November 19, 2008:  For the last three weeks or so, the economy has been in a state of extreme turbulence.  We have all known that the big “correction” was coming; well now it is here with a vengeance!

As a consultant, blogger, author and consumer, I am reading everyday about consumer’s lack of confidence in our institutions- government, corporations, and especially the banking system.  Now is the time for some of us to step up, and step up big.
I see this is the time for those of us who are truly engaged in the business of “community banking” to step up and try to help restore the trust.

I see “community banking” as being best represented by two primary financial systems, the community banks and America’s credit unions.  Although these institutions might see themselves as competitors, in my humble opinion they each play a role in serving a separate niche.

The community banking infrastructure to me is the heart and soul of the partnerships between local businesses and the local financial community.  This is “retail” banking at its best. I could oversimplify it and say neighbors lending to neighbors, but then again is that really an oversimplification. The point is that the money originates and stays in the local community. It doesn’t go to Shanghai or Manhattan, or Minneapolis.

Credit unions were for the most part formed around sponsoring organizations.  Employees and companies coming together to loan each other money to purchase a first house, a first car, or other similar purposes, a “community of interest” so to speak.  The purpose was not to return a profit to shareholders, but rather to pool assets for the common good. As we have evolved and those sponsoring organizations morphed or were simply merged out of existence you see the emergence of the community credit unions whose membership eligibility is based on geography rather than employer affiliation.  The core construct remains the same however, the intention was fort these institutions to serve members or consumers- not necessarily the business community.

Earlier this year, I wrote a case study about my former employer, a large community credit union and our “six point” plan to address some of the issues and opportunities that this environment presents for both credit unions and community banks. I would like to expand on those ideas here.

The “Six Point Plan”
1. Embrace a sales and service culture. As a colleague once said, “inconveniencing our members by forcing them to go elsewhere for a product or service that we offer is not acceptable.”

2. Make frontline employees and the branch managers key to customer service (as well as brand evangelism and, when applicable, product promotion) by converting them from “order-takers” to franchise stakeholders.

3. Reconnect with business “partners” that had been neglected in the conversion to community charter in 2000.

4. Reach out to communities through investments in dollars, community involvement, and individual volunteerism in each of the communities we serve throughout ten counties.

5. Embrace an initiative to define a “core member” strategy of current and future members whose values, interests, and long term profitability resonate with the CU’s. These members represented the potential for a lifetime “trusted financial partner” relationship.

6. Evaluate the “retail strategy” to include products and services, delivery channels, as well as compensation, performance management and measurement, and related systems.

For the purposes of this piece I want to focus primarily in three areas that I feel have particular applicability in our current environment- front line “evangelism” which I am going to call "engagement," "market analysis" to determine the demographics of current and desired member/customer base, and "retail strategy" which takes into account product development and delivery.

Engagement
A recent article from Peppers and Rogers, a national consulting organization, tells us that true engagement creates measurable and meaningful differentiation for organizations in three distinct areas- Productivity, Performance, and Sustainability.

Productivity

Depending upon what business you are in your costs for “human capital” on average represent 60 to 70% of total expenditures. As we know in some businesses it is much higher.  As we point out, the best companies are recognizing this and leveraging their return on investment in this area. A 2008 study by Development Dimensions International (an international training and consulting firm) indicate that moving an employee’s level of engagement from low to high represented a 21% increase in individual performance. Employees at the highest levels of performance have per capita productivity of 20% higher than the average across industries and offices with high levels of engagement are 43% more productive according to studies by the Society for Human Resources Management and the Hay Group.

Engaged customers also enhance your productivity through repeat business and word of mouth recommendations.

Performance

In addition to the productivity increases you also direct correlations to financial performance. Engaged employees tend to stay with their current employers at a rate of 85% versus 27% according to a 2008 study by BlessingWhite, an international consulting firm. The savings from reduced turnover alone are huge. Additive to that other studies showed similar correlations to companies with double digit versus single digit revenue growth and an average total shareholder return of 24% for organizations where 60 to 70% of employees rate themselves as engaged versus 9.1% total shareholder return for organizations with an engagement percentage of 49-60%. In retail environments stores in the top 25% engagement level deliver 36% higher operating income than stores with low engagement.

Customer engagement shows similar statistics including higher loyalty, increased revenue, increased profit, and increased wallet share. When you combine high employee and high customer engagement the results show literally a 100% difference in financial performance on a peer to peer basis.

I don’t know about you, but to me those kinds of bottom line impacts get my attention!

Sustainability
Beyond the financial and productivity gains let’s talk about sustainability of the organization. I want to talk about three different areas that Peppers and Rogers identified:

• Brand- a 2003 study stated the experience a customer has with your employees influences repeat purchase decisions so much that “they are your brand.” In the same study they reported that 51% of consumers report than “outstanding service” is the number one reason they continue to do business with an organization and that conversely 80% state they will discontinue doing business because of a bad experience.

• Strategy- the biggest reason CEO’s fail is not bad strategy, but bad implementation of their strategy according to a study by Ram Charan reported in Fortune magazine. Engaged employees play a critical role in that implementation.

• Human Capital- over the next 10 to 15 years the demand for experienced talent is expected to increase by 25% while the supply decreases by 15%. Under these circumstances retention of critical talent becomes even more important. Remember that “engaged” employees are 87% less likely to seek alternative employment.

The 2008 BlessingWhite study that I referenced earlier identifies less than 30% of employees as being engaged. The same study identifies 19% as being “disengaged,” but it gets worse, disengaged workers are not the most likely to leave- they “quit and stay.”

Market Analysis

Taking another lesson from the large retailers and even manufacturers is this concept of market analysis.

• Do we know who our most desirable and profitable member/customer segments are and what drives their behavior?

