The case for cooperative IT: How it works and who it’s for

Over ten years ago, five credit unions came together and formed a credit union service organization (CUSO). A majority interest was held by one, very large credit union, which owned all of the technology, had a full-time IT staff and was running an online banking system.

The other players were much smaller credit unions that couldn’t afford their own systems or IT staffs. Together, these credit unions formed a technology company that was organized as an S corporation.

The company was designed to retain very little profit, but instead to pass on any savings to its participating credit union members. Every founding credit union had a seat on this company’s board, although board control was held by the largest credit union.

As a board member on this organization, this was one of my first experiences with cooperative IT in the days that pre-dated what we now call cloud computing. The organization and its cooperative computing concept was a win all around.

Owners and board members from small credit unions obtained online banking and other IT services they desperately needed but couldn’t afford on their own. The large credit union offset costs for its data center and IT resources.

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“Cooperative computing strategies like this have been used by credit unions for many years,” said Gregg Tushaus, CEO of Emergifi, a CUSO that was originally formed by Corporate Central Credit Union in Wisconsin. The credit union now has three separate CUSOs—one for business services and healthcare benefits; one for asset liability management; and a third for technology services.

The CUSO that Tushaus runs provides IT services such as network management, hosting and maintenance for common applications like Microsoft Office 365, workstation and security management and cloud backups for disaster recovery.

“Our goal was to extend these IT services to other credit unions at attractive price points so they could focus on their core business and IT goals,” said Tushaus. “We are also planning a heavy emphasis on digital transformation, which many credit unions want to do but might lack the internal IT resources for.”

“During a major Wisconsin snow storm, most businesses and schools closed for the day,” said Chris Felton, President and CEO of Corporate Central Credit Union, one of Emergifi’s customers. “On that day, the offices were dark, and the parking lot empty, yet our credit union was open for business, thanks to the cloud-based services provided by Emergifi that enabled our workforce to work from anywhere, anytime, from any device. We also have a way to more rapidly implement, integrate and innovate IT.”

How cooperative IT works

Cooperative IT is both a technology and a business model. On the technology side, cooperative computing is a cloud-based service that is usually packaged as SaaS (software as a service) or as IaaS (infrastructure as a service). A majority stakeholder that provides the technology wants to earn revenue on it to offset costs. This stakeholder provides the technology and the staff expertise and support to smaller companies in the same industry that can’t afford the technology on their own, but that now have a way to access it through subscription fees. These smaller organizations have limited in-house IT, but now have a larger partner in the same industry that understands both their business and their technology needs.

This may sound like standard SaaS, and indeed there are a great many similarities. The difference is that smaller participants in a cooperative computing venture have a greater say in the large company’s technology direction and business strategies because they are either part owners (with a board seat and a modest financial investment in the firm) or key influencers on the firm’s advisory committee.

Initially the goal of many cooperative computing ventures was to spread the costs of technology among participating partners, but this is now starting to change.

“Increasingly, we see time to market for IT capabilities, and the fact that cooperative computing can save companies effort in implementing new directives such as digital technology, as key drivers for adoption,” said Emergifi’s Gregg Tushaus.

Emergifi’s primary customer and founding organization, Corporate Central Credit Union, agrees.

“Efficiency and productivity are enhanced by a digital environment and cloud migration,” said Chris Felton. “The cloud environment enhanced work efficiency for employees to be more productive – allowing the flexibility to set up a virtual office anywhere, anytime.

Being able to access everything from the cloud reduces ‘access’ frustration, improves security, and enhances knowledge sharing throughout the organization.”

Cooperative IT in action

The model works because although the cooperating companies might be in the same business, they’re not necessarily direct competitors. In some cases, they operate in different geographical markets. In other cases, they are in the same geographical market, but they serve different sets of constituents. Here are three models of cooperative IT.

Industry-specific

Emergifi is an example of cooperative computing that focuses on the technology needs of a specific industry. Explorys, which was acquired by IBM in 2015, is another.

“We approached Cleveland Clinic’s CIO with the idea of leveraging the clinic’s healthcare analytics and EMR (electronic medical record system) by providing them to other healthcare providers that wanted the capability,” said Charlie Lougheed, co-founder of Explorys. “We looked at the healthcare industry and could see that by placing an analytics layer above the EMR, healthcare providers would be able to ask questions about their patient populations such as ‘how many of our patients are diabetics, and how can we improve healthcare and outcomes for each?’”

