Is There a Productivity Opportunity in Credit Unions?

Two very important numbers about the nation’s third economic quarter have been released. The first was the 7.2% growth in GDP, the fastest one-quarter rate since 1984. The second number was even more spectacular: an 8.1% jump in workforce productivity. That number was just the latest in the string of such improvements. Over the last two years the annual rate of productivity increase


Two very important numbers about the nation’s third economic quarter have been released. The first was the 7.2% growth in GDP, the fastest one-quarter rate since 1984. The second number was even more spectacular: an 8.1% jump in workforce productivity. That number was just the latest in the string of such improvements. Over the last two years the annual rate of productivity increase has been more than 5%, a pace that has not occurred since the 1950s.

Productivity gains are crucial to creating new economic growth and well being. For if the output relationship between labor and capital is fixed, then greater output is merely the result of more resources. Productivity improvements are necessary to increase economic “wealth.”

Traditionally, achieving productivity improvements in the service sector of the economy, including financial institutions, has been considered more difficult than in manufacturing. The theory was that service jobs were much more “hands-on.” The “output” was more dependent on a live person such as a waiter in a restaurant or a teller at a cash window. This lagging productivity versus manufacturing would tend to push up costs faster in service industries than overall inflation.

But examples of dramatic productivity gains are now commonplace in the service area. Countrywide Mortgage in California says that process and technology improvements have reduced the time to originate a loan to 10 days from over two months in the past decade. Some credit unions are looking at first mortgage processes that can finalize a loan in just one visit.

Productivity and Headcount—Is There a Relationship?

Without productivity innovation, the alternative to improving efficiency and bottom line performance is either employee layoffs or wage givebacks. In countless industries, the challenge of increased earnings is often begun through headcount reductions. The former CEO of American Airlines, Don Carty, warned that “relying solely on revenues to fix the [earnings] problem [in airlines] is being shortsighted.” Cost reductions are imperative.

Today the airline industry is engaged in one of the largest efforts ever by a service industry to convert their customer base to “self service” options. These changes include finding the flight, booking the reservation, printing out an E ticket, using self-service kiosks at check-in and even carrying meals on board. By having the customer perform functions traditionally done by travel agents or airline employees, the industry hopes to enhance productivity, reduce employee costs and return to profitability.

At TIAA-CREFF, the mutual fund and retirement planning company that has prided itself on being a low cost supplier, the new CEO just announced 500 job reductions out of a base of 6,500. The goal is to lower the fund’s expense ratio from .49% to .35%. The motivation: the company had just lost a major contract from New York state to the Vanguard funds group, a decision based at Vanguard’s lower cost structure.

Finally a Barron’s writer has suggested that the federal government could pare its deficit by over $170 billion largely by managing the workforce more efficiently. The writer, Gene Epstein, says that $30 billion could be saved just by reducing the clerical to managerial ratio from the current 10.4 to the service sector’s standard of 8.1 to each manager. Basing managers’ pay on comparables with the non-profit, not the private sector, would reduce salaries another $28 billion. Finally reducing fringe benefits to the level of the private sector would save $29 billion. In the military lowering the ratio of officers to enlisted would save $18 billion. Reducing the 12 federal reserve bank districts to one would save another $1.5 billion.

The point of the article is that, as in the private sector, efficiency in government begins with head count and productivity.

“Brewers’ GM Told to Slash Team Payroll to $30 Million”

Even in baseball, the ultimate example of a “service” (labor dependent) business, general managers are being asked to create a competitive team by not spending money. The Florida Marlins with one of the lowest payrolls in Major League Baseball defeated three teams all with much higher payrolls and greater star-power averages. An alternative strategy has been developed by new general managers who look at a broader range of data to find out what it takes to win. This analysis includes overlooked individual statistics plus creative approaches to team strategy—“don’t give up an out.” Then they identify players who perform these lesser recognized “processes” well—not the stars with the highest batting average, lowest ERA or most home runs. The new book Money Ball by Michael Lewis describes how the Oakland Athletics created this strategy and the success they have had.

