Being a Small Community Institution Sucks

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I’ve seen some blog posts/presentations recently, touting the benefits of being small. Not small as in short (i.e., height), but small, as in organizational size.

My take: Hogwash. Being small sucks. And even if it doesn’t suck for your firm, the reality is that being small — or, more accurately, staying small — isn’t sustainable.

Regardless of the legal structure of your entity (for-profit or not-for-profit), every firm needs to bring in more money than it spends, if it wants to stay in business. Duh.

But even if your firm generates a healthy profit today, standing still isn’t a feasible option. Even if nothing changes in the number of your customers and the scope of their relationship, the reality is that Sally in Accounting and Bill in the call center are going to want to raises at some point in time. And your suppliers are going to raise their prices at some point. Which means there’s always upwards pressure on expenses.

In addition, if you’re going to innovate, that might take some capital investment over and above today’s level of investment. And where is that going to come from? Growth.

So while it may chic to say that small is beautiful, and though staying small may be seductive, it simply isn’t feasible. You have to grow.

One alternative is to grow the top line faster than you grow the expense line.

If you’re a credit union, you have some options here. Option #1 is to increase your penetration of your existing field of membership. If the universe of potential members is decreasing, this isn’t particularly easy. And if you haven’t been particularly successful at acquiring new members from the existing field of membership in the past, then you’re going to have to make some investments in marketing, service, product delivery, etc. to improve on past performance. And that takes additional money. Which cuts into profits. Which aren’t there if you aren’t growing.

Option #2 is to increase your share of wallet among existing members. If you’re a US credit union, good luck. US consumers don’t like to put all their financial products with a single institution. With the average age of CU members generally higher than the national average, this is a risky strategy, since many older consumers don’t need a lot of new deposit accounts or home/car loans.

The new crop of financial services customers — Gen Yers — might be different. Who knows. Good luck waiting it out until they need mortgages, home equity loans, investment accounts, and retirement planning services. Something tells me that CUs are going to have to make new investments (if they haven’t already) to attract them.

A second alternative is to continually decrease the cost structure of your organization.Good luck. A lot of what are commonly referred to as variable expenses act a whole lot more like fixed expenses in real life.

So you have to grow. And growing organically is tough — real tough. So you merge. But here’s the problem with many mergers — they’re really mergers predicated on cost structure reduction. They’re not geared towards improving market penetration or share of wallet. They’re based on achieving economies of scale. Assuming you’re even able to capitalize on these promised efficiencies, what happens after that?

You either have to grow the top line faster than you grow the expense line, or continually decrease the cost structure of your organization. Which, as we’ve seen, is really hard to do. So you merge again.

So you see, being small sucks. Unfortunately, so does being big. This leads us to the Goldilocks theory of optimal organizational size: The right size of a firm is not too small, not too large. The right size is just right.

My friend the CU Warrior writes:

Small, not-for-profit financial institutions have what most large financial institutions do not: the genuine ability to craft solutions to their field of membership’s unique needs…”

This is a dangerous belief to cling to. Their ability to craft solutions is not inherently better. The advantage that smaller organizations have is their ability to act faster (generally speaking). But with an ongoing pressure to get bigger, that ability to act faster diminishes all the time.

Now I’m sure that the “small is beautiful” crowd will find examples of firms that “disprove” my argument. Here’s my rebuttal: Anybody can find examples of successful, small CUs — at a particular point in time.

The history of management books is littered with the examples of firm who were “in search of excellence” or “built to last” when some author came along and wrote about them. How many of those firms sustained their level of success? Few. Very few.

There will be some firms that truly run counter to my argument. These examples are few and far between. And more importantly, it’s my guess that there’s something different in the way these CUs are managed that account for their success. That is, they’re not successful because they’re small. Instead, their unique success enables them to stay small.

I suspect that Mt. Lehman Credit Union is one of these CUs. First of all, my guess is that MLCU’s investments in technology enable it to continually hold down the average cost of transactions and interactions. When it launched mobile banking, for example, it didn’t simply add one more customer contact channel to develop and maintain. It migrated transactions and interactions from other channels to the new channel.

Second, I would imagine that the typical MLCU member has more products/member than most other CUs, especially those in the US.

And third, I’m pretty sure that the management team and board are well aligned on a strategic path that enables the CU to stay sustainably small.

So being small might not suck for MLCU. But it’s likely that it will for your credit union.

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