This document has been made available in electronic format by the International Co-operative Alliance (ICA)
March, 1998
(Source: ICA Review, Vol. 91 No. 1, 1998, pp.55-63)

Innovation & Change in Federative Decision-Making Systems:
CUFIS and the Credit Union System of Saskatchewan
by Dr. Lou Hammond Ketilson*

Innovation is the key to success within the financial services industry. It is particularly important to credit unions in Canada, where they face fierce competition from banks and trust companies, and imminently the insurance industry. Although innovation has been examined from many perspectives in the literature, the issues around the introduction of innovation into systems of organizations has received limited scrutiny. Using a case study methodology, this paper examines one attempt by a federation to create a structure that would stimulate innovation throughout the entire system. The federation in question is the Credit Union System of Saskatchewan, Canada; the structural innovation is Credit Union Financial Information Services (CUFIS).

A federative decision-making system is made up of autonomous organizations loosely joined together by a central administrative organization providing services to the individual affiliates. Such systems are characterized by a decentralized power base and consensus decision-making processes. The impact of these characteristics is specifically examined with regard to the innovative ability of federative decision making systems. The results indicate that federative decision-making systems are capable of innovation, however the decision-making structures present challenges to the diffusion process.

Theoretical Framework: Federations -------------------------------------------- A federation is a form of organization established through voluntary, binding and long term co-operation between autonomous affiliates. All affiliates maintain joint authority over the federation and act together in some areas and separately in others (Johnstad, 1997). A central body with a formal staff is typically created to direct the federation towards its common goals (Warren, 1968). Affiliates remain autonomous but relinquish control over some of their activities to the central body in return for some benefits (Provan, 1983) such as minimized network complexity and reduced environmental uncertainty (Oliver, 1990; Warren, 1968). In order for a federation to develop, there must be a large group of organizations with recognized interdependencies, a relatively large discrepancy between the main activities of the affiliates and the anticipated role of the central body (Provan, 1983) and some commonalties between the organizations (Johnstad, 1997).

Various types of federations can be identified on the basis of who holds power and control, and on how much of the organization is structured around the use of federal organizational principles. When distinguishing on the basis of power and control, three types of federations are suggested: confederation, federation, and quasi-federation; on the basis of the intensity of use of federal principles in an organization, two types are suggested: the part-federation and an integral-federation (Johnstad, 1997). The type of federation that serves as the focus for this paper is most accurately described as a confederation holding characteristics of an integral-federation. With the high amount of contact between affiliates and a consensus decision-making structure, the management of inter-organizational relations is quite crucial.

Inter-organizational Relations ----------------------------------- The literature identifies two main reasons why an organization would voluntarily enter an inter-organizational relationship: a need for resources (Oliver, 1990; Schermerhorn, 1975; Wievel & Hunter, 1985); and a desire to reduce the complexity and uncertainty in the external environment (Oliver, 1990; Warren, 1968). Additional reasons include the potential to exercise power over another organization (Oliver, 1990), and the pursuit of common or mutually beneficial goals (Oliver, 1990; Schermerhorn, 1975). Inter-organizational relations can have a profound affect on an organization, with an important one being loss of decision-making autonomy (Scher- merhorn 1975).

Various types of inter-organizational relationships will have a distinct impact on an organization's decision making process. In a federative context (Warren, 1968) the decision making function for the federation resides in the central administrative body (Warren, 1968), however, the decisions are made with the input of the member units. Consensus decision making is common in such federations (Warren, 1968). The downside of consensus decision making is the time that must be invested in the process. Decisions affecting the entire system cannot be made quickly.

Conflict is another by-product of inter-organizational relationships, and is the result of goal discrepancies (Morgan, 1986) plus resource scarcity (Pfeffer,1981). Organizations can have differing goals and exist in relative harmony, but if the resources needed to meet their diverging goals are suddenly scarce, then conflict will arise in an attempt to determine who gets the resources necessary to meet their goals.

