We're embarking on our first major foray into expanding our branch network. We know we want to measure each branch's productivity but how do we set the initial benchmarks, the initial goals for these new branches?
Tom Lombardo, National Director of Business Development, Clayco Financial Facilities, St. Louis
It is important to do your homework and start planning up front, prior to entering new markets. It is desirable to have an overall strategy with priority analysis completed before investing in costly fixed assets such as land and buildings, furniture, fixtures, and security equipment. Initial benchmarks are critical to success, and an evaluation of the overall market potential is the place to start. What is the competition from a credit union and bank standpoint? What type of growth rates and market share has been captured by the competition? What can your credit union reasonably expect in terms of market share over a three to five-year period? A successful freestanding branch will generate a profit in three to five years and will represent $20 to $25 million in deposits.
Determine what your strategy is to gain market share. Is the area under consideration a deposit market or a loan market, and what is the best strategy to gain your entry into the respective market? Remember the highest investment cost over the life of the building (40 years) is not your initial investment in land and building but in your ongoing employee salaries and benefits. Focus on employee productivity and design efficiency to help your returns. Branch accounting is a must in evaluating each location. Assign costs as well as track member activity carefully to get a true picture of each location.
Incentivize employees and hold them accountable for branch success. Remember convenience is still the most important thing that you can provide your member. Members have come to expect great service and will be less of a differentiator in the future since many institutions will focus on service. Measure success by member loyalty, wallet share, and profitability of your products and services. Set goals monthly, annually and in three-year projections. Review often and determine achievements regularly.
William Dean, NewGround
This is the "Holy Grail" of branching. Each credit union appears to have its own unique means of measuring profitability, not only on its financial products, but now on its branch network. The current rule of thumb has been that a branch could reach breakeven if the deposits were about $10 to $15 million and loans were in the $8 to $10 million range in the first one to two years of activity.
We believe that today's development costs for a quality, retail branch will force the breakeven higher and require the branch to be more in the $20 to $25 million range for deposits, matched with the equivalent loan portfolios. When you begin to benchmark, the first thing that the credit union has to examine is how the branch revenues and expenses will be allocated within the branch network. For example:
Are the loan officer and loan processing costs going to be decentralized or centralized related to loan profitability applied to the branch balance sheet?
Are security systems, business equipment, and centralized cleaning, waste, and other "vendor" services going to be apportioned on a per-branch basis?
Are employees, employee benefits, and other internal monitoring costs, especially for "part-time and roving" employees going to be apportioned?
These are just a few of the questions that a credit union has to discuss related to initially setting up its branch revenue and expense allocations for application to a profitability and breakeven projection. Initial benchmarks that could be set are the standard financial measurement criteria:
* Deposits
* Loans
* Net Income
* Deposits per employee
* Loans per employee
However, the benchmarks for success for a new branch are changing dramatically. The old paradigm of reaching $15 to $20 million over three to five years is no longer an acceptable standard in urban markets. New thinking and actual results have shown that obtaining $30 million in deposits the very first year are not only realistic, but becoming more common. One financial institution on the west coast has actually increased their first year's goals to be over $80 million within twelve months.
In addition, society is rapidly changing from the Service Economy of the 1980s and 1990s to the Experience Economy. In the new Experience Economy, consumers demand a fulfilling, personable and memorable experience with the businesses that they frequent. Businesses that deliver such an experience will thrive, and those businesses that continue to deliver their products and services with the dated customer service mindset are doomed.
The implications of this shift to an Experience Economy for the financial services industry are profound. Credit unions that continue to deliver financial services in the present-day retail service delivery model are making a strategic mistake that will dramatically reduce the effectiveness of their retail branches and the performance of their organization.
Tied to this shift to an Experience Economy, credit unions need to completely modify the types of productivity measures that reflect the member experience verses the transaction. The old traditional measurement of product and service categories are being replaced with ones that focus on the total experience. The new philosophy is that it is no longer about transactions, it's about the Experience. Credit Unions that embrace this shift now measure the depth of the overall member experience and profitability, rather than the old traditional products per member and transaction counts.
So, the $64,000 questions are: does the credit union want to continue to be "all things to all people" and struggle in the old paradigm of transaction-based banking, or do they want to embrace the new Experience Economy-based retail banking and drive their business using measures like member satisfaction, new member acquisition, repeat business, 80-20 servicing concepts, where the higher profitability members are treated like the kings and queens they should be, and employee satisfaction and retention, because its people are the most precious asset the credit union has relative to profitability and business success?
These are the goals and benchmarks that a credit union should consider and embrace related to branch success and ultimately profitability. Profitability comes from the concise balance of employees and members interacting in an experience delivery environment, where authentic, personal, and member-centric experiences can be delivered through the branch design, brand communication and branch essence application, and employee-driven relationship building that will allow the profits to take care of themselves. Focus on the people and the relationships and not the numbers, one will drive the other and success should be a slam-dunk.
Ralph La Macchia, La Macchia Group.
First of all, you must be using an accounting method that forces the branches to stand on their own for tracking purposes; then you need to create a pro-forma to determine how much income is needed to break even. This will include first determining your targeted member, what percentage of market capture is needed, and what market capture you currently possess in other markets. Basically, can the new market support you as a new entrant? What is your expectation of capital recoup? Can you live with the initial findings of these questions?
Based on the proximity of the new branch to your existing branches, you'll need to understand the possible volume of transfer deposits vs. new activity. This may sound like answering a question with a question, which it is, but it really makes you think it through and take ownership. The real truth is that the information requested above will enable you to create a pro-forma that will cut to the heart of the facts, i.e. how much to spend on property, how big should the building be, how many employees will it take, and what are the parameters we are willing to face once we pull the trigger on our new venture?
Just as important as the pro-forma, is this driver: who will manage and staff the new facility? The way we pose the question to our customers is, "What is the job description of the position of the market manager? The description would include task, activity and accountability. The answer we have seen all too often is x and y live close to where we are going to put the branch OR a and b have worked here long enough and now it is their turn to move into these positions.
We are able to get you the absolute best location, image, facility, etc., but we are never going to be able to be involved in the day-to-day. Face-to-face encounters are how your credit union is built, one member at a time. The pro-forma will be your map and compass. The staff you choose for your branch will have the greatest impact on your success, either positive or negative.
The game plan and goal setting is your part. "Build it and they will come" is no longer a sound business plan. Think it through and plan it, assume the worst, and talk about it every month. Hold everyone accountable and you should do just fine.
The DEI Design Team
New branch productivity/efficiency ratios can be established, first, by the existing main office branch numbers, such as members per employee, transactions per employee, deposits and loans per employee, etc. These ratios should then be adjusted based upon the comparison between the market/demographic characteristics of the main office branch and the location of the new branch. These adjustments will be dependent upon such characteristics as age, income, blue collar/white collar, high-tech vs. high-touch, etc.
DEI's Strategic Analyst prefers to compare these different ratios with those already established by the client instead of utilizing peer group ratios. There are many variables in the peer group data that have a tendency to skew the numbers.
The productivity and efficiency ratio goals should be achieved based upon the potential in the market area and the projected penetration levels/capture rate of the branch to be established in the market.
Have A Question For The Facilities Panel? E-mail Managing Editor Lisa Freeman: lfreeman
