INNOVATION Now an essential tool for Credit Unions
Timothy Harrington, CPA, CEO TEAM Resources 1-800-788-9542 tharrington@forTeamResources.com www.forTeamResources.com
Is change difficult?
Maybe the reason it seems that price is all your members care about is... ... that you haven't given them anything else to care about
Is change difficult?
“You Betcha!”
Change Ain’t for Sissies Power of Habit is very difficult to overcome What time is it?
“Change is not necessary. Survival is not MANDATORY. Edwards Deming
Important Mathematical Formula
If the RCE > RII then‌ Where: RCE = Rate of Change External to organization RII = Rate of Innovation Internal at organization
RCE > RII =
If the Rate of Change External to your organization is greater than the Rate of Innovation Inside your organization, the end is in sight.
What Is Innovation? It is not: • The result of a lone genius inventor. • Just about ideas • About individuality in thinking
Rather it is: •
• •
A collaborative process where people in many area contribute to implementing new ideas. Teams are very important to the process. About products and reengineering and processes, both future and present processes. Involving people who will challenge the status quo. (The person who moans and groans and complains may be the source of the next great innovation)
Where Does Innovation Begin? It begins with an idea which comes from: Nowhere...Such ideas usually die unless a fertile ground exists to develop them. or A goal...An outlandish or unreasonable demand or goal, one that a continuous improvement process will not reach, often may spark innovation.
How Do You Get These Ideas? With pressure! Being under the gun, with a deadline, adds a sense of consequence to the task and a purpose to spur it. By facing a challenge...seemingly unreasonable! Studies show that positive thinkers rise to a challenge. The more they are likely to face defeat, the more they want to beat it. By abandoning old paradigms! Abandoning the status quo, like rules, policies, and set procedures. Only when you leave the rules behind, can you be free to create. This is critical to successful innovation.
Innovation Blockages
We tried that before That's stupid That's not in the rules It's against our policy We don't have the budget We don't have the time We'll never get it approved That's not what they're looking for
Innovation Blockages In 1880, Thomas Edison said that the phonograph was of no commercial value In 1920 Robert Milliken, Nobel Prize winner in physics said; "There is no likelihood man can ever tap into the power of the atom."
Innovation Blockages In 1927 Harry Warner, Warner Brothers Pictures said (in reference to the desirability of adding a sound track to silent movies); "Who the hell wants to hear actors talk?" In 1943 Thomas Watson, Chairman of IBM said; "I think there is a world market for about 5 computers".
Innovation Blockages In December, 1977, Ken Olsen, President of Digital Equipment Company said; "There is no reason for an individual to have a computer in their home".
Innovation Process 1. 2. 3. 4. 5.
Look to the Past Goof off and read Use the Brains who work for you Get cozy with the customerj Try to fail quickly
Look to the Past
Ideas that worked elsewhere (before) might work for us today
Goof off an Read "Time wasting is an excellent source of innovation“ Robin Chase, founder ZipCar Set aside a space in the CU for a dreaming room. A place to recharge your batteries or Sharpen the Saw as Stephen Covey puts it
Use the Brains You Work With Small failures encourage big success -IBM story -Take blame for your staff’s failures One CU has a meeting monthly where all VPs must bring 5 new ideas -stupid, irrelevant, outlandish -they’re all accepted
“You only need one good idea a year.” Warren Buffet
Pay for innovative ideas • •
“Tell the CEO” – Intranet Suggestion Box bypassing supervisors Give the winner a trip to Las Vegas! •
Air, hotel and show…not the chips!
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Get Cozy with Members Let your members tell you how to get their business Twitter Facebook Member suggestions Focus Groups Get a group of local college students to do market research for you‌for class credit
Try to Fail Quickly If you find an idea you like, don’t ask an employee to study it along with all their regular work. Give them time to focus on it until they have concluded: -it’s a great idea worth pursuing -oh my God, run!!!
We are living in a radically changing world
“The biggest organizational challenge of the 21st Century will be to change fast enough to survive.� Peter Drucker Polaroid, Wang Labs, Montgomery Ward, Tower Records. Chrysler? Blockbuster Video?
Be Unreasonable
“The reasonable person adapts to the conditions that surround him. The unreasonable person tries to adapt the surrounding conditions to himself. All progress depends on the unreasonable people.� George Bernard Shaw
Encouraging Unreasonableness
We need to reward innovation. Creative Unreasonableness
If it ain’t broke‌
What if we don’t get innovative?
Maytag versus Whirlpool We have to remain: RELEVANT
We’re in a Commodity Business
How do you differentiate yourself?