How well organizations interact with their environments and attain necessary resources determines if they survive. Organizations can thus be thought of as processes for organizing necessary support from their external coalition. The coalition may place demands on the organization in exchange for its support, demands which may be in conflict with one another forcing the organization to prioritise demands (Pfeffer and Salancik, 1978). How these factors combine to facilitate or impede the diffusion of innovation throughout a system will now be examined.

Credit Union Financial Services Industry Context
----------------------------------------------------------- Over the past twenty years the financial services industry in Canada has grown dramatically. The industry's growth has been paralleled by a growth in personal income, combined with increasing urbanization, and rising levels of education. The result is sophisticated investors demanding greater variety in financial services and innovative forms of service delivery. At the same time government deregulation has blurred the boundaries between financial institutions, resulting in increased competition in the financial services industry domestically, accompanied by trends toward internationalization. Both of these factors have led to greater competition between financial institutions for the dollars held by well-educated, well- informed, cautious investors. For the average individual, regardless of how educated, the result has been confusion. In response, personal financial planning has arisen as a service in itself, often used as another strategy for marketing financial products. At the same time that demand for innovative services was increasing, the Saskatchewan economy was experiencing recession throughout the 1980's and early 1990's due to drought and low commodity prices. Recession meant fewer dollars in the hands of credit union members and therefore, fewer dollars in the credit unions. It was in the midst of this competitive environment, consumer confusion and economic recession that Credit Union Financial Information Services (CUFIS) was created.

Saskatchewan Credit Union System
------------------------------------------- The Saskatchewan Credit Union System (hereafter referred to as the "System") is made up of independent credit unions based in communities throughout the province, owned by the members they serve. There are 163 credit unions serving 558,000 members through 340 branches and service outlets with assets of $6.19 billion. They employ 2749 people and contribute almost $200 million to the Saskatchewan economy (Hammond Ketilson et. al, 1998). These "first-tier" credit unions form the base of the System and drive its actions. Credit Union Central of Saskatchewan (CUC) is a second tier credit union, owned and funded by the first tier credit unions. CUC provides a number of services to the credit unions that they could not provide on their own, such as marketing, data processing, human resource and planning support to the entire system.

This federative system relies on democratic methods of control and communication. The province of Saskatchewan is divided into 12 credit union member districts and one non-credit union member district. In each of the districts, credit union members elect individuals to the boards of directors of their own credit unions. The boards in every district then elect or appoint credit union delegates to attend delegate, sub-district, district and CUC's Annual Meeting. These delegates elect the board of directors who oversee CUC's operations. In this way, CUC is controlled by its member credit unions (Credit Union Central of Saskatchewan, 1996).

Credit Union Financial Information Services (CUFIS)
---------------------------------------------------------------- On May 1, 1987, Credit Union Financial Information Services (CUFIS) was established by Credit Union Central of Saskatchewan (CUC) as part of its future direction. CUFIS was established as a three year pilot project designed to provide financial information services to individual members, credit unions and other co-operatives (CUFIS, 1987b). It was intended to be a catalyst that would bring change to the credit union system in Saskatchewan (Financial Information Centre Project Plan 87-89).

CUFIS was set up as a subsidiary of CUC, yet separated legally and physically from CUC so that it would have the freedom to be truly innovative, while still reporting to a Directions Committee made up of the CUC executive management team. Initially it operated out of a storefront office designed with a customer focus, with a staff complement of four, later increased to five. CUFIS was created with the agreement that it would be funded by CUC and the System by having CUC reduce interest on share capital by 1/2% each year. As a consequence, CUFIS was not only answerable to its parent organization, CUC, but also to the many credit unions that own CUC.

During its first three years, CUFIS fulfilled its mandate by developing innovative software packages, an award winning video series, conducting numerous seminars for members and promoting the concept of financial planning throughout the Saskatchewan Credit Union System. The feedback from credit unions was positive although there was some doubt about whether individual credit unions could support their own financial planning services, as CUFIS was encouraging (Eggertson, 1990). Overall CUFIS seemed to be on track developing new ideas, products and services that educated members and helped credit unions attract and retain members in the face of stiff competition in the area of personal finances.

