June 12, 2001

In today's banking environment, there's a lot of talk about trying to drive customers to lower-cost delivery channels. But many banks are discovering that as customers move from branches to electronic channels, costs don't necessarily go down.

To better understand the relationship between channel usage and costs, Sandy Spring National Bank of Maryland has completed a three-month activity-based costing project using TruABC profitability software solution and TimeWand technology from PMG Systems, West Chester, Pa.

Though the $2 billion bank had been looking at profitability in its business units, products, and customer relationships for a couple of years, the time was right to upgrade to leading-edge methodologies and best practices. "We were using an activity-based costing approach, but we were doing it on a full absorption basis," said James H. Langmead, executive vice president and chief financial officer at Olney, Md.-based Sandy Spring. "We were just taking our existing costs and allocating them based on activities, as opposed to using standard costing, which we think is more appropriate in today's world."

The standalone system resides on PCs in the bank's finance area. Using TimeWand bar code technology, analysts can go into a branch or department and measure activity throughout a test period. Information gathered is then uploaded into the database.

"We're going to be able to better understand the capacity we have in our business units and what kind of activity is taking place," said Langmead. "Over time, that information is very powerful in helping to position resources."

The project's initial focus is primarily on the retail side, looking at the branch system, call center and electronic banking channels. However, Langmead said even after PMG analysts are gone, the bank's team will continue working through the rest of the organization. "They're working with a team of our people who are getting that knowledge transferred to them. When their consulting engagement ends, the Sandy Spring people will have the software and the understanding of the system to continue the project with other areas of our bank."

So far, employees have embraced the concept. "We have incentive programs that reward people for improvements in profitability," said Langmead, "so our people get very charged up when they have another metric to help them better understand what's going on in their unit and allow them to manage better."