There are many ways to improve overall operational efficiency and increase your efficiency ratio, but many banks and credit unions immediately jump to the idea that the best way to increase the efficiency ratio is by reducing their staff. However, this is a common myth and there are many other areas in your financial institution’s operations that you may not have thought about.
The Myth: Reducing Staff Leads to Lower Operational Costs and High Efficiencies
The reality is that staff reductions can lower the overall cost of an organization, generally staffing accounts for 50% to 60% of a financial institution’s cost. However, this does not necessarily mean you will see greater efficiencies simply by cutting staff members.
The Truth: Financial Managers Should Have Budgetary Insight and Control
In our past 25 years of experience, we have seen this very fact come to fruition time and time again. For example, benchmark metrics may signal to a global bank that they are overstaffed by hundreds of people. The global bank then terminates those hundreds of positions, but if you watch their staffing numbers over the next 18-24 months you may notice that they hire all those positions back. This cycle often highlights the fact that the fundamental operating processes have not changed, and therefore the institution has not become more efficient.
The reason we believe this misconception exists is that many financial institutions do not allow their managers to take financial ownership over their operations and staff. They generally do not have budgeting access, which limits their ability to understand the financial goals from a staffing and operational perspective. Instead, they are primarily thinking about how to get their daily operations done in the most efficient manner.
A hypothetical example is that you may have two open positions that pay $40,000 per year each, but realistically, as a manager, you know that role could be fulfilled by one person that can do the work of two people at $60,000. However, since you might not have access to the overall budget, you miss the opportunity to save the organization $20,000 and benefits.
Another example can be seen in the category office supplies. Your managers may order gel pens because they are nice, but if they saw the cost between gel pens and regular BIC pens they might be swayed to order significantly less gel pens to keep their costs down. These incremental costs can add up in a big way.
In addition to allowing your financial managers more access and responsibility for their budgets and operational cost savings, we wanted to provide a list of other areas that are not often thought about when considering how to increase efficiency without reducing staff:
As mentioned in the above example, BIC pens versus gel pens, high-end paper, and envelopes versus standard paper supplies. We are not saying that there isn’t a time and place for nice supplies, but the high-end office supplies shouldn’t be what everyone at your financial institution uses day-to-day because of the cost associated with more expensive supplies.
Customer and Member Appreciation
Many community banks and credit unions go above and beyond to show customers and members how appreciative they are for their business. However, we have seen that many institutions will spend $50,000 or more on small appreciation gifts. Ask yourself if a thoughtful and personal thank you note would suffice, or limit gift giving to select accounts. Often, a simple gesture can be the most impactful.
Coffee and Snacks
Many branches offer cookies or other treats every day to their customers. These snacks often never get eaten and are then thrown away at the end of the day. Coffee for employees is another huge expense. We have seen financial institutions spend anywhere from $500,000 - $1,000,000 on coffee. Both are extraneous expenses and while it can sometimes bring a sense of good will, we have seen that most employees, customers, and members are not impacted by a reduction in snacks and coffee.
This may sound silly, but when you really think about it, taking care of plants can be a huge expense for a financial institution. Imagine having living plants at all your branches and corporate headquarters, and then you pay someone to prune and water them 2-3 times per week. We recommend silk or artificial plants that do not need additional care to help reduce these ongoing costs.
It is often said that you cannot cut your way to success, and if you’re looking to boost overall efficiency within your bank or credit union, we recommend giving your managers some budgetary insight and control. You may even consider providing an incentive for cost reduction efforts. You will be surprised at the expenses your managers can reduce when given the visibility and responsibility.
If you want to learn more about the common myths and misconceptions surrounding operational efficiency, make sure to check out our “Profitability Enhancement Playbook.”