The Credit Union Experience

Layoffs in credit unions are rare even though salaries and benefits are 50 % of total expenses. For the industry, total operating expenses have risen at a rate of almost 10% per year for the last decade. Salaries go up because the number of employees continues to increase and the average salaries increase. Both numbers are shown in the graphs on pages 4 and 5 for the past eight years.

But hasn’t asset growth offset some of these expenses? In fact, aren’t a significant portion of these increases required to support growth? That is, a new branch investment without supporting personnel would be almost without purpose.

Share and operating expense growth show a very high correlation. For the credit unions over $1 billion, the credit unions with share growth above the peer also exceeded the peer in expense growth. Only eight credit unions out of 82 enjoyed an above average share growth but a below average expense growth.

Changing the Business Model

Breaking this tandem link of share and expense growth requires innovation. Many credit unions have relied on the “economy of scale” concept, hoping that by growing, operating efficiencies would be more or less automatic. This idea seems logical. When opening a new branch, call center or other service channel, the increase in capacity should exceed the cost to improve the service. Certainly large credit unions tend to have lower overall expense ratios than smaller credit unions.

The challenge however is not just to expand the business model, but to improve it. The key to competitive advantage as practiced in the above examples from airlines to mutual funds is lower cost. Lower costs require both process improvements and productivity increases.

Data is Scarce

Direct data to compare credit union productivity performance is hard to find. Not only is key data often lacking, but also because of different business approaches there is the legitimate question of whether situations can be compared. Two examples, however, suggest some of the potential gains that might be achieved by learning more about productivity.

An Atlanta firm — Financial Management Solutions, Inc. — has developed a software tool for financial institutions to schedule tellers based on matching member transaction demand with employees at the windows. One of the services of the firm is comparing total transactions per hour for all their subscribers. This data, which is published monthly, suggests that the range of teller transactions is from the mid 20s to over 40 per hour in credit unions. Even allowing for differences in the definition of a “transaction” the numbers suggest that there is a wide range of performance possibilities.

At an industry-wide level, credit union productivity can be inferred from two ratios:

  1. loans originated per employee;
  2. the total dollars from the net interest margin and interest income per employee.

These productivity “indicators” for credit unions over $1 billion show wide variation.

Is There a Credit Union Productivity Problem?

The quick answer is that we don’t know. There is little direct data that explicitly measures productivity, especially per employee. No standard industry benchmarks exist for the credit union business model which combines a wide range of consumer loan and savings products with managing a branching system.

But there seems to be a clear productivity challenge. As financial companies from mutual funds to mortgage brokers to banks all attempt to become more efficient as a critical factor in competitive advantage, then credit unions need to be more aware of their relative position. As Fed Chairman Alan Greenspan reiterates his intention to keep rates low, with the implications this has for continuing margin compression, efficient operations built on productive employees will be a necessity, not a nice “to do.” Is there any higher priority for 2004?




April 26, 2004


  • These are the types of articles that bring me back to
  • We have started tracking loans per loan employee - only, we weight our monthly loan volume to include new, denials, pendings and modifications (based on the amount of time spent on each category). The challenge is taking action when the numbers are low.
  • Very thought provoking.
  • I'm sorry, I forgot to include my email address in the last response regarding interest income vs. non-interest income.
  • Great thoughts! Need a clarification - is the ratio really "total $ from net interest margin and INTEREST INCOME per employee" or NON-interest (fee) income?
  • Very Good Strategic and tactical value. We need more on this topic. Credit Unions may be approaching very challenging days ahead as competitive and demograpgic pressures continue to erode margins.
  • Very timely and good advice. We are working with Profound Communications in Columbus (OH) to help us not only identify but to train and solve the same issues this article discusses. It's called their Staff Optimization program.
  • Productivity data is what our credit union is struggling with right now. I have been trying to find peer data, but from the article, it appears there isn't any at this point. I'm sure Callahan's will be the first to inform us if the data becomes available.