This article will focus on how what you should be looking for in the Best Performance Management Tools for Credit Unions.
What is Corporate Performance Management? According to the Harvard Business School, performance measurement focuses on four main areas:
- Communicate with external investors to ensure that a firms’ securities are fairly priced and that they are able to access capital
- Measure and Evaluate a firms’ economic performance
- Improve resource allocation and strategy implementation within a firm
- Build Accountability for performance through effective external and internal governance
The emphasis of this article will be on improving resource allocation and strategy implementation, specifically for Credit Unions. Though Credit Unions have evolved over time, their basic function is to take in deposits and reinvest those funds back into the community in the form of loans for such things as houses, cars, education, and infrastructure.
Almost all corporate performance management tools for Credit Unions are good at getting data from the general ledger, loan, and deposit applications. Management needs to understand how efficiently it is raising deposits and making loans and is the process getting better over time. To be able to perform this analysis, the data need to come from various modules.
General Ledger Data – The data in the general ledger measures the financial performance of the Credit Union. It is good for tracking the various sources and uses of funds. Sources are the revenues generated from you deposit and loan activity in the form of net interest income, service charges, and fees. Personnel, property, and equipment expenses are your typical uses of funds. The main emphasis of the measurements is that your sources are growing faster than your uses.
Deposit Data – Up to half of the Credit Unions’ efforts is raising deposits. The bigger the deposit amount per member raised, the less labor it takes to raise the deposits. One of the main ways to attract deposit dollars is to pay a higher interest rate. If you pay too much interest, however, there will be no money left over to pay your employees.
Loan Data – The other half of the Credit Unions’ efforts is lending the money back out to the community. Again, bigger loans are cheaper to make labor wise than smaller ones. The best way to get bigger loans is to lower your interest rate.
Credit Unions need to be able to track all the loan and deposit activities by branch, product, relationship officer, etc. They need to know by instrument, how much money they are making. The money losers need to have the associated fees raised, interest rates adjusted, or automate some of the labor involved to deliver the services. To be able to perform these types of analyses, the performance management tool for Credit Unions also need to include funds transfer pricing (FTP) and activity based costing (ABC).
Funds Transfer Pricing – To attract more dollars, there is a constant battle to offer more interest you pay on your deposits and less interest you receive on your loans. The difference between these two rates is called net interest margin. Funds Transfer Pricing is a mechanism that separates the two activities.
Each deposit dollar brought in is compared to a safe alternative investment such as U.S. Treasuries. For instance, if a member wants a 6 month CD, the Credit Union will want to compare the rate they offer on the CD to a comparable 6 month U.S. Treasury. If they offer more than the U.S. Treasury, there is no net interest margin left over and they are losing money. On the lending side, they need to offer a loan at a rate that is better than the U.S. Treasury. If it is not, they are better off keeping the money invested in U.S. Treasuries then lending it out.
Activity Based Costing – Labor costs are the biggest non-interest expense of a Credit Union. Credit Unions need to know how much it costs to originate, maintain, and service their various and loan and deposit products. For example, it might cost $1,500 to originate a mortgage loan but only $1 to receive an online payment for the loan. Credit Unions need to know what activities are happening at the instrument level and how much each activity costs so they can charge the appropriate amount of services charges and fees.
Data, data, data – I worked with a Credit Union where they printed out reams of data every month on each of the previously mentioned modules. There would be a bunch of reports the focused on branch and product profitability. With dozens of branches and products to keep up with, that was a ton of trees! They also produced loan origination and deposit production reports by branch and relationship officer. That was another hundred pages of stuff. They also generated Asset-Liability Management reports that looked at the net interest margins of all the various products. They even produced costing reporting so deposit services could update their service charge prices as appropriate.
There was a half a dozen accountants crunching these numbers for a couple of weeks each month. They would then spend another week or so printing and mailing everything. They would finish everything by the end of the month just in time to do it all over again.
Start with a simple model – It did not take long before the bankers in the field started a revolt. They were being buried with data and were not able to effectively manage their day. It was like a pilot flying a plane and the cockpit had the information of every other plane that was flying in the area. They would never be able to land the plane!
There is a fine balance of being able to capture all of your general ledger, deposit, loan, funds transfer pricing, and activity based costing, as well as member relationship data and being able to present it to your team in a useful manner.
If you want an effective corporate performance management tool for Credit Unions, it has to highlight what is important to the reader of the report and not much else. It does not need to show everybody else’s performance. Dashboards, balanced scorecards, key performance indicators (KPI’s), and comparisons to goals are all effective tools in helping your team achieve better performance.
Getting the Best Corporate Performance Management Tools for Credit Unions – The first requirement of picking a good performance management tool for Credit Unions is their ability to data warehouse information from your general ledger, deposit, and loan systems. These tools also need a good reporting engine. The most popular solutions for this requirement are SAP BusinessObjects, IBM Cognos, Oracle Business Intelligence Enterprise Edition, and BI360 from Solver.
The second requirement will be the solution provider’s ability to perform funds transfer pricing (FTP). Axiom Software Funds Transfer Pricing, Oracle Financial Services Funds Transfer Pricing, Fiserv Funds Transfer Pricing, and BI360 from Solver are all good tools for FTP.
The third requirement will be for activity based costing (ABC). While Credit Unions are new to this discipline, manufacturers have been very active in ABC. A very good tool for activity based costing is ImpactECS by 3C Software. Another solution that I have used for ABC effectively is BI360 from Solver.
If you are looking for a performance management tool for Credit Unions that meets all three requirements, you might consider BI360 from Solver. With BI360, Solver is Enabling World-Class Decisions for Banks and Credit Unions. Solver, Inc. is happy to answer any questions and review BI360’s easy-to-use, Excel- and Web- powered financial reporting, consolidation and budgeting tool for banking and finance industry users. With both real-time or data warehouse integrated analysis, comprehensive reporting and collaboration, BI360 is a way to accelerate performance management for your Credit Union.