ORLANDO—That the CUSO business model has been a boon to credit unions, both as individual CUs and the community as a whole, is clear. What is often less clear to many, however, is that not every CUSO proposed is based on solid business model assumptions.
The CFO with CO-OP Financial Services, one of the largest CUSOs in the country, offered some insights into how to address that challenge.
Kari Wolfing of CO-OP speaking to NACUSO.
Speaking to the NACUSO annual conference here, Kari Wilfong offered her thoughts on “CUSO Creation and Valuation: To What End,” urging any credit union (or CUSO) considering a new CUSO or a CUSO investment to “begin with the end in mind.”
“It sounds basic, but know your unique value proposition,” advised Wilfong.
She pointed to a template that CO-OP frequently uses when considering new initiatives in which it then fills in the blanks around questions that include who are the key partners, what are the key activities, what about customer relationships and customer segments, what are the key resources, key channels, cost structure and revenue stream.
“This is replacing the traditional business plan, because it’s a story captured in a single page,” said Wilfong.
Wilfong said those considering chartering a new CUSO frequently ask her about the legal structure or form of incorporation that would be best suited for a CUSO. Those CUs need to, again, answer “to what end?,” according to Wilfong. Those options include:
- Corporation. A taxable entity that is more structured when it comes to capital and governance. This model is seen more often with institutional investors.
- LLC. A pass-through entity that is extremely flexible and is very popular at certain sizes. For credit unions holding any ownership in a CUSO that is an LLC, it must be treated as an equity, reminded Wilfong, noting that any portion of loss must be reported monthly as a CUSO ramps up.
- Cooperative. A traditional C corporation with special patronage rules. It requires payment of an annual patronage distribution (minimum of 20%), which is ideal when all owners are customers, said Wilfong. It is not ideal for passive investors.
The Lady or the Tiger
To get her audience to think of CUSOs in a different light, Wilfong drew upon the story “The Lady or the Tiger,” by Frank R. Stockton. That story, written in 1882, includes as characters a King who is in charge of the land and who has a simplistic judicial process; the princess, the king’s daughter; the courtier, a dapper member of the court who is largely unknown; the lady who is the most attractive woman in the land, and the tiger, who is hungry.
The premise of The Lady or the Tiger is this: if someone is thought to be guilty of something, they are put in an arena where there are two doors. The person under trial must choose between the first door, behind which there is a beautiful woman who will marry the “innocent” man, or a second door behind which is the hungry tiger who will eat the “guilty” man.
The story gets its title when the princess falls in love with the common courtier, and does so without permission of her father. When the king learns of this he puts the courtier on trial, and that creates the dilemma. Right before the trial the princess learns behind which door is the beautiful lady who, if chosen, will marry her lover. The story ends with the princess looking at the courtier and nodding toward one of the doors. Who’s behind it? The reader is never told.
“Let’s think of the king a little differently,” said Wilfong. “He’s the most powerful member of your board. He could be your biggest CUSO investor. The princess is the owner or operator of the CUSO, who has a little more knowledge than the king. The courtier is the least powerful board member who wants to be included, obtain valuable services, but doesn’t have much influence over what occurs. With environments forever changing, think of the tiger as a corporate meltdown, the lady as growth. The princess has the insider knowledge and is personally vested in the outcome. If you’re not all crystal clear on your goals, you get a Lady and the Tiger situation.”
What does this story tell us? “How we define the end depends on the role we play in the story, and the end can change depending on the environment,” said Wilfong. “So what I suggest is that you do some scenario planning and see how, if, when or where a breakdown might occur. Be nimble and ready to change course. Have a graceful exit strategy, which I like to call the pre-nup.”
Misplaced Focus
Wilfong noted that NCUA’s new CUSO reporting rules go into effect on Dec. 31, 2015, and said the reporting is pretty straightforward. “What gets complicated is the CUSO of the CUSOs,” she said.
Wilfong believes NCUA’s oversight is misplaced, but most of all, redundant. While CO-OP would have no concerns should NCUA come visiting, she added, “We’re already under this scrutiny, but it’s not from the NCUA, it’s from our clients. Our clients are the ones asking the questions, submitting RFPs, looking into security and risk and contract complexity. So be prepared if you’re not already getting those questions.”
Speaking again to the question of “to what end,” Wilfong said it’s not uncommon to talk with people excited about forming a new CUSO because they see all the potential revenue streams. What they often don’t see, she said, is all the hidden costs, such as compliance, technology, human capital and potential costs related to intellectual property.
The latter, she said, “is the new hot one. Just because you can do it doesn’t mean someone else hasn’t done it or doesn’t have a patent on it.”
The other expenses she said must be considered include the “dreaded allocations.” That is a reference to the need to determine accurately how much staff time is really being used on a project/initiative/function. “This can be crucial when doing an acquisition, when a company/CUSO looks profitable, until find out what real costs are and where they are being allocated,” she said.
Finally, noted Wilfong, there are time and opportunity costs to be considered, including missed opportunity costs. “What ideas are you leaving on the table because your focused on something where you don’t know to what end.”