Operational efficiency: Process improvement opportunities for credit unions

Roundtable discussions for credit unions have been conducted with McKinsey & Company consultants around the country. One of the key takeaways from those meetings was based on the comparison of efficiency ratios [noninterest expense / (net interest income + noninterest income)] between credit unions and banks with assets ranging from $500 million to $17 billion. Participants were stunned to see banks maintaining a long-term average of around 0.50 and similarly sized credit union averages bouncing between 0.60 and 0.70—a massive systemic difference. There are two practical explanations for the gap between equally-sized institutions: Credit unions spend more heavily on operating costs and member service, or credit unions are much less disciplined at controlling costs. The truth is probably a combination of both. 

Expense control will most likely become, if not already, one of their top three priorities. Why? Because the Great Recession stole growth from many of them, and expense management is the best way to eke out profits in the absence of growth. It is also an essential competency for any credit union that wants to build a sustainable business model. While increasing or maintaining revenue and asset size may prove to be a challenge, there are avenues to help alleviate some of the financial pressure by focusing on operational efficiency. It is imperative that leadership take a critical and deep analytical look at their operational efficiency, which drives expenses. It is only through this path that credit unions will be able to make a change in their operating procedures and processes to reduce cost and, in the process of making things more efficient, improve member experience. The next series of papers will examine how some credit unions—like their competitors, banks—are adopting quality methodologies like Lean Six Sigma to help alleviate some of the financial pressure by increasing operational efficiency and differentiating themselves based on improved service. Quality methodologies, by definition, force an organization to assess how they conduct business from the products they offer, how they market and sell them, what processes and systems they rely on to deliver these products, and, ultimately, how the members gauge the service they receive from the credit union. When an organization makes the decision to deploy a quality methodology such as Lean Six Sigma, its leaders are looking for cost reductions and improved service through organizational transformation. This involves a shift from the classic business and operational management model to a process management model. This provides increased process clarity, consistency, and ownership as well as improved oversight and general control. These report series will help demonstrate how credit unions and their competitors have utilized quality methodologies to improve the overall performance of their organization. 

Today, one of the few paths to improved profitability & member experience is smart process management.

Credit Unions Improve Processes through Quality

A survey of credit unions ranging in size from $130 million (M) to $7 billion (B) in assets provided a wealth of information concerning continuous improvement initiatives. Regardless of where these credit unions were on their quality journey, their size, or their location, there were some common elements among all that were interviewed.

General Findings

• CEOs and/or board members as key drivers—The credit unions’ quality initiatives were sponsored by either the CEO or a board member. This created an instrumental and vital top-down strategy. In some cases, the CEO learned about Lean Six Sigma through a board member or through his or her service on other boards. But in essence, it was some type of firsthand experience that promoted the adoption of the methodology. More significantly, all the CEOs and board members recognized that this was something important to their credit union.

• Measurable strategy to improve service quality—The leaders of these credit unions were seeking a meaningful strategy to improve service quality—i.e., how to define, measure, and improve it. While most financial institutions claim superior service, there is very little in terms of infrastructure, metrics, data, and credible fact behind these claims. Survey participants made a conscious decision to start their quality improvement journey by first gaining a better understanding of and defining their members’ expectations. Using surveys or call center data helped with defining service level expectations. The stated end goal for these credit unions was to use quality methodologies to differentiate their institution from banks and other credit unions through improved service.

• Reduce operational expenses—Another main reason these credit unions implemented a quality strategy was their strategic goal of reducing operational expenses without adversely impacting member experience. There was recognition that a systematic look at their business processes—using these quality methodologies—would allow them to measure and quantify performance vis-à-vis member expectation. This would allow executives and leaders to hone in on key improvement opportunities, the added benefit being that a data- driven methodology would help take the emotions out of the decision- making process. Ultimately, streamlined processes would help reduce expenses and improve member experience.

• Not to be left behind by banks—Among the credit unions surveyed there was awareness that their primary competitors, usually banks in their communities, were actively pursuing process & experience improvement. The general consensus was, “We can’t just sit by and watch the competition improve processes, experience, reduce expenses, and better their performance while we do nothing.” It was a keen awareness of the competitive marketplace that drove these credit unions to seek out process improvement strategies.

• Build a culture of continuous improvement & transformation—The interviewees made it clear that it was their central goal to make process improvements that were measurable, quantifiable, and meaningful. Their objective was to formalize a strategy by creating a common language, a training platform, and a way of problem solving. In turn, this would help create a culture of continuous improvement and accountability within the organization.

• Educate from the top down—Another common theme among the credit unions involved training. In almost all cases, the organization provided executive- level training to senior staff. This was necessary to help embed the continuous improvement philosophy in the organization’s culture—to make sure that everyone understood what was going on and why quality was important to the credit union. Irrespective of the length of the training (some sessions were half a day and others a full day), it was crucial for senior leadership to fully understand their roles and responsibilities in deploying this methodology. Additionally, select, high- potential employees were trained as Lean or Lean Six Sigma Green Belts. These resources were then used to identify and implement improvement opportunities.

• Dedicate staff for continuous improvement—Regardless of the credit union’s size, all had at least one to three part-time (20%–25% of their time) or full-time dedicated staff members to identify improvement ideas and implement solutions. As their quality journeys continue, all the credit unions have plans to train more staff to get them comfortable with the quality methodology. In general, financial institutions of all sizes—both credit unions and banks—are remarkably similar in their overarching strategy for deploying a quality methodology. Given this, they typically achieve a similar series of milestones along their quality journey; these mile-stones are shown in Figure 1.

