Performance Measurement in Irish Credit Unions: An

evaluation of the appropriateness of PEARLS

Sylvia Dempsey & Ruth Vance

Performance measurement is one of the areas within Management Accounting that, in

recent years, has attracted significant interest. Credit Unions are mutual non-profit
making organisations whose principle activities are the accepting of shares and
deposits from members and the making of loans to members at reasonable rates of
interest (Friendly Societies 2001). Nearly half the population of Ireland is a member
of a credit union. PEARLS is the performance measurement system operated by the
Irish League of Credit Unions in all affiliated credit unions. The aim of this research
is to examine if the PEARLS measurement system reflects the leading literary thought
on performance measurement.

Performance Measurement in Irish Credit Unions

Each credit union is an autonomous organisation and manages its own affairs. In each
credit union, strategic planning is carried out by a voluntary board of directors, with a
salaried manager looking after the day-to-day running of the office. The Irish League
of Credit Unions acts as the internal watchdog, with the Irish Financial Services
Regulatory Authority (IFSRA) externally ensuring that there is proper governance
within the credit union movement, that reasonable transparency exists and that people
are given a fair deal (YCU Annual Report 2003).

At the 2000 AGM the Irish League of Credit Unions passed a motion to use the
PEARLS performance measurement system, which was already in use since 1990 in
over twenty countries. Every quarter financial results, in the form of a call report (see
Appendix 3), are submitted to the League and a PEARLS report is returned to the
individual credit unions (see Appendix 2). Each letter of the word PEARLS measures
key areas of Credit Union operations: Protection, Effective financial structure, Asset
quality, Liquidity and Signs of growth. Static ‘Standards of Excellence’ are applied to
most of the ratios, these are intended to act as a target for the individual credit unions.
Is PEARLS an effective Performance Measurement System

According to recent literature, in order to be effective, a performance measurement

system should be linked with the strategy objectives of the organisation, reflect both
internal and external concerns, report past performance, but also create new
opportunities for the future, and aid communications, learning and decision-making
within the organisation.

Link with the Strategic Objectives of the Organisation

At the turn of the century, it was recognised that to ensure that decision-making is
fully focused on delivering results, performance measurement must be linked to
strategic objectives (Kaplan & Norton 2000, Nilsson et al 2002, Loch et al 2002,
Brignall et al 2003, Murby 2003). The Irish League identified the key strategic growth
areas on which they needed to focus to ensure future success and growth as being:
decrease in staff turnover, improvement in quality of staff, younger age profile of
members, investment in marketing programs, investment in IT, increased service
range, and increased community involvement (McCarthy 1999).

PEARLS does not measure, or make any attempt to encourage, the level of success of
each credit union in achieving low staff turnover or improvement in staff quality.
Staff turnover could be measured with a simple financial ratio. But more importantly,
staff satisfaction, which would lead to low staff turnover, could be effectively gauged
using staff surveys, this would also give an insight into areas staff feel need
improvement. Attendance at training courses would improve the quality of the staff
and should be encouraged by PEARLS. The amount of training that staff has received
could quite easily be reported in the measurement system.

In order to counteract the aging member population, credit unions need to increase
their ‘young’ membership base. Even though a figure for members under the age of
sixteen is required in section 8 of the call report, no ratio or measure is included in the
resulting PEARLS report. At the very least, the ratio that currently measures the
percentage of members who save and borrow should be broken into various age
categories. Not only would this predict trends for the future, but also enable credit
unions to target certain age groups with their marketing programs.

Even though investments in marketing and IT are essential to the credit unions’
survival, they are not specifically and separately reflected in PEARLS. Instead, they
are included in the general investment ratios reported in PEARLS. As a result,
managers are not encouraged to invest in automating procedures or improving their
profile in the community. Investment in marketing and IT should be explicitly stated
separately from other types of investment. Only then would managements’ attention
be drawn to their significance.

A wider range of services offered by credit unions must be encouraged in order to

continue to be competitive in an ever increasingly innovative financial sector.
PEARLS does not at present contain any measure that encourage increases in product
range. Income from new products launched could be included, and measured against
total income. The number of new products per quarter could also be reported. But,
because of their social conscious, more importantly for credit unions, customer
satisfaction with new service (rather than the profitability of new services) should be
measured.

Credit unions differentiate themselves from other financial institutions by creating a

greater sense of the unique value of the credit union to the community. However,
PEARLS makes no attempt to stimulate improvement in community involvement.
The current measure of growth in membership does not takes into account the number
of members leaving in a period and therefore separate measurement of retention levels
is required. The credit unions placing in the community could be measured by
reference to the number of members it has as a percentage of the population of the
community. This figure would also reflect the satisfaction levels of customers and
perhaps target markets for the future.

