I get it. You want to merge with a peer sized credit union. Together you will have more scale, twice the number of branches, twice the membership size, twice the assets…twice, twice, twice. Having all things twice should create the golden ticket of economies of scale. But after the merger you seem to have twice the payroll but not twice the benefits. What happened? The dirty little details get in the way.
- If you don’t trim the payroll, you don’t save money. People are the highest cost of operations. Unless you have fewer employees after the merger, you are not going to save money. Are you willing to make those decisions?
- If you don’t trim the vendors, you don’t save money. The continuing credit union needs to quickly decide what vendor to use for each service. Having multiple vendors for a service within a credit union does not create efficiencies.
- Be ruthless in you vendor selection. Past relationships with vendors are great but that is not a reason to keep a vendor if the vendor is not competitive on price and quality. Buying a foursome at your credit union golf outing is not a sufficient reason to keep a vendor.
- The cost of terminating vendor relationships is a cost of the merger and should be calculated into the decision. This is especially true for core IT services where the termination fees can be excessive.
- The staff expertise needed to run a credit union of X size is not the same as running a credit union of 2X size. The general level of expertise has to increase significantly if the size of the operation increases significantly. There are all-star employees working at smaller credit union who could work at any sized credit union but the overall expertise level at smaller credit unions is not equal to the overall expertise level at larger credit unions. If the merger puts you in a peer class that is significantly larger, are you willing to make the necessary changes in staff? That is a significant hidden merger cost.
- Larger credit unions tend to have different operational processes and a more formalized protocol and policy structure. Are you ready for that?
- The technology tools in a larger credit union tend to be more extensive and expensive than in a smaller credit union. Do you understand that cost and has that been a part of the analysis?
- If the merger puts your credit union within the jurisdiction of the CFPB, are you ready for the enormous costs of that oversight?
- Do you have the attitude to analyze the profitability of services and cut services that cannot be self-sustaining?
- Have you gotten past the identity of the CEO and directors? Does the board have the vision and talent for a larger, more complicated organization?
- How are you dealing with the staff issues? What will be the organizational structure and who is in each of the slots? How are those decisions being made…by unemotional analysis or by cutting internal deals to be “fair”?
- How are you dealing with different salary levels and employee benefits? Do you have to pay retention bonuses to keep key employees around for the transition?
- Can you close branches? Do you have keep unprofitable branches open?
- Is there a strategy to tear down the “us and them” walls and tribe-like behavior that sometimes occurs post-merger?
- Do you have the metrics to measure the success of the merger?
Instead merging with a peer-sized credit union, you might consider collaborating. If you do all things “right”, a merger will be more effective in the end as all of the changes will be occurring within one organization and that is more efficient. But the truth is that very, very few credit unions do all things “right” in a merger. The people issues get in the way. There is a reluctance of rocking the boat too much and that keeps people from making all the necessary changes.
Collaboration between existing credit unions achieves many of the benefits of economies of scale without a lot of the internal strife that a merger can bring. The collaborating credit unions can continue as independent credit unions able to control their own destinies. If the credit unions eventually do decide to merge, the collaboration phase will be like the training wheels stage. The credit unions will be used to working together and will be better prepared to make the necessary changes for a successful merger.
So before you make the decision to merge understand all the people and cost ramifications and decide whether it is better to merge or collaborate at this time.
ABOUT THE AUTHOR: Guy Messick, the CUSO Guru, is General Counsel to NACUSO and a partner in the law firm of Messick & Lauer P.C. Guy and former NCUA Chairman Dennis Dollar will join again this year in what has become one of the most popular panel discussions of the NACUSO conference. With a special emphasis on regulatory actions both current and anticipated, Messick and Dollar team up to provide over fifty combined years of insight into what is happening at NCUA, CFPB and other agencies with an impact on credit unions and CUSOs.