Institutions insured by the NCUSIF reported rising net income year-over-year, yet it would behoove credit unions to remain cautious. Abundant risks, such as exposure to a flat yield curve and heightened competition, have increased exposure to interest-rate and credit risks. Furthermore, competition from new entrants such as neo-banks threatens to pull business away from credit unions.
In today’s environment, 95 percent of CFOs participating in a recent survey said their organizations should be doing more to leverage financial and operational data and analytics to make better business decisions. At a time when finance executives have access to more data than ever, they struggle to leverage that data to understand business trends. That puts them in a tough position. They play an integral role in developing, executing and monitoring their institutions’ strategies, but they often fall short in articulating the meaning of financial results, and in understanding how leaders can make better decisions based on those results.
For CFOs, the survey results mean they must pivot to improve processes and make better use of data and advanced analytics to inform strategy. To advance enterprise performance management, here are three recommendations that span profitability analysis and planning functions.
Visibility of Relationship Profitability
Does your institution measure the profitability of each relationship and customer? If not, how hard would this be to do? Profitability is at the heart of any institution’s long- and short-term strategies, so determining key profitability drivers should be a mission-critical priority for any CFO. But while nine out of 10 CFOs say monitoring relationship and customer profitability is important in the aforementioned survey, just 43 percent monitor relationship profitability, and only 41 percent monitor customer profitability.
Understanding the total value of a customer’s relationship is essential for frontline managers, who can then price loans and deposits appropriately, more effectively market products and services, retain the best customers (and service them appropriately), and more. Finance leaders should consider profitability measurement systems that:
- Actively manage complex relationships and portfolios
- Aggregate sourced and derived data in a single repository
- Provide a robust calculation and modeling engine
- Offer actionable insight on ways to improve financial performance
The survey also revealed that high quality data and analytics should be a key area of focus.
High-quality Data and Analytics
Sixty-five percent of CFO survey respondents are only somewhat confident in their institutions’ abilities to manage the financial impact of industry disruption. This may be due in part to challenges with data and reporting accuracy, which in turn hinders effective business decisions. Leaders should therefore consider embracing tools that will improve accuracy and help them make strategic and tactical decisions in the organization.
Successful finance teams understand the need to differentiate descriptive analysis (what are my results?) from diagnostic analysis (why did I get these results?). These analyses support decisions that enable sustained competitive performance and require:
- Access to clean and consistent data
- A robust database with sophisticated modeling and analytics capabilities
- The ability to integrate data from any source to perform calculations, create and monitor plans, measure profitability, and conduct other types of reporting and analyses
- Automated reporting and report distribution
A third key focus area that emerged from the survey results is the need to empower one’s employees.
In addition to providing the right tools and improving the accuracy of results, financial institution leaders must make the right investment in people and resources, coupled with best-practice processes, to drive better performance.
In the survey, 72 percent of CFOs say their institutions are experiencing resource constraints, up from 61 percent in last year’s results. Outdated processes further hinder 39 percent of responding institutions, while 33 percent note that personnel skillsets need improvement.
This is not the time of “business as usual” in financial institutions. You must continue to invest in your people—and the tools, processes and infrastructure that support them—to retain intellectual property and drive performance in the new normal of today’s economic climate.
Kermit Randa, CEO, Kaufman Hall Software
Ken Levey, VP, Kaufman Hall Software.