• Do we know what influences their “buying” decisions? Is it rate, convenience, service, location, etc?

• What is happening to our target demographic is it shrinking, growing, or remaining stable?

• What about the “feeder” groups, who are they and what, is happening with them?

Data I have seen says that in some cases consumers are selecting their PFI- or preferred financial institution as early as their teens. Once they have established that relationship it is hard to dislodge them from a competitor.
Many of the financial organizations I have spoken with are frankly still doing what they have always done- building branches, competing over rate, or expanding geography. In the case of credit unions in many situations our strategy is to move into “banking territory” by offering business services or expanding our CUSO infrastructures to move into that space- with varying degrees of
success.

Retail Strategy
When I talk about retail strategy I mean it in the broadest context. Financial services have become largely a commodity. Consumers want the products that they want delivered in a manner that fits the totality of their needs- convenience, functionality, and cost. They don’t want us to define that for them.

I remember in my experiences in the Total Quality movement in the late seventies and early eighties where people like Edward Deming introduced us to a hard truth- quality is defined by the consumer. We have to recognize that our members and customers are going define convenience and quality in financial services. Similarly in the same time period I began seeing the impact of effective materials management strategy. Concepts like opportunity cost, lean manufacturing, optimizing purchasing quantities, and other techniques. Saving dollars coming in the door in costs rather than trying to make it up in passing price increases along to the end user of customer.

Major retailers like Wal-Mart have been using strategies like this for years. Like offer convenience and pricing by vigorously leveraging their relationships with key suppliers. They optimize their in store “real estate” as well. They know exactly what moves and what doesn’t.

How many community banks and/or credit unions are scrutinizing their efficiencies and optimization of “real estate” as a business strategy? Are we looking at where we spend our dollars and how we deliver our products? Are we aggressively managing those factors?

My Experience
In early 2007 Oregon Community Credit Union embraced part of these strategies. We began looking at our demographic and at our core/non-core mix of “members.”  We started looking at our “product portfolio and our “core competencies.”  We also began looking at our delivery strategy.

We took a risk and began experimenting with smaller branch infrastructures that were located where members went, rather than expecting them to come to us!  We also began looking at communities where we felt like we could create synergies based on our culture and demographic and create “fit.”  We opened our first true “kiosk” branch in a University bookstore with hours emulating the “host” location- that means seven days per week!

We also embraced the beginning of a true core competency strategy to differentiate ourselves. We chose not to embrace the business services model, but rather to refine our target demographic and deliver a brand and a product that differentiated us to that demographic.

In April of 2007, we introduced the Remarkable Checking product. This product was a “turn-key solution”. By turn-key I mean that the product, the software to track and manage it, and even the sales and marketing “training” were created by a third party vendor. They were able to show us that by leveraging technology and efficiency we could inure huge cost savings that would allow us to pass those savings along to our members in the form of compelling rate differentiation. By structuring the product we could also create “sticky” relationships that would “bind” member/customers to us. These “services” also spoke directly to member’s desire for convenience and value. You could say that combined with the other elements of our plan that we were successful-
In the twelve months following launch we saw the following:

• 4000 new membership accounts

• A 21% increase in asset size

• $150 million in net revenue

• A significant increase in “wallet” share

We were pleased with the results.

Quite candidly however there was significant opportunity that we had not fully captured- the benefits of “efficiencies” in other parts of our process management efforts. In this category are benefits from reduced per transaction costs, the costs of materials and supplies, and the benefits of optimizing buying decisions on a myriad of things ranging from printer paper to custodial services. In short the application of materials management techniques to our non “front office” functions. How many community banks and credit unions have embraced full cost accounting models?  Do we really know how much money is “leaking” through inefficient purchasing and servicing of our retail infrastructure?

Do we have the core competency and expertise to even evaluate these systems? I would submit that we don’t.

My Conclusion

This is a great opportunity for those of us in the “community banking” world. We are the guys from Main Street, not Wall Street. We are the neighbors, and members of the community that live and work in the towns and cities we serve.

By utilizing the “six point” plan we can address the issues facing our businesses and our member/customers. We are positioned to create the trust and to deliver the solutions.

I want to be clear; these elements are systemic to achieve a meaningful and sustained level of success. You can just do one. A new core system, or new product, or sales training by itself will not achieve the results. In fact BlessingWhite captures it in their engagement study:

“ ……They continue, however, to describe a different, more comprehensive model which includes five levels and
incorporates critical concepts such as satisfaction, quality, and loyalty. The “new” levels in hierarchical order,
are satisfied, loyal, recommend, best products and services, and pride. Most importantly, these levels also
describe the critical foundation that this system is based upon – a foundation called trust.”

They also state an absolute correlation between employee engagement and customer engagement!

Outsourcing, technology or other solutions without engagement do not yield the same results.  But, when you can combine them, the results are pretty overwhelming:

• 21% per employee productivity increase

• Average 60% higher retention rate for valued employees

• Shareholder return of 50%+ higher than non-highly engaged companies

• Financial performance of 100% higher than peer

• groups for organizations with both high employee

• and customer engagement scores

I don’t know about you, but those kinds of numbers get my attention. The studies also show that less than 30% of organizations in the world have embraced an integrated engagement strategy, so I leave you with this thought from Robert Jarvik, inventor of the Jarvik artificial heart:

Leaders are visionaries with a poorly developed sense of fear and no concept of the odds against them.

Do you want to lead, or do you want to follow?

Mark Herbert is a principal in the firm of New Paradigms LLC and has assisted organizations including Honeywell, Spectra Physics, Mobius, Oregon Research Institute, and Oregon Community Credit Union build their lighthouses. To learn more about the Compliance to Commitment model, Mark can be reached at mark@newparadigmsllc.com.