MADISON, Wis. (10/19/10)--How sustainable is the credit union business model? Sustainable, but with caveats, according to four experts who recently spoke at Filene Research Institute’s Credit Union Sustainability Colloquium: Evidence and Actions at Harvard University. The colloquium was made possible through collaboration among the Massachusetts, New Hampshire, and Rhode Island Credit Union Leagues, Harvard University CU in Cambridge, Mass., and Filene. Participants included 85 credit union CEOs, directors and executives from New England and from Filene’s research and innovation partner credit unions. Filene will publish a full review of the day’s proceedings and findings in early 2011. Peter Tufano, a Harvard Business School professor and a Filene Research Fellow, introduced a Harvard business case to show that growing profits and growing sales do not always make a viable business. The case study’s Butler Lumber Co. had to decide--just as credit unions do--on how to use four levers for the right mix of profit margin (lowering costs, raising revenues or both), asset turnover, leverage (using as much capital as possible), and payout (distributing funds to shareholders). If Butler Lumber gets it wrong, the company will grow its way into default. The credit union corollary: Credit unions with excess capital can manage with low profits for a long time; but without access to outside capital, the only way to grow sustainably in the long run is to pull one of those four levers. Building on Tufano’s sustainable growth theme, John Lass, senior vice president of strategy and business development at CUNA Mutual Group, led a discussion of what those levers look like at credit unions. An excellent way to do that, he said, is to look at National Credit Union Administration reports to see what a few big credit unions are doing to optimize growth. State Employees’ CU in Raleigh, N.C, wins a high return on assets (1.07%) and a better return of equity (16.37%) with a 2% (of assets) operating expense ratio and a high leverage factor-- a capital level that hovers around 7% of assets. You can fail even though nobody dislikes you, said Frances Frei, a Harvard Business School professor. Credit unions particularly must be careful about trying to be all things to all members, because a drive for across-the-board excellence is much more likely to lead to mediocre performance in all areas. Instead, it takes strategic courage to decide what your credit union will not do well--and make sure you don’t do it. If you try to be good at everything, you will run out of money long before you’ve succeeded. Not a recipe for success, Frei said. Dorian Stone, a partner at McKinsey and Co. and a Filene Research Fellow, said outsized operating expense ratios are the bane of most U.S. credit unions. A straightforward comparison of operating expenses shows U.S. credit unions lagging similarly sized banks by 20% and more. Moreover, competitors aren’t likely to get less efficient, so it’s time for credit unions to do better. Key elements for credit unions to assess include whether they are using scaled operational models, prioritizing the right performance improvements to deliver value to the member, and having the right accountability in place at each level to ensure high levels of performance, Stone added.