The Difference Between Productivity And Efficiency

This cheat sheet offers a visual breakdown of the meaning behind two often-confused metrics.

 
Andrew Bolton

 

The terms “productivity” and “efficiency” are often used interchangeably when, in fact, they have distinct meanings for credit unions. Productivity measures outputs. Efficiency measures inputs. Efficiency measures money in; productivity measures money out.

For those that like a helpful memory trick, productivity contains the letters O-U-T: prOdUctiviTy

Two Graphs About Efficiency

Efficiency measures input per unit of output. To be as efficient as possible, an institution wants to use the least amount of inputs to create the greatest amount of outputs. When the inputs required to make an output decrease, efficiency likewise increases — generally, a desirable result.

The efficiency ratio, a kind of all-encompassing measure of efficiency, measures how much it costs a credit union to make $1 of revenue. In the graph below, you can see that as of the end of 2014, it cost the average credit union 80 cents to earn $1 of revenue.

EFFICIENCY RATIO
For all U.S. credit unions | Data as of Dec. 31, 2014
© Callahan & Associates | www.creditunions.com

GOW2.6-1

Source: Callahan & Associates’ Peer-to-Peer Analytics

 

Credit unions have been able to reduce their cost of earning $1 of revenue by nearly 12 cents in the past five years.

The operating expense ratio is another measure of efficiency is. This ratio takes the total non-interest expenses of a credit union and divides them by its average asset size. Credit unions must manage their expenses prudently while also investing enough to grow, and the operating expense ratio helps leaders determine how well they are achieving this balance.

OPERATING EXPENSE RATIO
For all U.S. credit unions | Data as of Dec. 31, 2014
© Callahan & Associates | www.creditunions.com

GOW2.6-2

Source: Callahan & Associates’ Peer-to-Peer Analytics

 

Expense management has been an even greater focus at credit unions since the recession, as evidenced by the operating expense ratio declining consistently over the past four years.

 

Three Graphs About Productivity

Productivity measures output per unit of input. Credit unions want productive employees to maximize the outputs (income, loans generated, and more) returned on inputs (usually human capital). When the outputs are increased and inputs are decreased or stay the same, productivity likewise increases — generally, a desirable result.

One useful metric to show credit union productivity is members per employee, which contextualizes employee work load.

MEMBERS PER EMPLOYEE
For all U.S. credit unions | Data as of Dec. 31, 2014
© Callahan & Associates | www.creditunions.com

GOW2.6-3

Source: Callahan & Associates’ Peer-to-Peer Analytics

 

While the ratio of members per employee has remained relatively flat in recent years, the recent peak of 388 members per employee in 2011 was their most productive point for this metric.

Two other metrics — net income per employee and annual loan originations per employee — ascribe dollar values to the work of every employee.

NET INCOME PER EMPLOYEE
For all U.S. credit unions | Data as of Dec. 31, 2014
© Callahan & Associates | www.creditunions.com

GOW2.6-4

Source: Callahan & Associates’ Peer-to-Peer Analytics

 

2014 is one of the best years in recent history for the average amount of net income generated by credit union employees.

ANNUAL LOAN ORIGINATIONS PER EMPLOYEE
For all U.S. credit unions | Data as of Dec. 31, 2014
© Callahan & Associates | www.creditunions.com

GOW2.6-5

Source: Callahan & Associates’ Peer-to-Peer Analytics

 

With increased mortgage and consumer lending activity at credit unions, their average employee now is able to generate significantly more loans compared to 2009-2011.

These charts visually illustrate some simple metrics related to productivity and efficiency at credit unions. Interested in how your credit union stacks up or seeing even more metrics? Take a look in the Scorecard of our Search & Analyze section.

— Erik Payne contributed to this article.

 
 

Feb. 8, 2015


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