Cutting Costs

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'Ingrained' Efficiencies

WesCorp Staff Always Watching Ratios

SAN DIMAS, Calif.- Amid widespread anticipation of more short-term interest rate hikes that would put more pressure on revenue, many are striving to do all they can to keep costs low to protect spreads.

As rates rise, "margins are tightening and it is important to watch your efficiency. You don't want the expenses to grow out of control," said Todd Lane, CFO at WesCorp.

Lane noted that in the case of his own corporate, it had the third best, or lowest, efficiency ratio in 2004 for all corporate credit unions.

Lane said that the other two corporate credit unions that managed to post even lower ratios were in part helped because they offer fewer services than Wescorp. Moreover, he said that WesCorp services are all in-house, "not outsourced," which effects efficiency ratios because outsourcing could help save more but at the risk of some quality loss.

"Size obviously helps in lowering efficiency ratios," said Lane, who oversees the finances at the $24.9-billion corporate credit union.

Efficiency Culture

Getting employees to focus on striving for greater efficiencies is a day-to-day affair, he said. "Efficiency is ingrained in our (credit union's) culture," Lane said. To do this, WesCorp makes sure all its employees look at the ratio regularly, and that they are familiar with any changes and are motivated to help lower it. The credit union also periodically tackles special areas where cost reductions are possible.

"A couple of years ago we looked a the process of accounts payable. For us, it was a very manual process. We were getting invoices, routing them, getting signatures (for approval), signing checks and then sending them in the mail," Lane said.

The process was reduced as WesCorp "built an automated system that automatically routed the invoices for approval signatures and down to generating the check automatically to send out," Lane said.

"It saved a lot of time and effort," which translates into greater efficiency, he added. Saving time directly effects the efficiency ratio as it helps avoid hiring as the organization grows.

As a result, WesCorp has "one person doing the job (of handling accounts payable), same as 10 years ago when volume was 200%" smaller," Lane said.

The headcount of employees at Wescorp hasn't increased in the past five years and remains steady at some 460 people, even as asset size rose about 40% during that time, Lane said.

"We have grown quite a bit over the past three years. We have not added employees," he said.

A Useful Tool

Lane said that one useful tool to help keep costs under control is ABC, or Activity-Based Costing. It can be used to show how much the corporate credit union is spending on "activities across the organization."

For instance ABC can help WesCorp determine whether paying employees twice per month means that the CU is spending too much.

"It's important to keep an eye on expenses because it is our members' money," Lane said.

Expenses may rise between 3% and 4% this year, down from a 15% increase last year, as more services are provided. Expenses rose in 2004 because three new item-processing centers were added, he said.

While WesCorp sees its asset growth at a standstill this year, it anticipates a reduction in its efficiency ratio. For this year, the corporate credit union sees its efficiency ratio at 50% to 55%, which means that roughly about 50 cents to 55 cents are spent for each dollar earned, Lane said.

Last year the ratio varied between "55% and 60%" and the ratio was above 60% in 2003, he said.

Lane stressed that the efficiency ratios for a corporate credit union shouldn't be compared with those of a natural-person credit union.

Hold The Phone

VoIP Technology Offers Real Savings

WASHINGTON-One analyst said that one expense item credit unions should start to examine for cost-cutting is telephone costs.

Specifically, said Dan Holton, manager of Information Technologies at consulting firm Callahan & Associates in Washington, D.C., using data lines to carry voice conversations.

The so-called VoIP, or voice-over Internet protocol, can help slash telephone bills, especially long-distance charges.

With VoIP, the voice "instead of going through the phone line, goes on a data line," he said before cautioning, "you have to work to prepare for it. It's not done overnight," he said. The biggest hurdle is to install a new VoIP system.

"Credit unions will normally work with a solutions provider like Cisco Systems, Avaya or Nortel Networks to help install everything," he said. Start-up costs "can be expensive" as they include new hardware. In some cases a hybrid system of telephone lines and VoIP may be set up with fewer costs, but a credit union doing that may not get all the savings, Holton said.

In addition to that, there are other costs involved that are difficult to estimate related to training the staff to use VoIP.

The amount of savings is going to vary depending on a CU's size and how it operates, in how many time zones. "If all calls a credit union makes are local, then there are no savings," he said. Those with branches in distant places save the most.

