Cost Accounting - a Term as Foreign to Bankers as a Profitable Trust Department

I checked with Mr. Campbell, and just as I thought, he knows exactly how many pieces of carrots, potatoes, celery, peas, onions and green beans go into a can of vegetable soup. Even after enhancing it with sea salt and macaroni, and at a sale price of $1.00 per can, Mr. Campbell makes 15 cents net. That's good pricing.

Ask a banker what it costs to process his most popular account (DDA) and he'll read you a number from a BAI or ABA manual that's ten years old. And the banker charges his customers zero for the account. That's dumb pricing and bad business.

I knew what cost accounting was from my study of accounting. It made sense then, but it wasn't until I went to work for Industrial National Bank of Rhode Island that I learned the real impact of knowing your costs. Our holding company consisted of 13 subsidiaries, including the largest which was the bank. Our CEO had a simple management style. Every division stands alone and brings home the earnings so that the holding company stock listed on the NYSE returns a good dividend and appreciation to the stockholders. There were two drainers of corporate earnings at the time - the Trust Department and MasterCharge (as it was called then). The Head of our credit card offering had a reasonable excuse - startup costs were killing profitability. He needed time to build volume. The CEO granted him three months. The Head of Trust said it was inherent in the nature of the business. Trust Departments don't make money, they provide service. The CEO had three words for him - fix it now.

The following Monday, the Holding Company CFO departed from the downtown Providence chambers of walnut-clad offices, antique desks, oriental rugs woven centuries before any of us even knew there was once a Persia, and priceless Narragansett Bay art works. The CFO was on his way to the IT facility that we called the Formica desk, asphalt tile, relocatable cubicle environs located at an industrial park in Cranston. The only "antiques" in the place were the four GE-415 mainframes we acquired for the cost of two-men-and-a-truck whenever a user abandoned theirs.

The CFO had a conceptual design for a Cost Accounting system that would track all costs by customer account. There was just one huge problem. How do we account for the single largest cost in the department - Trust Officer time? He had the answer. They're going to feel like production line workers at Davol (maker of hot water bottles). They will have to fill out time cards.

We built the system. Every trust officer was assigned a billing rate based on the traditional algorithm that lawyers, consultants, accountants and plumbers use - salary, fringe benefits, overhead, G&A, and profit. Every transaction was assigned a standard cost which was sensitive to our situation, not some other bank's. After that, it was like any other accounting system we were processing. At the end of the first month's processing, we printed out account summaries which showed, in essence, how much it costs to manage every trust account and how much the estate was charged.

Three discoveries shocked everyone involved:

1. The biggest loser was the largest account. The name of the account garnered even more respect than Saint Patrick.

2. Every small account was losing money because the minimum fee was something someone pulled out of a hat thirty years ago.

3. No account was paying a fair price.

The Head of Trust was right - too much service, no profit. The solutions were obvious. Manage the accounts with tighter rules. There were 125 trust officers in the department. If one of them passed a ringing phone, answered it, and found out it was from the largest account, he would work the request and obviously record his time. It was the best way to earn brownie points. All 125 trust officers were charging time to the largest account.

Second, the minimum fee was raised. No one closed their account.

Third, all rates were increased.

Conclusion: If a lawyer for the estate complained and took his case to the judge, the trust officers followed with green bar listings in hand. Thanks to the clean design of our IT people, even a judge could figure out that the bank was spending money to service the needs of the account and therefore was justified in billing for reasonable compensation. The Trust Department never lost a case.

Our IT subsidiary enjoyed a little bit of entrepreneurial spirit, and took the Trust Cost System to market. We went to every major trust department and presented our system. The Head of Trust accompanied us on every sales call. Besides being young, charismatic, smart and earnest, he told his story of the past with humility. Every head of trust was still in that position so they related perfectly with his story. They bought with enthusiasm. As far as IT was concerned, all we had to say is the system is written in COBOL and it runs on OS. Those two things defined the IT world in 1972.

"We fixed it, Mr. Cummings, and then some."

Epilogue: Industrial National Bank of Rhode Island was too small to be noticed in the list of Top Hundred U.S. Banks back in the seventies. But in terms of management brain power (two men with the same set of skills), the results speak for themselves. The bank renamed itself Fleet Bank and during one of history's banking crunches, it acquired the spoils of practically all the major Boston banks. After rebuilding the "empire," and reaching to #8 in size, it sold the goods to Bank of America at a 49% premium.