Wednesday, December 3, 2014

Trent’s Comments 
Fall 2014 Germantown, Tennessee 
Thoughts on Cost Control
Insights into cost control and efficiencies
The rules of profitably continue to change   We are in the midst of an historic period of low rates, with corresponding narrow Net Interest Margin.  Improving your cost control, in a number of areas, can make a significant impact on your profitability.   While your attention naturally turns to cost control in difficult economic times, a better approach is to build a culture of cost control that permeates your organization. In effect, it is a type of fiscal discipline.  As you strive to elevate your entire staff's awareness of the importance of cost control, you will instill habits that extend to current and future business practices, for matters large and small. Let’s look at a few key areas you should address in order to succeed at cost control and revenue improvement.

Stop giving things away.  Your loan and deposit agreements with customers provide for certain types of fees . . . for research, overdraft charges, and late fees, for example. One of our struggles in community banking is that we have given away so much, for so long, that customers have come to expect it.  By the way, doing so greatly devalues the services you provide.  Implement a review of fees you are due, and put in place new practices that make it much harder for employees to waive such fees.  Late fees on loans, for example.  Unless the bank has made an error, why would you waive such a fee, that the customer has contractually agreed to?  
Remember that employees are the key to successfully implementing this change. Education and training to help employees enforce the rules are key.  On occasion, you may have to remind your staff that it is revenue that allows you to keep the lights on and pay salaries.  An employee who charges a fee, but whispers “I’m sorry THEY are making me charge you” is not carrying a message of the value of the service rendered. As you’ve heard from me before, “knowledgeable, enthusiastic” employees are the key to success.  These are costs in the sense that potential revenue is slipping out the door instead of going to your bottom line.

Staffing remains a significant cost for all banks.  It is my humble opinion that many of you are overstaffed.  Before you doth protest much, let me explain.  By failing to properly utilize the technology that you have invested in, you are creating undue costs via manual or automated work arounds.  One of my “tricks” for identifying gaps and improving utilization is to look for the use of spreadsheets.  Often, spreadsheets are used by employees to overcome perceived gaps in product capabilities, when in reality these are often gaps in training on how to use the core system more effectively.  Have your staff fess up to the spreadsheets they are using, and consult with your core vendor about ways to accomplish the same things using the core system.  One key danger with spreadsheets is that they don’t travel well.  If the person who wrote the spreadsheet isn’t around to modify and maintain it, it often becomes useless, posing the risk that important work won’t get done.

Encouraging and preserving mediocrity, by failing to establish performance standards and holding employees accountable, adds to your salary cost.  An example of this is the impact on employee morale, as those who are doing their own work become resentful of those who are not pulling their weight.

Contracts and relationships associated with Information Technology services are often overlooked.  Especially for those of you who choose to outsource data processing, there are long term contracts that reflect significant costs to your bank.  These costs include day to day costs, and extraordinary costs that might be associated with acquisitions, early terminations, or conversions to other systems.

Overall management of these contracts is an important subject.  I have written and spoken about it extensively.  For our purposes, however, I want to focus on the ongoing cost elements of these contracts, as they are significant and persistent.  Complex services, such as core account processing, involve complex pricing, and I often find errors in monthly billing associated with these contracts. Failure to correct an error the first time means it is likely to persist.

To ensure that your bills are accurate, evaluate them in light of the terms and conditions, and pricing schedules of the contract.  It's important to look at these bills every period (whether monthly, annually, or otherwise)  in a timely manner.  Such familiarity will cause your staff to better understand what is “normal” and quickly identify errors. 
 You'll also find that many such contracts preclude your recovering all of the over-billing or other errors, if you wait too long.  One such contract I saw recently limited the vendor's liability to the last three months of overages and errors.

One final area.  As we’ve discussed, our industry has given away so much, for so long, that it is hard to convince both customers and employees that we need to charge for services rendered.  One way to break this cycle is to intentionally attach fees to any new services you offer.  The “iTunes Store” concept of pricing is not that different from J.C. Penney’s original fractional pricing method. It works well.  Consider such pricing for products and services you introduce, such as 99 cents for mobile check capture, or $7.95 for a specially branded or photo debit card.  Doing so communicates value to your customers, and acclimates them to paying for value.

I could go on, but I’ll save the rest for another time.  Please take a few minutes to investigate at least a couple of the suggestions above.  It is my hope you can enter the New Year with a newfound focus on controlling your costs, and thus improving your bottom line.

My best to you and your families for a wonderful Holiday Season! As always, please let me know how I can help you.

Recent and Upcoming Speaking Engagements
November 6th 
Western Independent Bankers: Director’s Conference, San Francisco
November 14th
Connecticut Bankers Association: Annual Conference, Scottsdale
November 19th
Arkansas Bankers Association: Technology Conference, Little Rock
November 20th
Tennessee Bankers Association: Directors Retreat, Nashville
January 13th (2015)
 Tennessee Bankers Association: Retail Sales and Bank Marketing Conference, Nashville
Trent's Comments is published six times each year and provides insight into strategic topics facing financial institution executives. Please feel free to share this with your staff and colleagues. 
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