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• W37254097 abstract "It wouldn't make sense for a homebuilder to start with the roof and work his way down. But a top view of cost accounting for product profitability may make much more sense for your bank. In the course of consulting assignments at community banks, I have often seen the confusion and controversy that arises when bankers try to find an effective approach to measuring product profitability. Unfortunately, they lose sight of basic givens when they set out to get scientific about costs. For instance, bankers often forget, or don't wish to acknowledge, that certain standalone products are unprofitable almost by definition--ATMs, internet banking--but are vital to competing. It's always a major undertaking Often, when bankers begin to research product profitability, they are set by such challenges as the very heavy investment of time and labor in performing the analyses, and the high cost of available off-the-shelf product profitability packages. Perhaps the problem lies in the initial approach--treating the exercise each time as if it were the parting of the Red Sea. It's common for community bankers to decide to take the bottom-up method of evaluating profitability, which entails weighing all products, and attempting to dissect all of them into specific segments. Though it sounds very scientific and methodical, this approach can be a daunting, long-term task that certainly will prove to be time-consuming and expensive--and with questionable results. As an example, consider a client who recently purchased a canned product profitability package and attacked its first product--savings passbooks. After about 13 months of high-cost labor, staffers finally identified what they thought to be the product's net results--a loss. Well, many could probably have told them that on day one for free. Plus, having confirmed the obvious, what then do they do with results? Call in all passbooks? Another client reviewed its demand deposit products (about seven different types), and spent several months stuck on how to identify and break out back office support costs by each specific product. In the end, it all represented non-interest demand deposit processing costs, with activity based on usage of each. The costs could probably have been lumped together as one product line with quite unnoticeable effect. Building a foundation For a clearer view of the challenge, perhaps we should take a step and decide what bankers really want to accomplish in this regard. Products are grouped by three distinct functions: * Funds using (loans/investments) * Funds providing (branch offices, capital, misc.) * Non-fund (Trust, annuities, insurance) A departmental profitability system is designed to slot each product line where it belongs, and where it is managed within the bank--under the auspices of a specific function. Within a departmental system, all costs (and income) are identified and posted by department. Thus, when properly structured, the departmental system will clearly identify the profitability of the function and its products. As an example, the Consumer Loan department (a profit center), when structured within a departmental system, will house all consumer loan products, and show their net results. If management then chooses to drill down further into the product line and identify profitability by specific product, it already has all data necessary to do so. It becomes a simple matter of breaking down the total operating costs (direct and indirect) of the department by specific product. This is much less costly and time consuming than the bottom-up approach. Similarly, deposit product profitability begins in a departmental system, with all funds-gathering costs slotted into the branch offices and their support functions (the deposit fund providers). The total branch column of the branch network will identify the direct and indirect operating costs--in essence, the total cost to generate deposits. …" @default.
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• W37254097 date "2003-06-01" @default.
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• W37254097 title "Product Profitability from the Top Down: Maybe You've Been Going about Profit Analysis with the Wrong End of the Telescope. (Community Banking)" @default.
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