When Assets Become Liabilities

Credit unions and their members are living in an era of disruptive technology. The pace and scope of change is bringing new ways of meeting personal financial needs.


A Program
Sponsor Support
Fixed Assets: Buildings and IT
The Virtual Branch
The People Paradox
The Challenge: Converting Assets

Credit unions and their members are living in an era of disruptive technology. The pace and scope of change is bringing new ways of meeting personal financial needs. So comprehensive is this Internet-driven revolution that one CEO has likened the era to riding on a tectonic plate. The entire geography of the business and economic world is shifting to a wholly new global configuration.

When change is this fundamental, assets that organizations have created can become liabilities if those assets prevent the organization from doing something else to remain competitive. These "assets" aren't just the resources recorded on the balance sheet. They also include the internal processes, programs and products that compose the way of doing business. Moreover, the organization's most important assets, its people, can also inhibit the transitions organizations must undergo to remain relevant in an era of change.

A Program
"There's no percentage in getting attached to your product. . . when founders get attached to their seminal ideas, the world they helped change goes right on changing, and in no time they are a drag on their own companies." Jim Clark in Netscape Time.

Many of the products in credit unions are traditional. In fact, new kinds of services are often labeled "non traditional." Recently, a CEO told me about a review his credit union had undertaken of collateral protection. The credit union primarily serves the military community. Auto loans are a significant part of their loan portfolio. Four full-time employees oversee the collateral protection program that provides insurance if a borrower has an accident in which the losses on the auto are not insured or fully covered by the borrower's insurance company.

In an effort to manage expenses, the credit union looked at all services, including the need for collateral protection. The average borrower was a career military person, an occupation that has a strong tradition of personal responsibility. The credit union judged that the risk of losses from members with an auto loan but no insurance was lower than the continuing costs of administering the program. A twenty-year plus program was stopped, four jobs were changed and a raft of paperwork dropped.

Sponsor Support
Another credit union has undertaken an urgent 90-day study of alternatives to continuing sponsor support of key operational areas including all personnel, payroll and benefits administration and alternate delivery systems if in-plant offices were to be closed. Since its founding, this credit union has benefited from a close tie with its pharmaceutical company sponsor. From the company's point of view, the credit union, which has over $250 million in assets, is seen as a department of the company. The CEO reports to the finance office and is given an annual review by an officer of the company.

The credit union's management and board have determined that corporate mergers and divestments reconfiguring the drug industry mean that the credit union should not tie its fate solely to the plans of the sponsor. What was viewed for years as a form of benevolent support and mutual benefit, now appears a risky scenario. The credit union is looking at all areas to estimate changes in costs should they have to take over the tasks provided by the sponsor.

To protect its ability to do business in a flexible manner, the credit union will have to find alternatives for personnel administration, office locations and even some marketing activity. Sponsor support in this case has become a liability as the financial services and pharmaceutical businesses respond to very different market forces.

Fixed Assets: Buildings and IT
Credit union branches, even head offices, are often symbols of success. These are the visible assets that are used to communicate the less tangible resources that make up the financial products on the balance sheet. These marks of success are frequently based on business circumstances that occur at a particular time and place.

But markets change. Recently I was asked to assist in planning with a board to show the different strategies that could justify a branch office. In the board's view, all branches needed to be full service, including tellers who would cash checks and take deposits, functions which were easily provided by ATM's located in the facilities.

The CEO wanted to experiment with a variety of branch strategies and move transaction services to electronic means. The board was concerned with serving members who did not want to learn to use automated delivery.
These planning challenges are not unique. In some instances we have been able to convince the board that traditional views of the value of a branch have to be updated. In other cases, the board has held fast to one model of branch activity.

Many people believe the asset in the form of the branch or head office is extremely valuable because it shows the credit union's presence and commitment to a community. Leased offices are not an option, certainly not for the head office. Buildings are needed to make a statement. The irony is that the "statement" that looks perfect for the current business may not fit future needs. The fixed asset commitment may limit mobility and become a hindrance when new market approaches are needed.

The Virtual Branch
The folly of misplaced bricks and mortar was less consequential when that was how every competitor played the game. Today clicks replace bricks as members move to new views of the credit union. The use of the Internet can even redefine a credit union. A credit union that had a large nationwide field of membership recently completed a full service website. To its surprise the profile of members using the Internet was very different from those in its traditional business model. Computer-based members wanted a greater variety of products and services and needed more sophisticated information.

In the area of technology, most credit unions rely on a data processing relationship or an internal unit that is critical to its functioning. The host system's capabilities set the framework for much of what a credit union can and cannot do. The core concept of the DP function as a transaction processor is now giving way to the need for relationship management. This new requirement to integrate a member's total credit union activity with other data to support pricing strategies and 1-to-1 marketing is very different from the old function. Open connectivity with Internet solutions is essential. Integration with other databases and service providers is key in a networked era.

The continuing rapid improvements in chip technology and broadband transmissions are causing much faster obsolescence and therefore write-offs for all technology-based investments. But the more that is invested, the greater the reluctance to keep bringing in the new. In many cases it is the mindset in an organization and not the asset itself that determines whether an investment remains an asset.

The People Paradox
Although it is truism to say that people are an organization's most important asset, there is also the reality that this asset can become a liability. The following are two examples of managing this situation.

In one instance a credit union had a strategic goal of doubling the balance sheet assets in five years while keeping the headcount constant. A hope was to encourage a completely different way of thinking about the role and skills of all employees. Does the credit union still have to do its own item processing? Can marketing be outsourced? Can training and essential human resource functions be managed by a third party?

Most importantly, what is the role of the credit union staff when they have contact with the member in person, by the phone or email? The credit union is seeking to add value to every member contact but in fundamentally different ways than in the past. Information management, advice and sales are the skills being developed for the new business model centered around managing member assets.

In a second case, a company had developed a very sophisticated Internet strategy relying on the skills of several employees who were self-taught in the emerging technologies of website design. Increasingly the organization relied on the judgment and capabilities of these few employees. Unlike branch management, having redundant Internet capabilities in the firm was not an option. As the company became more reliant on these technically savvy persons, the organization's agility declined. What the employees were interested in got done; if other technologies were needed but not within the skill set of the staff, the new resources were not used. Finally the employees did the inevitable and left for greener pastures.

To the surprise of the company, the solutions for replacing the skills through a combination of outsourcing and job redesign with remaining employees opened up a whole new set of solutions. To everyone's surprise, better and timelier responses became possible.

When I asked the CEO about the change, he used a football analogy. He said, "everybody thought the Detroit Lions would have a much worse team this year when Barry Sanders retired. (Sanders was an all pro running back.) Actually they found they had a stronger 'team' even without one of the NFL's premier players. We discovered the same thing."

The Challenge: Converting Assets
Very capable employees with seemingly unmatched knowledge and skills can become liabilities if they stop growing. Jim Clark, in his book Netscape Time, said it best:

"The irony is that you're always striving for some kind of security, but you're never really secure. . . not if you know what's good for you, that is. The only safety in business is to keep growing. Once you stop, there is no place to go but down. . . The status quo is deadly because it ends growth and eliminates the ability to change."

In other words the more "fixed" assets become, whether these be assets on the balance sheet in the form of buildings and computers or in the organization's skills, the greater the chance they could be barriers in an era of sweeping change. In many cases this fixed aspect is more of mind set about change than an intrinsic characteristic of the situation. The challenge then is not necessarily to add more assets to sustain success, but rather to manage the continued conversion of assets already acquired.




Feb. 28, 2000



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