By Doug Wadsworth
Just like debt ratios in lending, it doesn’t matter how much money you make, but how much you spend. If you can’t keep your expenses under control you won’t be around much longer. You may not discover numerous large and obvious expenses to cut, rather numerous smaller ones (which add up).
Here are some tips for reining in excessive expenses, especially if you have recently taken reins at your small CU:
Inspect Every Bill, Every Month
Every bill (paper or electronic) should be personally inspected by you before being paid. Keep doing this for at least your first two years to catch annually recurring ones. After that, continue to inspect them randomly, forever! Some bills you’ve been paying for years may not even be legitimate, i.e., the “legally required” federal wages poster (get it free online from the government website and no, you don’t have to update it every year). Or the “Who’s Who List of CEOs” (that nobody looks at), or some wonky “Best Business Recognition” award (massaging your ego for a fee), or those Routing Number or Yellow Pages directories that nobody uses anymore?
Why Are Your Employees Doing That?
Pay attention to the daily procedures your employees are following and how much they cost (in time, as well as supplies). Small credit unions (especially with long-time employees) tend to repeat ancient procedures long after they have become obsolete. Who is responsible for applying common sense? Who is responsible to revise or abolish obsolete and expensive procedures? You.
You Need to Buy More of What?
This is a very satisfying job for the new CEO, and you will be surrounded by opportunities (so write them down for fond memories, decades later).
When I was a couple months into my CEO job, an employee came to me saying we needed to buy another box of these expensive little “hole punch keepers” that would bind up about 1,000 pages of the daily reports we were printing every day. Whoa, Bessie! I told her hold off ordering more until I could research it. I discovered we had been paying for automated electronic archiving of all those day-end reports for years, while we continued to redundantly print paper copies. Every. Single. Day. An entire ream of paper, each time. We had accumulated hundreds of these bound stacks of paper: under tables, on tables, against the wall–probably 3,000 lbs. of them. Totally unnecessary.
Then, I discovered we had an ongoing order of the most expensive Hammermill paper available, being delivered every few weeks–300% more expensive than standard copy paper! That single cost-cutting measure saved us a couple thousand dollars per month! So, get involved in everything your employees are doing, and ask “why.”
Vendor Contracts & Negotiation
Last year I was at a CUs Unite conference (cusunite.org) for small credit union CEOs, and was listening to a panel of large credit union CEOs who had recently absorbed other failing small credit unions. I raised my hand and asked about common reasons these small credit unions were failing. A common theme was that their CEOs had signed up for an expensive software package when times were good, but when times got tough (and they couldn’t afford it anymore), they were locked into expensive contracts and couldn’t escape.
Even though you are small and without the leverage of billion-dollar institutions, initial prices quoted by vendors are negotiable. Like car shopping, the “posted” price is just a suggestion, because maybe some idiot will pay that ridiculously high amount! When looking at the price, remember to focus on the recurring monthly expense and not just the one-time up-front implementation cost.
As a credit union, we can amortize large up-front expenses on our books. The vendor might be willing to drop the monthly price if you agree to pay a larger chunk up front (which can sweeten the deal for them and be more affordable for you).
Contract Traps
In addition to getting down the prices, there are some common “contract traps” you want to avoid:
- Long-Term Contracts: If this vendor knows they have a good product, you won’t want to leave. So, why are they trying to lock you up long-term, with early-termination penalties? Other than card processing, I usually won’t sign a term longer than three years. If they are as good as they claim, you wouldn’t want to leave after three years.
- Deconversion/Termination Fees: Unless there is an obvious cost to de-converting (reasonable expense for them to package and deliver secure data back to you), there is no reason for a termination fee, other than entrapment. Tell them you just don’t do termination fees, as it communicates a lack of faith in their own product.