Product or Industry Lifecycle
Tired of others stealing your business? Pay Day Lending Advertise Guaranteed Direct Deposit Better: Guaranteed Early Payday
Different Generations Merged Set (X + Y = Dot Com)
Gen Y
Dot Com Generation
Gen X
Financial Products Dot Comers Find Appealing 1) Auto loans 2) Auto leasing
Financial Products Dot Comers Find Appealing 3) Investment services 4) Credit cards that pay Cash Back
Financial Products Dot Comers Find Appealing 5) Line of Credit 6) Student loans
Financial Products Dot Comers Find Appealing 7) Debit/Check Cards 8) Travel/vacation loans
Financial Products Dot Comers Find Appealing 9) Free Checking And/or high rate checking 9) Home loans 10)Social lending 11)Value of credit unions
Practical Ways CUs Can Market to Dot Com Generation 1) Position credit union as information source 2) Emphasize convenience especially with credit 3) Present lots of options (choice = power) 4) Must use technology
Practical Ways CUs Can Market to Dot Com Generation 5) Don’t gear all marketing efforts to Boomers 6) Remember family membership/target parents 7) Attract newlyweds
Practical Ways CUs Can Market to Dot Com Generation 9) Target schools 10)Conduct unconventional marketing and get involved in events they’re involved in
Electronic Contact – Proximity Payments “Purchasers buy 20% more using proximity chips than with other payment methods.” Financial Services Technology Magazine November 2007 This means more interchange income… 20% more NFC chips allow P 2 P payments without accessing the internet. Cell phone to cell phone payments.
Social Lending
High Rate Checking • Need 10 debit card transactions per month • Need direct deposit or one other ACH per month • Need e-Statements • Or you only get 0.10% interest and free ATM transactions at any ATM
INNOVATION Now an essential tool for Credit Unions Timothy Harrington, CPA, CEO TEAM Resources 1-800-788-9542 tharrington@forTeamResources.com www.forTeamResources.com
“If we want things to stay as
they are, things will have to change” Tancredi From “The Leopard” by Guiseppe Tomasi di Lampedusa
Strategic Planning The competitive ‘banking’ environment requires that a credit union must look ahead and around and determine “where do we go from here?” The credit union must engage in strategic planning that clearly defines objectives and assesses both the internal and external situation to formulate strategy, implement the strategy, evaluate the progress, and make adjustments as necessary to stay on track.
Strategic Planning is not an Event It is a Process
Mission A Mission is ‘why’ you exist • What market or social needs you intend to serve or meet? • Who are you going to serve? • Why does the market need you?
Vision Statement Vision: Right Direction • What will be different 3-5 years from now • Multi-year planning horizon • Basis for budgeting, annual plan • 4 Tests: – – – –
Clear Concise Compelling Quantifiable
Clarity of Vision is important
Purpose of Strategy To develop Market Advantage in some area There is no “one size fits all” strategy You can’t be “all things to all people” Marketplace is extremely competitive You must create a reason for people to come to you
Environmental Scan • The environmental scan includes the following components: – Internal analysis of the firm – Analysis of the firm's industry (task environment) – External macro-environment • Internal analysis can identify the CU’s Strengths and Weaknesses • External analysis reveals Opportunities and Threats. SWOT analysis
S.W.O.T. • The SWOT analysis provides information to help match: – resources and capabilities to: – the competitive environment in which it operates Internal
External
Strengths
Opportunities
Weaknesses
Threats
SWOT Matrix
S.W.O.T. Matrix A SWOT matrix helps you link your Strengths with Opportunities, etc. Strengths
Weaknesses
Opportunities
S-O Strategies
W-O Strategies
Threats
S-T Strategies
W-T Strategies
S.W.O.T. Matrix
S-O strategies pursue opportunities that are a good fit to the company's strengths W-O strategies overcome weaknesses to pursue opportunities S-T strategies identify ways that the CU can use its strengths to reduce its vulnerability to external threats. W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats.
Strategy Formulation To attain superior profitability, the firm seeks to develop a competitive advantage. A competitive advantage can be based on cost or differentiation.
Market Advantage When the CU is able to deliver the same benefits as competitors but: a. At a lower cost (cost advantage) or b. Delivers benefits that exceed those of competing products (differentiation advantage) A Market Advantage allows the CU to: a. Create superior value for its customers b. Create profits for itself c. Grow
Know Where You’re Starting From
Environmental Scan Environmental Analysis Understand Trends National Regional/local Internal
Internal Trends Product Usage Checking Electronic Debit/Credit Cards By Delivery System Financial Trends Balances Key Ratios
What was intended?
What was the cause?
What was intended?
What was the cause?
Core Values Core Values: Right Behavior • How we will engage with each other • Qualities we want to be known for • Limited number: 5-6 at most
Know your Business Model Know your Strategy
What is a Business Model? A business model is a unique strategy that produces revenue from specific sources and incurs expenses in specific ways. The revenue and cost structures will be different for each business model. Some business models are built to produce profits, some are not. Which is yours?
