The Strength of Scenarios

Sce·nar·i·o: a sequence of events esp. when imagined; esp : an account or synopsis of a possible course of action or events.

Stra·te·gic: of great importance within an integrated whole or to a planned effect.

One of these words can help your credit union get to the other, suggests John Oliver, president of Laurel Management Systems, Palm Springs, Calif. Specifically, exploring scenarios of the possible futures CUs might face can help your board of directors stay focused at the strategic level of planning.

“I can’t tell you how many times I go into strategy discussions in credit unions and community banks, and the discussion is actually all around budgets and tactical issues,” Oliver says. “Scenarios are a very helpful tool in emphasizing that strategy isn’t about numbers. It’s a discussion of what markets are we going to serve, how are we going to serve them, and how are we going to do it better than anyone else. Unfortunately, none of us is really trained well to think strategically—and that includes board members and senior executives.”

What Will Shape the Industry in 2020?

Scenarios for Credit Unions 2020, a new report published by CUES and Decision Strategies International, W. Conshohocken, Pa., peers out into the second half of this decade, based on an analysis of recent and current economic conditions, new directions in financial services, diverse perspectives of credit union executives and other business leaders, and a survey of CUES members.

The report presents four scenarios of where 2020 may find credit unions in an era where wider fields of membership and a global view of financial services dial up the competition, where technology changes the definition of service, and where “a sense of crisis is more the norm than the exception.”

The report aims to offer “plausible ‘what-ifs’ that challenge prevailing beliefs,” says Nicole Adams Kraus, principal with Decision Strategies International.

The four scenarios present diverse visions of a future in which the economy booms or struggles, cooperation within our movement continues or fades away, technology transforms payments and financial service delivery or moves at a slower pace, and the demand for and availability of executive talent changes accordingly.

Incorporating these kinds of scenarios into strategic planning offers a useful alternative to the traditional “straight-line format” approach of forecasting the future based primarily on a credit union’s past performance, Kraus says. Scenarios “start with the outside first, asking what big changes are in play and what impact that might have for credit unions,” from the pace of regulatory change and potential for taxation to the impact of new competitors entering the market.

“This type of planning helps to bring to the surface the tough things that really need to be on every credit union leader’s radar,” she says. “You need to be having internal conversations about these issues and understanding whether you have the necessary resources to address these possibilities.”

Scenarios may simultaneously paint different pictures of the future and underscore commonalities that become big imperatives for the organization. One example is the need for deepening succession planning, especially for executive talent in business units where change seems to be most far-reaching.

“We almost always find that there are some common threads across the different scenarios that turn into priorities, or what we call key success factors, for credit unions,” Kraus says.

Testing Initiatives, Conducting Experiments

The divergent futures suggested in scenario planning should help credit unions prepare for more nimble responses as evidence mounts about the actual directions of those trends. “How are we going to recognize when this is happening? What would be the trigger point for us to take action if it does happen? And what will the action look like?” Oliver notes.

Beyond a big-picture view, scenarios also provide a means to assess the likely impact of new or planned initiatives. “You can run it through the filter of the scenarios and ask, ‘Does this return value to us and our members if we engage in this initiative as it is constructed today?’” Kraus notes. “If it seems to be very fragile under three of the four scenarios, you can evaluate it more closely and see if you need to reconsider the timing or its dependency on other initiatives. Maybe instead of building it in-house, you might decide to bring in a partner so you have more flexibility to turn the lights off if it doesn’t end up proving valuable.”

Kraus recommends that credit unions incorporating scenarios into their planning take a quarterly “pulse check” on whether and how these views of the future seem to be playing out. Board members can provide useful perspectives on those progress checks, given their viewpoint from outside the credit union looking in, she notes.

“There is so much noise out there and so many changes happening that this can help you to focus on the changes that are going to make the most difference for your credit union,” she adds. The point is not to make major strategic swings based on isolated bits of information, but “to listen to the signals and make sense of them as a team.”

