Let’s assume you know that your credit union needs to collaborate to reduce operating costs but are unsure of how to start down the path. A certain amount of planning is necessary, however, you shouldn’t over plan and as a result never “pull the trigger.” A collaboration is a relationship, not a transaction. Many changes and adjustments will occur as the relationship matures. Collaborations are never perfectly planned from the beginning. Having said that, it is important to define the expectations of the parties as to the scope of services, the level of services, how costs will be shared and how decisions are to be made. Once those issues have been agreed to and each credit union can make its own business case as to how the collaboration will benefit it, the collaboration can begin.
Start simple and realize quick wins. The easiest collaboration to implement is a service the credit union is already performing for itself. This costs the credit union money that it could re-direct to another service model. For example, every credit union has to perform compliance, collections, marketing, loan underwriting, internal auditing and bookkeeping. Pick one to implement. If more than one credit union can share the personnel and expertise, it is possible to realize savings. Well-run CUSOs also realize increased service levels and expertise.
Do not assume that everyone understands what is meant by compliance services, loan underwriting services or other services you may choose. Be specific in your definition of what services will be provided and the expected service levels. Define the following: How are you going to share costs? Will it be equal sharing by the relative size of the credit union or by transactions? How much capital will be needed to break even? Will a CUSO be established or will the employee costs be shared by contract? Will the shared employee be employed by a CUSO or by one of the credit unions while the CUSO “rents” the time of the shared employee? How will decisions be made? Will every credit union have an equal say or will there be unequal voting powers? How will credit unions be admitted to the collaboration and what is the procedure if a credit union desires to leave the collaboration?
It is my experience that operation services collaborations work best among peer-sized credit unions with equal voting powers. Peer-sized credit unions have comparable operating issues and resources that can blend well together.
Some credit unions have hired professionals to help them through the planning process and organize the collaboration. If you expect to incur pre-formation costs, it is common for the credit unions to have a funding agreement in which each posts an amount for an “exploratory committee.” If a credit union decides to proceed with the collaboration, the amount expended can be allocated to formation expenses. If a credit union decides not to proceed, the funds are forfeited. The contributed amount is the cost of being at the formation table.
In order to realize the benefit of the collaboration, each credit union will have to make its own business case that will justify to the board the underlying reasons for the collaboration. A series of questions should be asked and answered. Will the service provided by the collaboration be equal to or better than the services the credit union currently receives? Will the services provided by the collaboration increase the level of expertise available to the credit union? Will the collaboration open up new opportunities for the credit union or speed up the implementation of opportunities? Will the collaboration have a positive financial impact to the credit union? Not all collaborations need to have a positive answer to each one of these questions, but the benefits should be reviewed and recognized. As to the financial impact, the credit union will likely need to reduce its staff and rearrange its internal operating procedures to fully realize the potential financial benefits of the collaboration. One very big advantage of a collaboration is the ability to negotiate more favorable terms from vendors. This is a tangible benefit of scale. Perhaps the services selected will be provided by a third party with terms negotiated by the collaboration.
I saved the most important point for last. The essential factor in successful credit union collaborations is the trust, transparency and communication level between the credit unions’ CEOs and ultimately their boards and senior staff. When all credit unions act in the best interests of the group and each other, the collaboration is almost always successful.
Guy Messick is a partner at Messick & Lauer P.C. and can be reached at 610-891-9000 or gmessick@cusolaw.com.
