Forming the Perfect Collaboration

Is there such a thing as a perfect collaboration? Maybe not, but there are steps you can take to optimize the benefits of a collaboration. In my over 30 years of working with credit union collaborations, I have learned what works and does not work. Credit unions do not collaborate because they want to. Credit unions collaborate because they have to.

Collaborations are not easy, but the good news is there are CUSOs that have proven they can save millions of dollars annually for their credit union owners while maintaining high performance levels. CUSO models have been built and proven.

A collaboration has a fuzzy, feel good, Mr. Rogers-type image: “If we all work together, we will be better off.” Maybe, but before we think of us, we must think of me. What are the individual self-interests of each credit union partner? How can we best align the self-interests of the credit unions in a CUSO business model so that all the credit unions are pulling their oars in the same direction? If all the users of the CUSO services are also the owners, there is a pure alignment. If there is a service problem, the users/owners fix it.

For successful collaboration, you must find good partners. A collaboration with good partners has its challenges, but a collaboration with bad partners is impossible. What is the “currency” of the CEO of the partner credit union? Allan Cohen and Dave Bradford, in their book “Influence Without Authority,” discussed how to work in situations where control is shared. They recommended that you discover your partner’s currency. Ask, what does your partner need and how can you help deliver on those needs so your partner will help you? What internal and external pressures exist for your partner? Are you able to aid your partner without adversely affecting the collaboration and your currency? The key is to know all the pressures and opportunities affecting your partner so you know how to manage the challenges in the relationship. You can’t manage what you do not know.

Take the time in the planning stage of the collaboration to define the following for each credit union:

• The goal for the collaboration (e.g., cost containment and higher performance levels);
• The method of achieving the goal (e.g., use of technology tools and sharing staff expertise costs to underwrite mortgage loans);
• The scope of services the collaboration will provide (e.g., define the portion of the loan services the credit unions provide and the portion of the loan services the CUSO provides);
• The service expectations (e.g., the quality and timeliness); and
• The timeline for implementation and achievement of the goals.

These will be your success metrics. Write them down. The capital needs and staffing plan should be written to meet the success metrics.

Just forming a CUSO to save on operational costs is not enough. All the credit union owners have to make changes within their credit unions to fully leverage the collaboration. Efficiency requires that each credit union use the same forms and procedures for the services that interact with the CUSO.

If you don’t trim the payroll, you don’t save money. People are the highest operational costs. Are you willing to terminate employees? On a positive note, the talented employees who are hired by the CUSO will work within a larger organization with a greater potential career path.

If you don’t trim vendor costs, you are leaving a lot of money on the table. Your greater scale should mean significant cost reductions. Select vendors solely on cost and performance, not the number of foursomes bought in the credit union’s golf outing.

In a collaboration that significantly increases scale, the strategic thinking behind it must be elevated. A $250 million credit union in a collaboration with three other equal-sized credit unions must think in terms of how a credit union with the scale of $1 billion operates. Significant benefits from collaborations require significant changes.

Too often credit unions look at a collaboration as one-dimensional, i.e. by asking if the CUSO has made money for the credit union. In determining the full benefit of a collaboration to the credit union, the credit union should consider its total return, which, depending on the type of CUSO could include:

• An investment return;
• A patronage return;
• Fee income;
• An increase in the credit union’s capital due to the appreciation of the credit union’s capital account in the CUSO;
• Interest income from loans the CUSO helps the credit union make and service;
• Employee cost savings;
• Vendor cost savings;
• The value of access to key service providers;
• The value of increased staff expertise;
• The value of enhancing the services offered to your members; and
• Net income from fees earned by a credit union providing services to the CUSO.

Admittedly, some of these benefits may be hard to quantify, but the value exists. It is important to recognize the multi-dimensional value of CUSOs.

If possible, reward a credit union owner based on the owner’s usage of the CUSO’s services. You are incentivizing each owner to contribute to the scale of the CUSO, which will benefit all owners, and to remain with the CUSO as the percentage of the owner’s revenue contribution is tangibly rewarded. The usage bonus can be realized through a patronage dividend or tiered pricing.

Paralysis by analysis can be a problem. At some point, a collaboration requires a leap of faith grounded on trust in your partner. Many successful collaborations have begun when two or three credit union CEOs decide that it is essential to obtain scale. They say to each other, “We have to collaborate and while all the details are not yet clear, we are committed to the relationship and will find a way to make this work.” The collaboration will start off with a plan, but the plan will constantly change as the collaboration faces unforeseen issues. After it is formed, a collaboration requires constant vigilance to measure its effectiveness and keep the partners aligned. Longstanding collaborations require that the mutual trust evolve from the credit union CEO to the staff and boards as well.

For those of you who have not considered collaborations, please do not delay any longer. How many of your millennial members will choose the new Apple Card, PayPal or Rocket Mortgage over the credit union’s services? We are at a crossroads. If we do not act soon, we risk losing an entire generation to fintech competitors. Credit unions need to grow scale quickly to successfully compete and that means moving forward with a merger or collaboration. Pick your strategy, but if you don’t grow your scale, you are likely to be Blockbustered one day.

Guy A. Messick is an Attorney at Messick Lauer & Smith. He can be reached at 610-891-9000 or gmessick@cusolaw.com.