Credit unions can also test the impact of the conditions set out in the various scenarios by conducting small experiments before committing to major investments. Kraus cites the example of moving to virtual tellers as members get more comfortable with do-it-yourself services. Instead of installing these terminals in all your branches at once, why not install them in one or two branches to test member response? Or, a credit union looking to partner with retailers on new forms of mobile or e-payments could begin by working with one merchant or a small chain.

Possible Pitfalls

Scenarios may raise the possibility of changes that seem daunting, such as the tightening of economic cycles or the possibility of taxation. Kraus calls on directors and executives to set aside a “gloom and doom” response to these changes in favor of an opportunities mindset.

“If we do become taxed, what are the advantages we might be able to take from that?” she asks. “If people stop going to branches, how might that benefit us? What are the new ways we can communicate with members? If you’ve been successful doing something a certain way for a long time, the idea of changing that can be scary because you don’t know what’s on the other side. But we know the world is changing, so we need to look for the positives there.”

Oliver agrees that changes that may shape the future can seem daunting. “It can be easy to get bogged down in the negative, whereas the only thing that is going to keep us relevant in the future is using scenarios to find opportunities that will take us to new levels and will make us viable organizations that resonate within our marketplace,” he says.

“We mustn’t allow the scenarios to just focus on ‘Oh, woe is me,’ because the end result of that is that we bury our heads in the sands and fail to recognize or acknowledge the huge changes that are going on in the marketplace and what we need to do about them.”

The titles of the scenarios in the report convey that keeping pace with members, competitors, and other forces requires an ongoing journey: “Stuck in a Rut,” “Finding a Second Wind,” “Hitting a Wall,” and “Blazing the Trail.” (See table, below.)

The four possible futures described in the Scenarios 2020 report are derived from considering two factors along a continuum

“These names are not meant to reflect an opinion about which ones are good for credit unions,” Kraus says. “We would argue that there are no bad scenarios, which goes back to the spirit of looking at the upside of opportunity and change.”

Using tools included in the workbook section of the report, the four scenarios can be analyzed according to a credit union’s unique perspective and situation. It’s also useful to customize them based on individual credit unions’ fields of membership and local economies. Whatever the size of the credit union or region served, scenarios can be adapted and applied to study the impact of the trends foreseen for each market area, Oliver says.

Adapting big-picture scenarios to study their application in your credit union’s space is crucial.

“We need to get much better at focusing on the actual needs of our individual marketplace and on looking outside of financial services on how consumer buying habits and loyalties are changing and what that might mean for the way we deliver services,” he recommends.

Thriving in 2020—and Beyond

Credit unions using scenarios in their strategic planning should aim to keep their focus on the major changes in the wings but monitor for any shifts around the edges. Oliver recommends that his clients who base long-term strategic plans in part on scenarios follow up one or two years down the road with trends analysis to see how forecasted shifts are progressing and whether they are likely to enhance or derail strategies and initiatives.

In offering additional rationale for using scenarios in long-term planning, Kraus cites the research of Arie De Geus, author of The Living Company: Habits for Survival in a Turbulent Business Environment, who identified four characteristics of long-lived organizations. The longest-running companies are (1) financially conservative; (2) cohesive, with a strong sense of identity; (3) sensitive to their environment and ready to respond to changing market, economic, and political forces; and (4) tolerant of outliers and exceptions and willing to experiment.

Credit unions do well in terms of frugality and their sense of identity, she suggests, and can use scenarios as one way to enhance their outward views of the business and consumer climate and their willingness to experiment with new ways of doing business in a changing world.

“This notion of experimentation is about becoming a learning organization that is willing to accept some level of failure as long as there is continued learning and improvement along the way,” she says. “Scenarios are very much focused on helping people to gain the peripheral vision they need to become a long-lived organization and to bring the experimental mindset into their planning.”

Karen Bankston is a long-time contributor to Credit Union Management and writes about credit unions, membership growth, marketing, operations and technology. She is the proprietor of Precision Prose, Stoughton, Wis.