The social conscious of the credit union is considered the corner stone of the credit
union ethos. As already stated above, the inclusion of a measure of the customer
satisfaction with ‘social’ products offered by the credit union, such as budget
accounts, low interest loans for community groups or housing and business
development schemes operated is important. These are typically ‘high cost’ products,
but important to the community ethos of credit unions.

Reflect internal and external concerns

PEARLS deals effectively with the needs of its members as owners. Even though the
credit union operates as a non-profit organisation, the members still require
information on interest rebates and a return on shares held. PEARLS measures this
under many categories and as a result safeguards owners’ interests.

However, in an increasingly competitive market, the thing that is crucial to success is

meeting the requirements of its members as customers (Kaplan and Norton 1993,
Ramanathan et al 1995, Hawkes 2001, Atkinson et al 2001). As well as reflecting
customers’ needs, a performance measurement system must also reflect what is going
on in the world around the organisation, particularly benchmarking against
competitors.

The interests and influence of these external factors are not built into the PEARLS
measurement system. Change in membership or customer retention levels as
compared to industry standard would be valuable benchmarks for credit unions. These
would let credit unions know if their growth matched, exceeded or fell short of the
growth experienced by other credit unions or their competitors.

The credit union could compare its operations in many disparate areas to that of its
competitors. Staff turnover and age levels, product innovation and customer
satisfaction levels would all be appropriate non-financial measures to benchmark and
would point to possible problems in the future or strengths which could be used to
gain competitive advantage.

Before being implemented in Ireland, some adaptations were made to PEARLS to

ensure that it suits the needs of the Irish credit unions. It is envisaged that the system
will be further refined over time so it can continue to meet the needs of the Irish credit
union movement (ILCU Memo1). In this same spirit, PEARLS should be continually
adapted to cater for the changing environment in which credit unions operate. For
example, the ‘standards of excellence’ that are prescribed are static and give no
indication as to how the changing economic climate might affect a credit union’s
rating.

Report Past Performance

The primary strength of PEARLS lies in its ability to evaluate past performance. It
provides clear financial results on how each credit union performed in the past
quarter. Its objective nature eliminates any ambiguity about results and reports to
managers the financial consequences of decisions they have already made. Because of
this objective nature, the PEARLS report is easy to prepare and understand, this may
account for the high initial compliance by credit unions with this system. Some
managers have even put PEARLS to further use, by preparing a trend analysis, thus
assessing if improvements have been made over previous periods.

The inclusion of ‘standards of excellence’ provides benchmarks against which a credit

union can assess its performance and identify its strengths and weaknesses. However
there is not a standard of excellence for every ratio and as mentioned above, the
standards have not be adapted since PEARLS was implemented.

Create opportunities for the future

The fact that PEARLS is a financial objective system is a disadvantage when it comes
to creating future opportunities. Managers may be motivated to make short-term
decisions that improve financial results to the detriment of long-term success of the
organisation(biblio). For example, a manager might decide to cut staff levels in order
to improve the wages to income ratio. The financial ratio improves immediately, but
long-term customer satisfaction levels may fall due to increased queuing time, and
staff retention levels may fall due to increased work pressures.
PEARLS does go some way towards providing suggestions for opportunities for the
future. For example, it flags deficiencies in regard to cover against loan losses and
write-off, highlighting to managers whether or not their credit union is adequately
protected. However, by its historical nature, PEARLS presents the results of past
performance without appropriate guidance towards corrective action for the future.
Information about intermediate decisions that will ultimately lead to superior financial
results together with a non-financial subjective aspect is required to facilitate early
identification and correction of problems at source.

Aid communications, learning and decision-making

A good measurement system is one that communicates direction, letting everyone in

the organisation know the objectives of the organisation, while at the same time
facilitating learning so that they can get feedback from the performance measures and
learn from the experiences (Lucy 1983, Maloney 1999, Bourne 2003). Successes and
failure should be identified and communicated without delay, as they become building
blocks for further development (McMann 1999, Hakes 2001).
A report detailing the position of each individual credit union in relation to other
similar sized credit unions would be of benefit as such a communication would
motivate, encourage and support learning. IS THIS REPEATING AGAIN
Opportunities for managers to learn from decisions made by other credit unions would
be very useful. Also benchmarking credit union performance against external
competitors could have profound advantages.

The hierarchical nature of the credit union movement’s structure does not facilitate
good communication. Opportunities from the performance measurement system may
have been lost due to the time lag between filling in the call report and receiving the
PEARLS report.

Applying a common IT system across all credit unions could streamline and expedite
the performance reporting process and facilitate benchmarking between credit unions.
Automation would also eliminate discrepancies in filling call reports. An advanced IT
system could also facilitate the inclusion of differing forms of measures.
Conclusions

PEARLS is an effective tool for reporting past performance. Its objective nature
ensures no ambiguity or bias is factored in to the reporting of performance. The
magnitude of measures in PEARLS means it is designed to cater for varying financial
perspectives. However the main strength of PEARLS is its simplicity. It is because of
its simplicity to prepare and understand that it has a high compliance rate.