Different Business Models Different Results As a % of Average Assets Yield: Interest income Less: Cost of funds Net Interest Margin Less: Operating costs Less: Provision for loan losses Net loss before other income Plus: Non-interest income Minus: Corporate Stabilization Equals: Net Profit or Loss (ROA)
12/31/10 12/31/97 4.46 (1.21) 3.25 (3.07) (0.78) (0.60) 1.33 (0.22) 0.51
7.63 (3.64) 3.99 (3.32) (0.44) 0.23 0.78 1.02
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“Going into battle without a plan is foolhardy. But as soon as the shooting starts, the plan is useless.” General Dwight D. Eisenhower
“Planning is everything. Plans are nothing” General Dwight D. Eisenhower
Market Advantage Find 1 thing at which you can be an expert If you are exceptionally good at 1 thing: • Members will seek you out for those things • Members will forgive you for all those things you are not so good at
Where Can You Create a Market Advantage? 1. Price – Nearly always wins… If you have a business model that supports it
2. 3. 4. 5. 6.
Placement – Convenient Locations Product – innovative or unique Promotion – brand yourself well Quality of Service Low Operating Costs
Thinking Strategically • Look at Marketplace • Look at effective companies outside banking Wal-Mart, Starbucks, Subway, Nordstrom, RitzCarlton, McDonalds • Look at your trends • Understand (or guess) at member needs • Identify what successes already exists that can be amplified (emergent) • Identify what you need to move forward
Where are you positioned? WalMart – Low cost – Wide selection – Few but good employees
Home Depot – – – –
Low cost Wide selection Few employess Mass market
Nordstroms – Higher prices – Fine quality – Customer is always right
Ace Hardware – Higher prices – Smaller selection, but good quality – Helpful, individual service
Community Banks – Cookie cutter service – Broad distribution
– Personal service – Part of community
Many Strategies to Choose From • • • • • •
Limited Sponsor or Target Market Low Operating Cost Strategy Superior Service Quality Strategy Convenience Strategy Multiple Relationship Strategy Share the Load Strategy (fees)
Change is inevitable. Growth is optional!
Limited Sponsor or Targeted Market
In Some Ways, the Easiest • • • • •
Focus everything on the Sponsor Brand yourself with them Work that relationship Be involved Survey the employees for Loyalty (NPS)
Low Operating Cost Strategy
Branches Evolve
84
1.10%
Interest on
Checking 0.96% Operating Expense to Assets Ratio CU Average = 3.33%
85
DORT FCU
86
First Atlantic FCU
87
ROA at Low Operating Cost CU CU Avg As a % of Average Assets 12/31/10 MD CU Yield: Interest income Less: Cost of funds Net Interest Margin Less: Operating costs Less: Provision for loan losses Net loss before other income Plus: Non-interest income Minus: Corporate Stabilization Equals: Net Profit or Loss (ROA)
4.51 (1.25) 3.26 (3.33) (0.78) (0.85) 1.46 (0.16) 0.45
$850 Million CU with no Cash in Branches, all automated
4.43 (1.45) 2.98 (1.73) (0.10) 1.15 0.54 (0.19) 1.50 88
This Credit Union is able to Develop a PRICE Advantage Significantly Lower Loan Prices Significantly Higher Deposit Prices
“If the rate of change inside the organization is less than the rate of change outside the organization, the end is in sight.� Jack Welch, Former CEO General Electric
Superior Service Quality Strategy
Superior Service If you are going to ‘hang your hat’ on Superior Service It has to stand out so significantly that members will rave about your service to their friends And you need to measure it
Superior Service “If you don’t measure it, you can’t manage it.” Dr. Edwards Deming
Book
“The Ultimate Question” By Fredrik Reicheld “How likely are you to recommend our products or services to friends, families and colleagues.”
Net Promoter Score 0 1
2
3 4 5 6
Detractors
7 8
9
10
Promoters
Net Promoter Score subtracts the % of Detractors from the % of Promoters 75% - 20% = 55 NPS
Superior Service Examples Nordstroms Department Stores – – – –
Service to customer above all else Hard work and individual productivity Never being satisfied Excellence in reputation, being part of something special
Ritz-Carlton Gold Standards I build strong relationships and create Ritz-Carlton guests for life. I am always responsive to the expressed and unexpressed wishes and needs of our guests. I am empowered to create unique, memorable and personal experiences for our guests. I understand my role in achieving the Key Success Factors, embracing Community Footprints and creating The Ritz-Carlton Mystique. I continuously seek opportunities to innovate and improve The Ritz-Carlton experience. I own and immediately resolve guest problems. I create a work environment of teamwork and lateral service so that the needs of our guests and each other are met. I have the opportunity to continuously learn and grow. I am involved in the planning of the work that affects me. I am proud of my professional appearance, language and behavior. I protect the privacy and security of our guests, my fellow employees and the company's confidential information and assets. I am responsible for uncompromising levels of cleanliness and creating a safe and accident-free environment.