In l990, CUFIS' mandate was continued for another three years during which time it was to focus more on pure research and less on applied research (CUFIS Directions Committee, 1989). However, by mid 1992, CUFIS had been relocated back into the CUC head office and at the end of the year, it was dissolved.

Analysis of Events ---------------------- Despite the apparent success of CUFIS as source of innovation within the Credit Union System of Saskatchewan, it was disbanded. Some of the factors identified as barriers to achieving the objectives set for CUFIS as an organization included the structure of the organization, the structure of the federative system, resource dependency, and goal compatibility.

Organizational Structure
Adhocracy vs Ambidextrous:
With its informal internal structure, lack of job descriptions, and lack of formal rules and procedures, it would appear that CUFIS was initially designed to be an innovative organization in the form of an adhocracy (Mintzberg, 1989). It was expected, however, to act like an ambidextrous organization - to innovate, problem-solve and develop products and services with one hand and deliver and support these products with the other hand. Unfortunately, CUFIS was not sufficiently resourced to be ambidextrous, as it did not employ enough people to support these dual activities.

Differentiation vs Integration:
In complex environments, organizations often differentiate into smaller units better able to cope with complexity than the organization as a whole because they are focused on a limited set of activities (Lawrence and Lorsch, 1967). These differentiated units must also be integrated to a degree in order to pursue common organizational goals, thus creating constant tension as organizational units are at the same time differentiated and integrated.

In a rapidly changing and uncertain financial services industry, CUFIS was differentiated from CUC to allow it the freedom it needed to be innovative to generate ideas and products to compete in a dynamic marketplace. At the same time, integration was required with CUC in order to pursue the common goals of CUC and the Credit Union System. CUFIS also needed CUC in order to support and deliver its products and services so it could maintain its research and development focus, but because of the separation from CUC, CUFIS had little contact with the necessary CUC departments during the developmental stages of their projects. When the time came to transfer a project, staff at CUC felt little or no ownership and often saw it as an increase in their workload.

As a result, CUFIS projects often did not receive priority attention. Overall, it would appear that the relationship between CUFIS and CUC was not conducive to the long term survival of CUFIS. Indeed, it may not have been possible to create a relationship that was close enough to provide adequate support yet distant enough to allow innovative freedom with CUFIS structured as it was.

Structure of the System:
The decentralized, federative structure of the Credit Union System itself was also cited as a reason for CUFIS' separation from CUC. Several individuals who were interviewed believed that CUFIS had to be separate from CUC and from any particular credit union in order to gain the support of all credit unions. If CUFIS was perceived to be a part of CUC, the independent credit unions would feel that CUFIS was being used to push centrally developed ideas, products and services. Similarly, if CUFIS affiliated with any single credit union, the other credit unions would feel that one credit union's ideas were being forced on them. In either circumstance, the individual Credit Unions would have perceived CUFIS to be a threat to their autonomy and would not have supported it.

Resource Dependency:
During the late 1980's and early 1990's CUC saw its first decrease in assets in over a decade. Many credit unions were amalgamating and struggling to survive at this time. In addition to this, competition was increasing. Between 1987 and 1989 the mortgage companies in Saskatchewan increased their market share in the areas of deposits and loans by almost five percent. These gains came at the expense of the banks and credit unions.(Credit Union Central of Saskatchewan, 1987d; Credit Union Central of Saskatchewan, 1989b).

Credit unions were feeling the pressure to survive while still trying to balance the interests and needs of their members. Such a bottom-line focus, as opposed to a long term investment focus within the System put extra pressure on CUFIS. Many interviewees referred to the "economic realities" credit unions were facing and stated that most credit unions were in need of the services CUFIS provided but were also in need of the money that supported CUFIS.

