiencies and kneading organizations until efficiencies took their place. This is good and fascinating work, and one that brings value to people’s lives.