"(With VoIP) you have something called long-distance routing, so say that you are calling from New York to LA and have branches in New York and LA, instead of calling (by phone) from New York, system will push calls from the LA area so you don't have costs from long distance," he said.

"It is getting harder and harder to justify not using VoIP," Holton suggested.

For a credit union to assess whether it should change to VoIP there are several things to consider. "If the phone system is fairly new, it may not be worthwhile. But if you are already looking for a phone system, you should definitely consider Voice IP," he said.

Reducing Staff

BECU Has Had To Make Job Cuts

TUKWILA, Wash.-Boeing Employees Credit Union has grown into the sixth-largest credit union in the country at $5.2 billion in assets. But it hasn't come without growing pains. Last year, the credit union did something only a handful have done to date-it cut 150 jobs last year to boost returns to members and reduce loan rates.

"We went through a couple of efficiency rounds. One in June, with 70 (layoffs), and the other in October, with about 80," said spokesperson Todd Pietzsch.

The decision was a result of a thorough analysis of all operations, he said.

The cuts were "across the board" and some involved managers, he added. In June the cuts were mostly "backoffice," hitting part of the marketing and information technology staff.

Improved efficiencies after changes in the operating system led to job cuts.

Before the operating system change at the end of 2002, "we had to do all our programming. (Afterwards) we certainly didn't need all of the IT help," he said.

Effect On Mass Media

On the other hand, the decision to lay off marketing specialists came as BECU "stopped mass media advertising."

It cut its mass media buy even as it expanded its membership base beyond the Boeing Co. employees who made up its original, core members. Cutting these spending helped its ratio too.

"We now serve everybody in the state of Washington (after a change in charter in August 2002)," Pietzsch said. He said the credit union figured it could manage annual rates of membership growth at about 8% just by showing good value.

More Job Cuts

In addition to eliminating programmers and marketing specialists, BECU, the acronym it now uses as its name, reduced the "front-line" staff manning branches.

"We merged the deposit side and lending. Now if you come in to lobbies one person can give loans or open accounts. Before, you had to meet with two," he added.

In addition, the credit union reduced the number of people staffing its 33 "cashless" branches from five to four as it went to a "just-in-time" scheduling system from a previous that he described as a "worst-case scenario."

This meant that four people instead of five could run one of branches located inside grocery stores. The branches are cashless as the money is handled by ATMs.

"In the branches we moved from (staffing for a) worst-case scenario to more of a just-in-time," he said. All branches are in the Seattle metroplitan area.

The headcount slashing wasn't the result of deterioration in efficiency ratios but to be more competitive. The 400,000-member CU's senior management "saw that our competitive situation was starting to slip away. We were always very competitive with rates but that edge was starting to erode," he said.

The changes in rates in the U.S. during the past years "brought that to light," he added.

"Our spread to our competition, the difference of what we were charging for loans compared with competitors, was getting smaller," he said.

The one criteria the credit union used to reduce personnel was to "look at things we could do without sacrificing service," Pietzsch explained.

Small CU, Big Goals

The Steps Taken By Carolina FCU

CHERRYVILLE, N.C.-Donna Beringer, who started out as CEO for Carolina FCU in Cherryville, N.C., seven months ago, said she is now working hard at "looking at several ways to cut costs."

"One of the projects is to eliminate using a commercial bank for doing the deposits and receiving cash. We will (start to) pay our checks out of our own accounts and we will make our deposits of checks directly through the Federal Reserve System," she said.

Beringer said that the move will help Carolina FCU eliminate service fees that average around $600 per month. In addition, it will be able to use the minimum balance of $800,000 that it is now required to maintain. "We are going to be able to keep that money in house or invest it," she said.

The credit union will eliminate an opportunity cost. "If I maintain in the corporate, I could get 2.5% to 3%," she said. Also, it will save on courier costs and other small things that add up, she said.

The $20-million, 3,200-member Carolina FCU, which was originally a credit union for the Carolina Freight Trucking Co., is also looking at other possible immediate cuts.

"One of the other things we are looking at is bundling our data processor systems under one data processor instead of going with several," she said.