A General Manager's Report from early in 1987 indicated that initially CUFIS was to generate a return on investment of 12% through the sale of its products and services. By mid 1988 it was obvious that CUFIS was not going to be able to meet this target. Actual revenues were approximately one third of that projected. After that, CUFIS' revenue targets were adjusted down but there was still difficulty in meeting them. It was determined that people simply would not pay for financial planning at this time; at least they would not pay for it as it was provided and marketed by CUFIS. This made CUFIS even more dependent on the System than it was intended to be. The credit unions controlled virtually all of CUFIS' resources and they were not happy with CUFIS' results.

Goal Compatibility:
Based on comments made during the interviews, it would appear that there was initial goal compatibility between CUFIS and the credit unions, but that this changed throughout CUFIS's lifetime. Credit unions realized they needed innovation, information services and full financial services in order to remain competitive. Many credit unions also had ideas for products and services they would like to offer their members but did not have the time or resources to develop themselves; CUFIS was perceived to be able to help these credit unions by developing their ideas for distribution throughout the whole System.

This compatibility, however, did not seem to last long, with interviewees indicating that CUFIS did not live up to their expectations - tangible products that they could offer their membership and that would generate revenue. It was felt that CUFIS never provided this to them, or at least, not in sufficient numbers. It is possible that the credit unions never fully understood the mandate of CUFIS, which went beyond product development to include innovation in the areas of member education, information services and service management, therefore they assumed CUFIS was failing to meet its objectives. Ultimately, some of the larger credit unions began developing the same products and services that CUFIS was developing, demonstrating their lack of confidence in, or knowledge of, CUFIS' activities. Thus began a downward spiral, with the conflicting demands of the System and Credit Union Central forcing CUFIS further and further away from the objectives and strategies that had started it down the path toward innovation.

Conclusions --------------- This paper examines an attempt by a federation to create a structure, a separate subsidiary, that would stimulate innovation throughout the entire system. The factors identified as barriers to achieving the objectives set for CUFIS as an organization include its original organizational design, the relationship between CUFIS and the Credit Union System, and the federative characteristics of the Credit Union System of Saskatchewan.

We need not conclude that because CUFIS was not able to meet its stated objectives, innovation within a federative system is not possible. True, it may be difficult to move all organizational members of a System to agreement on a central strategy for innovation, especially if the members are significantly different from one another. However, such diversity may, and does, stimulate spontaneous innovation at the decentralized affiliate level. Since the System is based on shared values, once the members do agree on a strategy for innovation, implementation of the strategy is often easier and occurs quite quickly.

We can, however, conclude that errors were made in the creation and design of CUFIS. CUFIS had demonstrated its ability to innovate, but was not able to control the implementation process throughout the system, as indeed no single player can, thus demonstrating the strength and yet weakness of a confederation. The goal of being differentiated to foster creativity, while also needing to integrate with the system for the purpose of generating and sustaining support for its activities, was impossible to achieve.

A lack of clarity regarding control over decision making was another factor linked to organizational design. An organization such as CUFIS had no voice in the decision-making process of the federation and could not defend its actions, while receiving only limited feedback from other members of the federation through the Directions Committee.

More significantly perhaps, the study identified that the creation of CUFIS was inconsistent with the traditional approach to innovation within the Saskatchewan Credit Union System. Typically, new ideas originate within an autonomous credit union. As the innovation proves to be successful, word of its success spreads, other interested credit unions pick it up and adoption and diffusion occurs. CUFIS, while its origin was linked to the System's Future Direction plan, was essentially the creation of the CUC's Chief Executive Officer. In the described case study, it is concluded that the implementation of a centrally identified initiative failed to be successful because grassroots acceptance is absolutely fundamental within a confederation.

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------------------------ * Dr. Ketilson is an Associate Professor of Management and Marketing in the College of Commerce, and Acting Director of the Center for the Study of Co-operatives, both at the University of Saskatchewan, Saskatoon, Canada.