Outsourcing lets CUs expand service offerings

You name it, they can do it. Credit union chief executive officers (CEOs) are finding there's an outside firm to handle just about any task they might need done. And to stay competitive, CEOs depend more and more on outside specialists who provide expertise and specialized knowledge for a fee.

"It's the only way we can offer a lot of our services," says Philip Farris, CEO of Alabama State Employees Credit Union in Montgomery. "You just have to be careful with the companies you use and make sure their ideas of service are the same as yours."

That's what stops some CEOs cold: When you go outside, whom can you trust?

Farris has overcome that worry and now uses outside specialists for envelope stuffing, statement printing and other data processing, and more specialized work like marketing and Web site development.

"Expertise is the main reason," Farris explains. "The programs we tend to start are somewhat sophisticated, such as handling credit cards, check clearing, setting up a Web page.

"In order to get expertise on staff, you have to hire someone with that experience or hire an outside firm to do the job for you. If you hire experience and they quit, you're stuck with no experience and you have to go out to the marketplace again.

"Particularly if you have a small operation, you would be paying someone full time and it wouldn't really be a full-time job.

"A lot of these things are time-consuming and difficult to do-for example, statement printing," Farris continues. "If you did it yourself, you'd have to have the equipment to handle it and sufficient volume to take advantage of the mail discounts.

"The money you save on postage almost pays for the outsourcing service," Farris says. "Things like credit cards and check clearings are pretty much the same way. It's almost impossible to keep up with all the necessary equipment you need and get the volume to make it pay for itself.

"Also, with credit cards and check clearing, time is really important. If you run short of staff or if your equipment is down, it presents a real problem."

Farris outsources a lot of work. "We also have a consultant for our investments, and we use service centers-corporations set up and owned by credit unions. Credit unions that participate can have their transactions done at other locations. That would be a type of outsourcing. In this case, we're allowing another organization to handle transactions for our members.

"We also outsource indirect lending," he says. "The Alabama Credit Union League has a company called CU Lending that handles indirect loans."

Farris says his experience with outsourcing has generally been positive, but warns, "Vendors change hands or staff or the way they do things. In that case, the service may lag behind what it's supposed to be.

"Also, a company may get bought out by another company. Then the particular service they provide may become a small segment of their business and not important to them. In that case, the company's equipment often doesn't get upgraded, it doesn't do sufficient training, and it falls behind in the marketplace. If you have a long-term contract, then you can have problems.

"With outsourcing, you have less control over personnel," Farris adds. "You have to make sure the company provides the service you need."

His tips for avoiding trouble: "Look at the product and check with others before using a service.

"We look at our vendors and see how much they depend on credit unions for business. If they're dependent on credit unions, they'll usually try and make credit unions happy.

"Check the kind of resources they have," he adds. "Look at how well they're financed, particularly with data processors. If a data processor needs to make major changes in its software or hardware, it gets very expensive. It needs resources to back it up.

"Check with members and see how things are going. Our members will tell us pretty quickly if something isn't performing the way it should be.

"There's not a whole lot more you can do," Farris says. "If vendors aren't going to provide the service you need, the only option is to change vendors."

Outsourcing isn't just for small and medium-size credit unions. Bill Brunton, CEO of Wayne Out County Teachers Credit Union of Livonia, Mich., credits outside vendors with helping his credit union grow to its current size. He also says outsourcing has streamlined his credit union, cut costs, and reduced personnel headaches.

"We have $270 million in assets but only 37 employees including me. So outsourcing has obviously helped us," Brunton says. "Most credit unions this size would probably have 120 to 140 people. The first misconception people have is, `Well, you're not fullservice.' That's not the case. We are. We have checking accounts. We have a large credit card department. There's nothing we don't do that most credit unions do. We just have it streamlined fairly well.

"We're probably one of the top credit unions in the country for expense control-and also with assets per employee and members per employee. Outsourcing has worked for us.

"We need experienced people to run our credit union," he says. "And everyone wears more than one hat, myself included.

"You have to pick your outsourcing partners pretty well," Brunton says. "People we partner with know we have very high standards.

"You're always going to have a few ups and downs, whether you're doing something in-house or outsourcing. We try to have the same quality control with our partners that we have in-house.

"There are advantages to outsourcing, on the expense side obviously," Brunton says. "But more than that, it gives you time to serve members. That's the whole theme here. It always has been and always will be as long as I'm here."

One of the companies Brunton uses is KochMcNabb Resources, Inc., of Southfield, Mich., run by Gary Morehead. Even though he makes his living through outsourcing, Morehead hesitates to call outsourcing a runaway trend in financial services.

"Some credit unions have been very aggressive in outsourcing and others have been disinclined," he says. "There can be real benefits, especially for credit unions in major metropolitan areas where there are lots of suppliers of various types of services."

What tasks should and shouldn't be farmed out? "Everyone agrees you should outsource computer programming," he says. "That's a given.

"Networking and personal computer maintenance can be outsourced, too. Marketing customer information file services are sometimes outsourced to a service bureau. In some cases, credit unions have outsourced a significant amount of detail work on their automated teller machine and credit card programs.

"Collections is an area where people have differing opinions about how much should be outsourced. With marketing, the most critical thing to do in-house is to handle select employee groups and community relations," Morehead maintains. "You can't hire an outside firm to actually represent a credit union at the Kiwanis Club, chamber of commerce, or to staff a booth. That's very awkward.

"However, the more detailed functions of marketing, such as preparing marketing pieces, writing speeches, designing campaigns, and Web site publishing are purchasable on the open market. Where there's a defined market of vendors who provide the service, that's something the credit union should look at outsourcing. Especially if the service provider is in a position to provide good, responsive service.

"You're potentially dealing with a more experienced, more knowledgeable individual just by virtue of personal qualifications-but also because the individual is probably exposed to a number of financial institutions or other businesses," Morehead says. "The benefit of that gets shared with each client.

"Because you're dealing with a more proficient individual, usually you should see a cost savings. If you're not careful, you could certainly end up spending more money. One way you could spend more money is by using a specialist to do generalist functions.

"Establish a budget up front and share that with the outside firm so together you can work out how to best use funds," he advises. "Set up ground rules: who's expected to do what and when.

"With an outsource situation, you should have very high standards of quality," Morehead says. "One of the best ways to ensure quality is to get a reference from a credit union you trust. Find someone who's already doing it right for other credit unions."

Copyright Credit Union National Association, Inc. Nov 1998
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