Figure 1: Lean Six Sigma Deployment Milestones

Quality at Work

The credit unions interviewed reported using Lean Six Sigma quality methodology on a wide range of initiatives, from the more complex – developing member experience strategy, implementing fully automated KPIs – to the tactical process improvement project including:

• Balancing teller cash
• Reducing teller shorts
• Optimizing branch cash usage
• Originating loans
• Improving consumer lending processes
• Reducing cycle time for opening new accounts
• On-boarding new members
• Renewing insurance policies
• Improving mail flow in insurance administration
• Reducing loan administration reports
• Reducing credit card losses
• Reporting for government taxes
• Adjusting accounts
• Settling credit cards
• Improving sales of homeowner’s insurance
• Shoring up the retail mortgage application process
• Distributing marketing materials, such as newsletters

Credit Union Success Stories

Credit Union 1

This credit union, with 30+ branch locations and assets in the $3.5–$4.0B range, is located in the Southwest region of the United States. The quality journey for this financial institution goes back to 2011, when leaders decided to implement a four-step strategy using Lean Six Sigma:

1. The first step was to create an inventory catalog of all existing processes in the credit union. Each process was then mapped, providing a good understanding of the current state.
2. Once the process maps were developed, the credit union moved to the next phase, which focused on discovering/identifying improvement opportunities.
3. Once the leaders developed a good sense of what to improve, they began prioritizing the list of opportunities, and Lean Six Sigma resources were assigned to start the process redesign.
4. The final step is ongoing as the credit union works to sustain the improvements. 

In preparation, the credit union hired outside consultants to train staff members in the Lean Six Sigma methodology. The consultants also provided coaching during the project execution and implementation. To develop the inventory catalog of processes, the credit union focused on eight business units, as follows:

• Mortgage lending
• Member services
• Consumer lending
• Audits
• IT
• Planning and marketing
• Finance
• Accounting

Much to the surprise of the leaders, the Lean Six Sigma team found over 800 unique processes among the eight units. With such large numbers to work with, a decision was made to prioritize the processes based on volume and potential to impact client experience. During the mapping exercises, the Lean Six Sigma team tried, whenever possible, to collect process data such as volume, cycle time, departmental head counts, and lead time.  As macro level process maps were completed, the credit union uncovered improvement opportunities. This helped identify the low- hanging fruit—items that could be addressed easily because they were quick fixes. This credit union shared four project examples that were the result of process documentation activities. 

Online Statements

The first project came from the marketing and planning department. One of the processes documented in this department focused on the conversion of members from paper statements to online or e-statements. Using Lean Six Sigma principles, the credit union collected process data on how many members were receiving offers from tellers in the branch to convert to the less expensive e-statements. Unfortunately, out of 900 offers made each month, on average only 10 members made the conversion.  Once the process was fully documented and the required process and customer data were collected, the credit union’s Lean Six Sigma team leader used a Lean tool, Kaizen, to identify solutions. The central goals were to simplify the conversion process for the member and to improve the tracking of branch data on whom the product was offered to and when.  To address the problem, the process was changed so that when a teller offers the e-statement to a member and the member indicates interest, the teller can flag the member’s account. Then, the next time that member completes an online transaction, a pop-up message appears on his or her screen. This message reminds the member of his or her expressed interest in converting to e-statements and takes the member through each step of the conversion process. If the member fails to complete the process, the account is flagged for someone from the back office to contact the member and assist with its completion. The improved tracking at the branch level will also improve the incentive programs. The solution is still being finalized by the IT department. The credit union is expecting a 30% conversion rate due to this improvement project. This could translate to yearly savings of nearly $150,000—all stemming from a simple, inexpensive, one-day Kaizen event.

Loan Modifications

This process improvement project originated in the consumer lending division. With fluctuating interest rates, it’s common for members to ask the credit union to modify an existing loan to match the rate or terms of another financial institution. Process mapping indicated that the loan modification process took anywhere from 30 minutes to four days per loan. This cumbersome process included 93 steps, 14 decision points, and four physical handoffs. The process started with the lending representative, who moved the request to the decision center (underwriting). Once a decision was made, the request went back to the lending representative, who, in turn, contacted the member with a decision.  Once the process was well documented, the Lean Six Sigma team conducted a one-day Kaizen event to determine ways to streamline the loan modification process. The result was a newly designed process that will include an 80% reduction in number of steps to just 19, two decision points, one handoff, and a new target time of 10–15 minutes per loan modification. The simplification of the process was based on the notion that most loan modifications can be completed by the lending representative. The data collection for the process helped identify a trend in loans with modification requests—they were typically for small loan amounts and represented a low risk to the credit union. 

While these projects seem simple in nature, once the problem was identified, the observed impact to the credit union and its members was significant. The power of the Lean Six Sigma methodology was that it helped uncover inefficiencies that the credit union had learned to live with over time. Lean Six Sigma provided a formal structure for improving processes throughout the enterprise. With an unbiased analysis of the process and the expertise of subject matter experts, this credit union has been able to successfully close large- and small-scale projects over the past five years.

In our next report we will continue to explore case studies in the application of Lean Six Sigma to Credit Union processes. What we are aiming to show in the course of these report is simply that quality methodologies are being used by credit unions and that many are benefiting from their use. We have witnessed quantifiable financial benefits and improved process efficiency in the credit unions with which we conducted research. The era of Lean Six Sigma as the differentiation strategy reserved only for the 500-pound gorillas in the sector is long over. Today, with the commitment of senior leadership and the presence of a few smart and motivated change agents, many credit unions can start to improve the value they deliver to their members, simply by operating in a smarter fashion. The data are there to prove this, if we follow the tenets of Lean Six Sigma—that we will not take decisions absent the appropriate facts. Several thought leaders in the credit union realm have launched Lean Six Sigma, and all of them are benefiting from the improvements the methodology has brought.