The phrase cost cutting initiative is used a lot in financial institutions lately. If you’re serious about cutting the kind of cost that will have a real impact on your income statement and balance sheet with real improvement of KPIs like efficiency ratio and ROA, reducing office supplies isn’t going to cut it. The community-based financial institution is in survival mode. The industry has shrunk by half over the last two decades. The reason why so many financial institutions have perished is because they couldn’t meet capital requirements. Credit unions may not be taxed, but they haven’t been spared. If you’re the CFO, the buck stops with you. Here is what you can do.
Start with labor cost, your number one noninterest expense. Outsourcing necessary tasks that fall outside of your primary business of taking deposits and making loans should always be considered. If outsourcing the task can be done at a lower hourly rate than your employees’ cost, do it. Outsourcing vendor management can be done at less than minimum wage.
The next highest noninterest expense is facilities and operating expense. Your financial institution is most likely contracting with over 100 vendors. This is where you can find the savings that will keep your financial institution financially viable, thus protecting your job and everyone else’s. Here is how to start your cost cutting initiative.
First, rank your vendors by cost. Your mission critical vendors such as core, credit card, debit card, digital banking, etc. will usually be the most expensive. Each of these vendors most likely has an evergreen contract with the financial institution. These contracts renew at the end of the term unless notification in writing is given prior to a specific date, usually six months before the renewal date.
Second, make sure you’re aware of the renewal date for each critical agreement.
Third, be aware that there’s a direct correlation between the time you have left on the contract before it expires and savings. Vendors know if you have a year left on these large contracts there isn’t time to make a smooth transition to another vendor. Even if you have no plans to change, don’t let them know. Depending on the service, somewhere between 18 months and three years is the optimal time to begin the negotiation.
Fourth, don’t try this at home. Savvy executives understand that unless you have negotiated hundreds of contracts over decades with a particular vendor, there’s no way you would ever know how to get the best pricing and terms. In addition, the time it would take would be disruptive to your primary goal of serving members or customers.
Saving money won’t do you any good if the level of service you receive will jeopardize member or customer service. Using a Maple Street Scorecard will optimize service you receive from vendors.
Here are some real-life savings examples: A $2.3 billion credit union saves $1.3 million per year totaling $17.9 million in savings, ROI 524 percent. A $614 million credit union saves $1.6 million per year totaling $5.6 million, ROI 976 percent. A $137 million credit union saves $197K, ROI 235 percent.
This does not include soft dollar labor savings. These examples are from Maple Street, Inc.