Similarly, the credi tunion also wants to start working with a single provider for its regular phone service, long-distance, and cell phones," she said. The credit union's members are spread out in several states and telephone bills run into the thousands of dollars, she noted.

Another project is "to do away with time cards and have an automated system," she added.

Beringer said she is also asking all suppliers and vendors if there are discounts and other, better options available.

Staying Fit

DECU Already Lean

ATLANTA-Some credit unions report they are already lean-and plan to stay that way.

"We have always been a very lean operation and very cost-effective so we don't have anything on the horizon to do differently," said Mary Olson, vice president of marketing and business development at the $2.6-billion, 164,000-member Delta Employees CU in Atlanta.

She says that running "a pretty lean stuff" and keeping operating expenses very low has helped it pay bonuses and "give back everything we can to members."

"Last year we paid $40 million in regular dividends, and gave a bonus of an additional $8 million that was a combination of a dividend bonus and interest refund," she said.

To keep costs low, Delta Employees has strict policies that require any manager doing any hiring to justify adding a person and document "what you are going to do and why you need" to hire someone.

To save on marketing, Delta Employees does "a lot of target marketing and some mass media," Olsen said.

"We do a lot of direct mail and e-mail targeted to specific members," she said. This helps to make spending more efficient, she said.

A Systematic Approach

Zero-Based Budgeting Is One Tool Recommended

SEATTLE-Glenn Christensen, CEO of credit union consultancy company Reflection Point Inc., said that there are many ways a credit union can reduce costs. But a systematic approach and a thorough analysis of operations can be a sure way to detect opportunities, he said.

"One of the key things is to make sure that expenses are closely aligned to the overall strategic direction," he said. Often, expenses will build up in areas not aligned with strategy and those can then be easy to slash.

Another tool, he said, that can be helpful to cut costs is one he referred to as "zero-based budget."

This is when a credit union doesn't take a historical approach to spending to determine whether to increase or reduce expenses by a given percentage but it budgets as if it were a new operation.

"Let's say we are starting today. We ask where do we begin to allocate resources going step by step," he said.

Zero-based budgeting "is a tool to get a good sense of what budget items are really contributing" to find a way to optimize allocation, he said.

One area that can help cut costs is the ATM network.

A credit union should compare costs of different networks and may also be good to encourage members the use of point-of-sale terminals instead of ATMs. ATMs can carry costs to the credit union that may be, for example, 50 cents per use, whereas use of a POS at a retailer may result in a fee to be paid to the credit union.

The credit union may try to "shift the behavior of the member through education" to get him to prefer the use of POS terminals.

The other thing for credit unions to look at, he said, is "their whole delivery system structure: ATMs, branches, phone centers," he said. Looking at the whole, it should then determine if they are making a contribution or affecting performance.

If contribution is little or performance is affected, the credit union "may see an opportunity to look to close down, to sell off the branch," he said.

Alternatively, a branch may need to be to moved to another location within that existing market, he said.

In the long-run, a credit union that has tried without success to cut costs may ask itself whether a merger could help more, Christensen said.

Little Things Add Up At Navy FCU

World's Largest CU Cuts Costs In Variety Of Ways

VIENNA, Va.-For the world's largest natural-person credit union, it is developments in technology that it is leveraging in order to reduce its costs.

Navy Federal Credit Union, the biggest credit union in the world with $24.2 billion in assets and more than 2.5 million members, can attest to that.

Keasha Lee, spokesperson at Navy Federal in Vienna, Va., noted, for instance, that sending e-statements instead of mailing the traditional paper statements helps save 52 cents per each "suppressed" statements, as the e-mailings are called.

"In 2004, with over 2.8 million suppressed statements, we saved around $1.5 million," she said.

Automating processes involved with mortgage loans have also helped the organization save.

Navy Federal has saved as much as "$240 per loan closed using e-signature," she said.

Another way technology and size have combined to help savings at Navy Federal is through the use of the UAD, an acronym for Universal Agent Desktop.

"It allows (call center employees) to look at all member information in one screen," she said. This saves time.

"The call center receives 30,000 calls per day and UAD saves 20 seconds per phone call, which ends up saving 166 man hours per day for the call center employees," Navy Federal's Lee added.

Attention Cheap Skates:

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