There is an irony in the fact that building societies are struggling to revitalise their business model at a time when there is a real need for choice on the high street. Encouraged by the likes of the Future of Banking Commission to provide the banks with stiffer competition, it is believed building societies could provide savers and homeowners with access to a better range of products and services. With trust, the benchmark of the customer/bank relationship, at a low ebb, the local, more personal service offered by the building society could be the key to restoring confidence among disillusioned consumers. Yet the opportunity to grasp the nettle and capitalise on this potential gap in the market is being clouded by a number of structural challenges facing building societies.

Faced with demands by the FSA to hold more capital, some smaller building societies have been forced to contemplate a merger. The two largest building societies represent almost two-thirds of the sector's total assets, meaning that there are plenty of smaller-scale operations struggling to fund the systems upgrades demanded by an increasingly technology-savvy customer base. Merger may be the right route for some, but the danger is that inefficiencies are retained beyond the union.

Moreover, many building societies are unhappy with the loss of brand independence that comes with a merger. Building societies grew up within communities, gaining extremely strong local identities and loyal customers, as evidenced by their town-focused brand names. A forced merger with another building society invariably focuses on achieving the best results for survival, with little consideration of the local brand and relationships. Ultimately, the strong local presence on which their entire model is predicated could be eradicated.

So, how to ensure survival, become more efficient and retain the benefits associated with a local brand?  An "Alliance Model" would require clustering a group of building societies in a formal coalition to share back office functions, managing similar funding, activities and resources across societies. Crucially, though, each member's individual customer-facing brand would be retained. Most building societies have similar lending and deposit-taking products, capital needs and processing requirements. This model allows for rationalisation, improved technological efficiencies and cost savings, thereby meeting capital requirements, while sustaining the trust and long-term relationships built with loyal customers.

But to reap the benefits of scale while retaining the local service ethos and closeness to customers, there needs to be swift consensus among members of this alliance regarding which systems to deploy, as well as regular measurement of the employee and customer experience. Agreement on technological change and careful, synchronised implementation of new systems is absolutely critical to achieve success, and demands clear and concise communication with customers and staff alike.

The treasury-based functions - such as back office processing, risk management systems and governance - present the most obvious opportunity for shared services. The greater the scale and the bigger the balance sheet being managed, the more options become available. But the number of members in an alliance needs to be restricted, with focus on synergies such as region, community ethos, scale or product sophistication. Trying to aggregate businesses at different levels of maturity is always a challenge, as embedded processes, technology, and the ability of the business to deal with various levels of complexity vary hugely.

For the smaller societies, the biggest problem is finding the capital expenditure to keep pace with automation needs. By joining together, they have a much better chance of being able to invest in the systems needed to grow at a sufficient pace. Several of the larger societies operate good platforms that could form the basis of a shared infrastructure. One building society has a state-of-the-art e-savings platform that is already used by some of the bigger societies and banks, while others have mortgage platforms that could be deployed for the benefit of other societies.

A good example of a model which the building societies could emulate is Rabobank in the Netherlands. Formed in the last century, it is a federation of local banks with a central hub acting as the ‘daughter', not the ‘parent', as in other banking models. The different Rabobanks operate in their own regions and share a common central infrastructure, covering areas such as the treasury function and back office processing.

Fundamental to the security of this model is that Rabobank has cross-guarantees in place, which means the Group acts as a backstop to each individual bank. The different banks benefit from a strong, shared infrastructure, essentially making them very safe banks to deal with and keeping the risk rating high. Equally important is Rabobank's clarity of direction. Historically a Dutch farmers' bank, Rabobank focuses its lending and investment activity in the agricultural sector. Strong knowledge of this sector improves its banks' ability to manage and evaluate risk in that sector, whether domestically or internationally.

Of course, this model has evolved over the course of more than a century. The luxury of slow, steady development of a building society model is not at the disposal of the sector, given the urgency of the current market environment. But there is much to be learned from Rabobank's experience, both in terms of its clarity of purpose and its shared systems approach.

One can foresee a time when a greenfield site could be constructed that could function as the prime servicing facility for the mutual sector. It could be built by a handful of the bigger players, with smaller societies migrating from their current systems over time. Product platforms, credit risk engines, client-facing internet platforms, fraud detection systems and call centres could be handled centrally for a number of societies. Of course, this would not only encompass sharing of these technology-based operations, but other services, such as HR.

Striking the right combination of scale and professionalism, while retaining localisation and those features that customers value, is the challenge facing the building society sector. Building societies want to be independently strong, able to raise capital and operate efficiently so that they fulfil the Future of Banking Commission's requirement to function as a more consumer-focused financial services industry. Ultimately, adopting an Alliance Model could preserve a diverse financial services market, marrying the best features of scale with a personalised customer approach.