- Auto-Renewal Clauses: Make sure it’s easy to cancel, not limited to a narrow window of time requiring special certified written mail to some obscure physical address. In addition, the vendor will often sneak in automated contract renewals for the entire term, another three or five or seven years! Preferably after the initial term expires, it reverts to a monthly contract, or at worst annual. If not, request it.
Keeping Track
Of course, it’s vital you keep track of these contract termination deadlines on your calendar. Many wise CEOs will automatically notify vendors to cancel any auto-renewal, even if they aren’t necessarily planning to terminate. Why? It gives added leverage to negotiate a better price (and ensures they don’t miss the termination notification deadline).
If you are already trapped in a contract and they won’t budge, your only hope might be finding some way the vendor is failing to keep their side of the contract. I recently met an attorney who helps small credit unions stand up to giant card processing/data processor companies. This attorney does a little digital sleuthing to discover where the vendor isn’t keeping their side of the contract (like failing to maintain adequate safety measures for their user logins) and sues them. The big processors will sometimes “settle” by waiving ridiculously steep deconversion fees and allowing early contract termination. (Message me directly if you want this attorney’s name).
Low Hanging Fruit
Chances are, as the new CEO there will be plenty of “low hanging fruit” you can easily identify to save money. Here are some examples of what I found in my first year, when I took the reins in 2008:
- We had a rented mail postage machine that cost us thousands per year, which we barely used (we handle little physical mail). As soon as the contract expired, I found one at a fraction of the cost.
- There were little air freshener boxes mounted in our bathrooms, and we were paying some maintenance guy to come by every month and drop a new fragrance cartridge in them… we can buy an annual supply of these for like $20 per year!
- We were paying top dollar for an electrician to come every month and change our burned-out lightbulbs. I can do this free when needed (and I bought a $30 pole for high ceiling ones).
- We were paying $2,000 per year for a subscription to receive new staff training DVDs every year. Cancelled! We couldn’t afford that, so we started doing our own training, internally.
- The previous CEO was paying $4,000/year for an administered 401K IRA plan. The annual administration cost was more than all employees were contributing per year, combined! Of course, there was also a $3,000 cancellation fee (what a racket), but I cancelled it immediately and switched us to a SEP IRA employee benefit, which has zero administration fees (free ninety free, thank you very much).
- What is your janitor charging you for disposable paper products, and are you really using that much? If your janitor is also your supplier, they earn a commission on paper product sales. Quite the conflict of interest. I’m positive our janitor was taking our newly purchased inventory out of the credit union in garbage bags. So, I found a new janitor and we started purchasing from a separate paper vendor. Voila, suddenly we used one-quarter the amount of toilet paper and paper towels (plus we were getting it cheaper).
- What about rented copy machines? Nope, just buy an old used one from your local copy machine place. They can last for a decade and you can get cheap maintenance plans (or just pay to replace it when it dies, and load your own darn toner). This will save you thousands every year. You don’t need the latest bells, whistles and laser show–just copies.
- Are you buying expensive loan application forms? Why not just make a generic one and change the wording/format to avoid copyright issues? How much are you paying for your paper credit card application brochures, and then tossing stacks of them when they suddenly become obsolete? Worse, are you paying flat expensive annual fees for “electronic” online/laser loan documents, even if you only use a few dozen of them per year?
It’s Your Job, CEOs
As the CEO, your job is to keep your expenses under control. As your credit union’s financial health improves, you and your employees will benefit with better pay and bonuses, and you can better afford to “give back” back those saved profits, to your members—just as not-for-profit cooperatives are supposed to!
If you are interested in hearing more of my ideas and experiences, check out my new book on Amazon: Keep it Simple, CEO, a DIY Profitability Guidebook for Small Credit Unions.
Doug Wadsworth is CEO of Tri-Cities Community Credit Union in Kennewick, Wash. Doug Wadsworth is also the president of a new non-profit advocacy group exclusively for small credit unions, the Endangered Small Credit Union Defense (www.endangeredsmallCUdefense.org) He can be reached at [email protected] or on LinkedIn here.