Umpqua Bank Taking retail to a new level
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Spread at Superior Service CU As a % of Average Assets Yield: Interest income Less: Cost of funds Net Interest Margin Less: Operating costs Less: Provision for loan losses Net loss before other income Plus: Non-interest income Minus: Corporate Stabilization Equals: Net Profit or Loss (ROA)
CU Avg 12/31/10 SS CU 4.54 (1.29) 3.25 (3.07) (0.81) (0.63) 1.26 (0.22) 0.41
5.08 (1.20) 3.88 (4.75) (0.40) -1.27 2.55 (0.20) 1.08 99
Convenience Strategy
Smart Principles • • • •
Say YES… 1 to say YES, 2 to say NO! Make each customer feel special! Always keep customer promises! Recover! To Err is human; to Recover is divine • Think like our customer
Commerce Bank Strategy • Convenience! Branches, branches, everywhere • Live tellers that love your deposits • Heavy retail emphasis • Sales educated staff
• Free checking, money orders, open weekends and holidays • One to approve a loan, two to deny it • Offer insurance and investments
Las Vegas area CU Strategy • Convenience! No one in Las Vegas more than 1.5 miles from our branch • Sales emphasis • Sales training and expectations
• No Tellers, Machines and Sales Staff • Sell insurance and investments • Offer PayDay loans
Detroit area CU Strategy • Convenience! 20 branches in Greater Detroit by 2013 • Building a sales staff • “The Michigan First Way”
• Slowly phasing out tellers and replacing with Sales Staff • Great Centralized Call Center
Spread at Convenience CU As a % of Average Assets Yield: Interest income Less: Cost of funds Net Interest Margin Less: Operating costs Less: Provision for loan losses Net loss before other income Plus: Non-interest income Minus: Corporate Stabilization Equals: Net Profit or Loss (ROA)
CU Avg 12/31/10 MF CU 4.54 (1.29) 3.25 (3.07) (0.81) (0.63) 1.26 (0.22) 0.41
5.46 (1.06) 4.40 (5.16) (0.82) (1.58) 2.83 (0.23) 1.02 108
Multiple Relationship Strategy
Average 6-7 Products per household All employees incentive based
Sales No Longer an Option • Top Management has to learn how to sell • Hire differently – Hire for attitude, train for aptitude
• Pay differently • The highest level service is sales
• Teach your staff how to sell, If they don’t want to learn to sell, teach them how to write a resume
Sales No Longer an Option • Sell products • Sell services • Sell what the member wants and needs • Sell relationships • Sell over-all value
• Don’t sell price • Can’t afford to be lowest loan rate and highest deposit rate • Sales training and service cost money • Measure: – Products per Mbr/HH – Balance per Mbr/HH
Spread at Multiple Relationship CU As a % of Average Assets CU Yield: Interest income Less: Cost of funds Net Interest Margin Less: Operating costs Less: Provision for loan losses Net loss before other income Plus: Non-interest income Minus: Corporate Stabilization Equals: Net Profit or Loss (ROA)
CU Avg 12/31/10 4.54 (1.29) 3.25 (3.07) (0.81) (0.63) 1.26 (0.22) 0.41
CO
4.20 (0.73) 3.47 (2.73) (1.00) (0.26) 1.33 1.07
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Share the Load Strategy (fees)
Every member of our Co-op has a shared obligation to make this CU successful. They can do it with balances, or by paying service charges
Spread at Share the Load CU As a % of Average Assets MOMMs Yield: Interest income Less: Cost of funds Net Interest Margin Less: Operating costs Less: Provision for loan losses Net loss before other income Plus: Non-interest income Minus: Corporate Stabilization Equals: Net Profit or Loss (ROA)
CU Avg 12/31/10 4.54 (1.29) 3.25 (3.07) (0.81) (0.63) 1.26 (0.22) 0.41
8.03 (0.74) 7.29 (6.96) (2.37) (2.04) 3.19 (0.26) (1.11)
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High Volume/Low Balance • 3 branches • Low income members / high transaction members • Tellers are very expensive… …but members don’t use electronic delivery systems as frequently or consistently
• Where does income come from? – High yields on Loans and fees and service charges
• Where do costs go? – Tellers – Collections
“If you don’t know where you’re going, any road will get you there” Casey Stengel
“The significant problems we have cannot be solved at the same level of thinking with which we created them� Albert Einstein Really smart guy
Tim Harrington Tim Harrington, CPA T.E.A.M. Resources 7049 E. Tanque Verde Rd. PMB 136 Tucson, Arizona 85715 (800) 788-9542 tharrington@forTeamResources.com