However, it also has major downfalls. PEARLS does not measure, or encourage, the
achievement of the strategic objectives of the credit union. It reflects the concerns of
its members as owners, but not as customers. It does not change in line with changes
in the environment in which it operates. Because of its financial objective nature, it
does not suggest opportunities for the future. The report is not produced in a timely
manner and therefore it does not aid communications, learning and decision making.

The use of non-standard measures has never been simple, but progressive
organisations have found that measurement aligned to strategy focuses the entire
organisation on its mission and core objectives. To be effective, the performance
measurement system should translate its strategic objectives into goals and a small
number of key performance measures. Managers would then be motivated towards
improving performance towards these objectives.

A mix of financial and non-financial, objective and subjective measures would

facilitate the full integration of strategies, and capture qualitative performance
(Kaplan 1983, Keegan et al 1989, McMann 1999, Ittner et al 2003b). Combined they
have stronger joint effect and can lead to enhanced business performance (Johnson et
al 1985, Bromwich et al 1994, Waggoner et al 1999, Ittner et al. 2003c). This would
result in more meaningful, transparent and comprehensible system. Even though this
system would be more difficult to prepare, its result would be more relevant to the
needs of the users.

A small number of key performances measure would highlight the importance of the
strategic objectives, without overloading the managers with too many measures.
Using information technology, the ideal system will provide a drill-down capability
from each of the key performance indicators, so the information does not loose its
meaning and managers can identify key problem areas (Kaplan & Norton 1992).
Because each individual credit union has its own social objectives, it can place more
emphasis on the measures it thinks important.

Information systems have contributed greatly to the success of such performance

measurement systems. It would also facilitate a timely and reliable performance
system, thus increasing the performance systems use for accountability and decision-
making purposes (Cavalluzzo et al 2003).

Performance measurement must also be dynamic and flexible enough to cope with
changes (Waggoner et al 1999, Hudson et al 2001). Accordingly, the measurement
system needs to be refreshed on a regular basis to make sure it doesn’t become the
norm (Waggoner et al 1999, Bourne 2003). Even in stable environments, ongoing
analysis allows companies to continually refine their performance measures and
deepen their understanding of the underlying drivers of performance.

The provision of up-to-date benchmarking figures, would facilitate learning from

other credit unions and from their competitors. This would allow managers to learn
from the successful performance of more lucrative organisations and avoid the
mistakes of others.
Appendix 1: Call Report
Appendix 2: ILCU PEARLS Report

Indicator Ratio Calculation Standard of

Exce
llenc
e
Protection
P1: Total write off of bad debts 100%
P2: Annual loan write offs / Average loan portfolio Minimal
P3: Accumulated bad debt recoveries/Accumulated bad debts 100%
written off
P4: Solvency (Net Value of Assets/Total Shares & Deposits) >=100%
Effective Financial Structure
E1: Loans / Total Assets 70%+
E2: Total Investments / Total Assets Max. 30%
E3: Other Assets/ Total Assets Max. 5%
E4: Members resources / Total Assets 70-80%
E5: Borrowed Funds / Total Assets 0%
E6: Total Reserves / Total Assets Min. 15%
E7: Statutory Reserves/Prior year savings and allocations Min. 10%
Asset Quality
A1: Total loan in arrears / Total loans outstanding < 5%
A2: Non-earning assets / Total assets < 5%
A3: (Statutory reserve+ Other reserves + Sundry creditors) / 100%+
Non-earning (Fixed) assets
Rate of Return and Costs
R1: Net loan income / Average net loan portfolio
R2: Total liquid investment income / Average liquid investments
R3: Total investment income / Average total investments
R4: Financial cost members resources / Avg. members resources
R5: Borrowed funds? Average borrowed funds
R6: Total income / Average total assets
R7: Gross margin / Average total assets
R8: Expenses / Average total assets <5%
R9: Provision for bad debts / Average total assets Resolution49
dependant
R10: Non-recurring income or expenses / Average total assets
R11: Net income / Average total assets
R12: Expenses / Income <43%
R13: Wages / Income <15%
Liquidity
L1: Liquid investment + Liquid assets – Short term payables / Min 10%
Total savings deposits
L2: Liquid Investments / Uncommitted savings deposits Min 20%
L3: Non-earning liquid assets / Total assets
L4: % of members who borrow Greatest number
L5: Total Investments + Cash / Uncommitted savings
Signs of Growth
S1: Growth in loans to members
S2: Growth in liquid investment
S3: Growth in total investments
S4: Growth in total members resources
S5: Growth in borrowed funda
S6: Growth in members shares
S7: Growth in total reserves
S8: Growth in statutory reserves
S9: Growth in membership
S10: Growth in total assets