What's Inside? What's Out?

One traditional way to describe a credit union is by the work that the organization does. A credit union takes in savings and makes loans, or runs branches or provides exceptional member service.


Excerpted from Callahan's Credit Union Report

One traditional way to describe a credit union is by the work that the organization does. A credit union takes in savings and makes loans, or runs branches or provides exceptional member service. These tasks are mostly carried out by credit union employees. The business challenge then becomes identifying and developing these core competencies better than any other firm.

However, today virtually every activity that is believed to be core to what a credit union does can be outsourced. This reality raises the question about what should be done by a credit union's own staff and what should be outside the firm. A bigger issue is also raised of exactly what does it mean to be a credit union?

37% of Loans
The speed with which traditional activity is being accomplished outside the normal credit union framework was illustrated by a manager describing his new automated on-line loan process. In the latest month, 24% of the credit union's loan applications were submitted and processed on-line; only the rejections are reviewed by staff. Another 13% were taken and completed or disapproved by an outside call center.

This activity did not include a soon-to-be introduced indirect lending program where there would be additional loan decisions made outside the walls of the credit union. Very quickly the credit union would be acting in only the policy setting and booking functions of the lending value chain-another party or an intelligent agent would be doing the application, underwriting and decision making.

If the "credit" activity is taken out of the credit union, what does it mean to be a credit union?

The Technology Revolution
Outsourcing has always been an option for firms. But today there are radically different means to this end. The networked era undergirded by the Internet is changing even the concept of the firm.

A recent example in another field shows how technology changes traditional expectations. Live artistic performance is one area which many believe can never be replaced by technology. Sure there are recordings, but not real live performances-that would change forever the idea of what it means to be an "artist."

Now comes the digital orchestra. For a recent revival of "Evita" the Technical College in New York City replaced the orchestra with 35 loudspeakers in the chairs where live players would normally be. These speakers are connected to a computer complete with the digital sounds of all the instruments necessary to accompany the stage cast. Only the singers and actors are live in this production, the orchestra is completely digitized.

To keep time with the conductor and the cast, the computer console operator taps out the rhythm on a keyboard. In addition to tempi, or speed, the digital orchestra has a virtually unlimited range of sound for each instrument. There are between 8,000 and 9,000 samples of the violin created and stored including separate upbow and downbow strokes. In essence why performance is a unique experience.

This digital orchestra has been over 15 years in creation and has completed over 2,000 performances without a crash. The orchestra is always on pitch, on time and never takes a coffee break. For a road tour of the show "Annie" the score requires 30 players. With Realtime Music Solution's orchestra, a producer can tour with seven people and 23 digital instruments. Is this hybrid production a live musical or not?

Why The Web Makes a Difference
Faster, better, cheaper have been the reasons why firms traditionally outsource. The reasons are not new but the Internet brings a whole new set of options that were not feasible just several years ago.

The first aspect of outsourcing via Web technology is speed. Make or buy, the traditional options, are too slow in today's economy. Owning a process is not as quick as finding a net partner with a solution.

But there is more than speed. The Net allows integration on a scale never before possible. The homogenization of activity through Internet protocols is pervasive. IP standards are universal and new capabilities can be linked and unlinked literally in minutes.

In the industrial era the key business concept was specialization, then integration via an assembly line or other connected "value chain." One way this sequencing might be improved was vertical integration in which a single firm controlled all aspects of design, purchasing, manufacturing and sales.

The Internet era is about convergence, the elimination of vertical value chains. The Internet permits integration without centralization or a single controlling entity. In essence a firm can now go out and plug together pieces from different specialties using application service providers (ASPs). A firm can now expand in all directions, not in just one specialty.

The New Opportunity: No Boundaries
The Internet's modular integration creates a radically different organizing concept beyond even outsourcing where there is still a central point of control issuing RFPs.

Today credit unions using non-Web based solutions outsource key activities such as mortgage lending, auto loan origination, branching, ALM reporting, investing, data processing, training, recruiting, HR support for payroll and benefits administration, 24-hour call center and regulatory compliance. These are just a few of the areas where third party firms manage existing critical credit union processes. And the list does not include all of the arrangements for new services provided through CUSOs such as broker dealer and insurance sales.

The new opportunity is not only to do traditional activities more efficiently and timely but also to rethink what is possible. Almost any area of e-commerce becomes feasible in a networked era. Whether the activity be a product sale or an advisory service, credit unions can make new Web solutions part of their business model virtually overnight.

More importantly, the concept of personalized customer service is reinvented with the capability of live on-line chats with members. The technology is in place so that the reach and range of the Internet defines the opportunity set for the credit union.

The Real ROI
In essence there are no boundaries, except our own imaginations, as to what a credit union can do in serving its members. One manager calls this challenge the ROI, or Return on Imagination.

If opportunities abound, what is the scarce resource that credit unions need to manage? I believe the new skill is "managing" activity occuring outside the firm. Partnerships require new competencies. This is not "deal making" or just lining up options and selecting the best offer. Rather, this is assessing whether an organization's strategic direction can be coordinated so as to support the credit union's. In the accompanying article, Steve Winninger describes this challenge.

Choosing the right area for new efforts, experimenting with beta models from new firms through limited rollouts, hooking and unhooking from these alliances quickly are all new activities that come with partnering. Not all efforts at partnering will succeed. But the risks should be reduced and the portfolio of opportunities expanded way beyond what a standalone firm's efforts could ever be.

What activities will become part of the web of services credit unions will offer is the most important strategic challenge facing boards and managers. There is no roadmap. Rather all roads are open.

Two ways to help the credit union go in the right direction are:

  1. Join with other credit unions on the journey. Share the risks and insights with other like-minded explorers;
  2. Involve the e-members today. Create a group of on-line members who will work to evaluate, test and provide assessments of different options.

Some may ask, is this really what a credit union is? A web of processes and alliances? My response is to listen to the performance and see if you enjoy it any less than with a "live" orchestra.




Oct. 2, 2000



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