The Challenge

The board of directors, along with the executive team, are clearly tasked with setting strategy for a company. However, the information needed to perform this task effectively is frequently lacking.

Creating value for stakeholders should be the strategic objective of the board and executive team, yet this goal is not always strictly about making more money. In not for profit entities, such as credit unions, the real objective is to maximize membership value in the form of better service, lower fees and loan rates or higher deposit rates. These objectives need to be balanced by targeting a return on assets (ROA) and capital level which enables growth and sustains the credit union through good times and bad.

Many credit unions do not have accurate information of where value is created, maintained and destroyed. Understanding value is critical as this provides valuable insight into what is good and bad about an institution. Addressing negative elements that are destroying value in a credit union's operations frequently can have the biggest impact on the stakeholders and can be accomplished with the least amount of effort.

Let's take member profitability as an example for identifying value creation. A product perspective underpins this analysis as members are profitable only if the products they acquire and the way they use the product generate value to the credit union.

To set the stage, a common rule-of-thumb across all industries is that the top 20% of customers/members create 300% of the value, the middle 70% basically break even, while the bottom 10% reduce the value by 200%. This may seem odd at first, but doing some simple math, 300% of profits less 0% less 200% leaves you with 100% of the value creation. This is popularly known as the "Whale Curve of Customer Profitability"

With this knowledge, creating and managing strategy becomes much more focused and executable. Your fundamental strategy becomes:

  1. Identify your best members and take care of them. Determine why these members create value then provide products and services that enhance and sustain this value. For example, develop affinity and relationship programs based on the member behavior that is both valuable to the member and the credit union. Also, now that you know the profile of members who add value, the products they hold and how they use these products, you can focus marketing on expanding and sustaining this group.
  2. Identify and keep value maintainers happy too. This group may not be explicitly generating profits, but they are valuable. They provide economies of scale that help pay for a significant portion of overhead cost. They also may help maintain relationships which attract higher value products. Eliminating this group would move that overhead to the value creators which would likely result in them no longer providing value, plus you might lose higher value products when you lose the relationship. Truly you are better off with them then without them, but this doesn't mean their contributions can't be improved. 
  3. Identify and address the value destroyers with a plan. The value destroyers are your key in increasing the value of the organization. There are generally three things you can do with this group. First, is you can raise the price they pay. Second, you can change their behavior as to how they use the product. Third, and a last resort, you fire them. Firing is a last resort as it is much better to devise a Performance Improvement Plan (A.K.A. a PIP) to move them up and out of this group. You also know what type of members and products NOT to focus on in you marketing

As stated before, managing this group is the easiest and will have the largest impact on value. Using rule-of-thumb data as before, if you set a goal and develop a corresponding strategy to simply move 10% of your value destroying members (equaling only 1% of total members) from the last tier to the middle tier, the monetary value of the organization can increase by 20%!

Mathematically, what you are doing is reducing your 200% negative contribution group down to 180%. Doing the math again, 300%-0%-180% equals 120%. so by focusing your strategy on just 1% of your members and mitigating their constraint on earnings you increase the monetary value. This 20% monetary value bump can then be redistrubted to all members in the form of lower fees. and loan rates and/or higher deposit rates.

The real key to doing this is to simply identify the value creating, maintaining and destroying members of the credit union and by understanding what products and members behavior add value and what doesn't. A profitability study utilizing Activity-Based Costing can highlight not only what products and member activities create or destroy value, but also (and critically) why. The "why" is the most important part as that leads directly to defining what needs to be fixed as the famous saying goes, "A problem defined is half solved."

At this point, you strategic goals are very simple:

  1. Understand what products and members create value and why so you can promote these products and behaviors
  2. Avoid value destroying products and members
  3. Understand what needs to be fixed and fix it

The Analysis

Why is Activity-Based Costing so important to this process?

Activity-based Costing (ABC), particularly Time Driven ABC (TDABC) is generally not well understood. Most people think it's "an accounting thing," but that is categorically incorrect. TDABC is 95% operational analysis and 5% accounting, if that much. Let's explain why.

For example, if Judy spends 20% of her time (a.k.a., Time Driven) on product Alpha, then 20% of Judy's compensation should be attributed to product alpha as a cost. Knowing Judy's compensation is easy, that's the accounting party and readily available.

Knowing what Judy spends her time on is the tough part as that information is probably not in any system. Also, Judy is likely working on numerous products and different ones depending on the time of day, week, month or year. Clearly, the operational analysis of what Judy does is far more involved than understanding what Judy costs in total. That's why TDABC is not "an accounting thing." It's the operational analysis of where Judy spends her time that matters.

The Time Driven component is the key. Time Driven ABC focuses on the most important resource in the credit union, people. In any profitability study, determining interest income, interest expense, and non-interest income are comparatively easy as all that information exists in some system and is tied directly to a loan or deposit product by a system code. Operational and people costs are totally different.

Operational costs, in contrast, are rarely directly tied to specific loans or deposits in the accounting system, so a TDABC time study is the best way to get this information. This is important because employee compensation often makes up 50% of all operational costs. Since these people need somewhere to work, computers, and numerous support services, employees drive most operational costs. As such, understanding how much time your employees are spending on specific products will directly impact how over 85% of all operational costs are assigned and thus, the profitability of those members and products. This in turn directly impacts the strategic decisions you make concerning those value creating, maintaining, and destroying products and the members that use them.


To enhance value, the most important job of any manager, executive or otherwise, is to remove the constraints which prevent the credit union from creating and increasing value to all stakeholders. The operational analysis provided by TDABC enables identification of a credit union's strengths, weaknesses, opportunities, and threats (SWOT) all at once. Benchmarks from peers at the product and activity level then allow the identification of specific products, activities and member behaviors that create, maintain and destroy value. With this information in hand, executives commonly have little difficulty in determining strategies that remove constraints and enhance value to both members and the credit union.