Issue-focused

There are also cooperative arrangements between companies that are focused on pooling efforts to solve a particular technology issue—like conducting outside vendor security and compliance audits.

“A couple of years ago, a group of us that had charge of security and compliance at our companies got together in a roundtable session,” said Ken Baylor, who was then head of Uber Global. “Our session was mainly on third party risk, and the challenges it presented because hiring auditors to evaluate all of the third party vendors was extremely expensive. There were also no clearcut standards on risk factors, which made the evaluation process difficult.”

The roundtable meeting was pivotal to the formation of The Vendor Security Alliance (VSA), a non-profit organization headed by Baylor and supported by companies that included Airbnb, Twitter, Dropbox, Atlassian, Docker, GoDaddy, Palantir and Square.

“The goal was to form a cooperative company where we could conduct and share third party audits with each other and pool our resources, and also to prepare for new security requirements like GDPR,” said Baylor. “By sharing our work with each other, we reduced time to market and cost for each of us. We later opened the service to smaller companies that also were struggling with the work and costs of third party vendor compliance audits.”

Infrastructure provider

In an example of IaaS-like cooperative computing, First National Technology Solutions, a wholly owned subsidiary of First National Bank, provides infrastructure hardware, software and support services that SaaS companies use to deploy their own offerings to end customers.

“Over the past ten years, we’ve built our infrastructure to support SaaS providers in multiple industries,” said Kim Whittaker, FNTS president. “Although we are a wholly owned subsidiary, we give our customers a sense of ownership by including them in strategic decisions and discussions on advisory boards.”

The strategy has enabled clients to achieve faster times to market with their applications, without having to invest in data center and infrastructure costs.

“Using an infrastructure service like FNTS gives us great business value because we can deploy a private cloud for our own SaaS offering and focus on our end business and customers,” said Carolyn Zainer, EVP Sales for Island Pacific, a retail SaaS company that is an FNTS client. “We meet often with FNTS to discuss strategic direction.”

Is cooperative IT a fit for you? 4 key questions to ask

For many companies, cooperative computing can be a way to share costs and get apps to market sooner, but it’s not for everyone.

For example, there are companies that prefer to maintain all of their technology assets in-house under direct management. For them, cooperative computing and even forms of public cloud computing, may not meet their needs.

Also, businesses that are fierce competitors in highly competitive markets are typically unlikely to invest or participate in cooperative computing. Though third party vendor audits and compliance checks, and the ability to share the work in this area, is one example where it has worked.

1. What role do you want to play?

Large companies looking to share infrastructure costs might opt to develop a spinoff IaaS organization that enables them to underwrite some of their infrastructure costs by extending IaaS services to others.

Conversely, if you are a smaller organization with limited resources, it might be to your advantage to subscribe to services offered by a larger company in your industry.

2. Is there adequate security, support and expertise onboard?

If you are a large company considering offering a cooperative computing service in your industry, can you offer the same level of security and governance to your clients that you expect for yourself? What if a smaller client experiences a production problem or has a question? Do you have the support personnel (and service culture) to handle client support?

“These were key questions we had to answer in our own organization,” confided a CIO who had been considering a cooperative computing venture. “I had excellent technicians on board, but they had trouble being empathetic with our own internal users. I knew they wouldn’t be able to work with an outside client.”

3. Do you have a say in strategy?

If you’re a minority partner or participant, having a say in strategy can be important for making sure your needs get met.

“Part of my role is evaluating and recommending technology business partners,” said Ben Baghdadi, CTO at Island Pacific. “When I evaluated our infrastructure provider, FNTS, I looked for capacity and expertise for working with any type of computing platform, which they had. I was comfortable with their security because they had come from banking and understood that. Just as importantly, I constantly dialogue with them about strategy, and I wanted that. I feel that we’re in sync.”

4. Is the partnership scalable?

From a technology standpoint, if you’re a client, you want cooperative computing to scale in the same way that it scales for private or public cloud. This scalability is for services consumed and for financial spend. However, there is an additional dimension in cooperative computing scalability that isn’t always present in cloud computing: scaling out to new areas of common business needs and interests.

Mary Shacklett is a freelance writer and president of Transworld Data, a technology analytics, market research, and consulting firm.