LAKE BLUFF, Ill.-Bigger isn't always better and can lead to problems for a credit union, analysts and credit union CEOs are cautioning.
Issues arise, they say, from exceeding the institution's economy of scale, and losing performance. With a focus on growth for growth's sake, the credit union often strays from the things-products and services-it does best. One analyst too, is concerned that too great a focus on growth can pull the institution away from the business-building strength of the cooperative business model, which is energizing and engaging members in the credit union (see related story).
Michael Moebs, economist and CEO at Moebs $ervices, asserts that often for credit unions below approximately $500 million in assets, the primary goal is growth-that is, growth to take the credit union to the asset size at which it can achieve its economy of scale. However, once the credit union reaches its economy of scale, the focus needs to shift from growth to efficiency. That change, said Moebs, leads to lasting business success and efficient growth.
Moebs $ervices' research on thousands of CUs and banks shows that about $500 million in assets is a point at which many financial institutions first reach an ideal economy of scale.
"With the focus simply on growth for the sake of growth, you eventually can reach a point where growth is no longer producing the scale you need," said Moebs. "In other words, you grow to a size where scale is no longer in your favor-it goes against you."
The Shifting Tide
The tide shifts and a credit union reaches its "dis-economy of scale" when it begins to have too many products and services, many of which if examined individually are not contributing to the bottom line, observed Moebs. "Often we see too many services are added when an institution is responding to competition or trying to distinguish itself in the marketplace."
Moebs, too, asserted that managing the business as the CU grows past its economy of scale becomes a much more difficult task, with leadership expanded as employee numbers grow. Management is spread too thin, leadership loses touch with the pulse of the organization, and the ability to make the right business decisions-and avoid missteps-lessens, he said.
"You go past the level at which you are making the most money, you go past your economy of scale, and you may begin losing money. Look at the big banks-at the high end of dis-economy of scale is the exclusive Too Big To Fail club," said Moebs. "If these banks fail they will affect the entire economy."
Mark Shobe, CEO of the $3.5-billion DFCU Financial, Dearborn, Mich., whose CU pays less than 50 cents to produce a dollar of revenue, agrees that management of the credit union can become cumbersome if the CU loses its strategic focus on efficiency as it grows (see related story).
How does the credit union know it is past its economy of scale? "The bottom line is increasing without adding any more resources-no new employees, no new branches," said Moebs. "Put together four to eight quarters where this happens and you are certainly at your economy of scale."
Going Too Far
Institutions that go past their economy of scale need to shrink in assets, adjust staffing levels, and shed all services that are not at least covering direct costs and indirect costs at a minimum, said Moebs. Ideally, all services should be contributing to the general overhead of the financial institution.
"Stay with what you are good at, the things you do best," said Moebs, who noted that sometimes cutting price can help, as well. "For example overdrafts. Reduce the price to below $20 and you will get more usage and more revenue than when your prices were higher.
"Efficiency means adjusting volume to maximize price," concluded Moebs. "Just growth means Too Big To Fail. No economy of scale means no compass, consequently no price position or direction."
For info: www.moebs.com
