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There's No ''IT'' in ''Thrift''

Well, OK, there is. But don't tell the Seattle-area bank that said no to ATMs, E-mail, and Web access. Can it continue to grow and remain monumentally frugal?
Connie Winkler, CFO IT
March 15, 2004

Take a new, young CFO, ensconce him in the downtown Seattle headquarters of a small but growing company with operations in eight western states, and you can be pretty sure that information technology will be an important aspect of his growth strategy.

So much for assumptions. Meet Brent Beardall, CFO of Washington Federal Savings, the bank that just says no—to IT. The $7.5 billion thrift, which specializes in fixed-rate residential mortgages and is consistently rated as among the safest of harbors for depositors' money, takes frugality to a completely different dimension. While other savings-and-loans spend 40 to 54 cents to earn $1 of revenue, in 2003 Washington Federal squeezed by on 16.5 cents. At the same time, it earned $145 million, a 2 percent return on assets, marking another record year for the regional thrift with 119 branches, 200,000 customers, and 750 employees.

"In a word, we're conservative," says Beardall. Employees at Washington Federal can forget about $100 anniversary lunches and similar perks; on the flip side, they don't have to sweat the budget, because there isn't one. Beardall signs each of the 1,000 paper invoices the bank generates each month, right down to the utility bills for every branch. "You know exactly where the money is going," he says, "and, more importantly, everyone knows you're watching."

Nowhere is the mantra of thrift more clear, however, than with IT. For the past 20 years, Washington Federal has relied on a homegrown general-ledger system and has eschewed all the technological underpinnings of modern banking—ATMs, online banking, voice mail, and call answering systems. Any pagers that beep or cell phones that ring are the personal property of employees.

Only one penny of every $1 in revenue is spent on technology, an extraordinarily low figure, according to industry analysts. Most banks spend 4 percent to 8 percent of revenues on IT; the larger ones spend up to 20 percent.

While analysts question how long Washington Federal can maintain its efficiency and growth without embracing IT more fully, the company rolls on, accumulating cash and planning new branches in Nevada, Oregon, and Washington State.

Laggards can be Choosers
Beardall came to Washington Federal in 2001 as controller, after working six years at Deloitte & Touche as the bank's CPA auditor. It's not that Beardall is totally down on IT, only that he sees no rush. "We recognize that technology has its benefits, but we wait until the technology is cost-effective," he explains.

When Beardall was an auditor at Washington Federal, he went to the CFO and argued for voice mail and "catching up with the times." His now-retired predecessor, Ronald Saper (who didn't use a computer), challenged him for proof. "I took that on: from my audit experience, I knew what voice mail cost, but I certainly couldn't prove that a voice-mail system, Internet access from each PC, or other systems would make us more efficient."

Beardall goes further: "The way we do things now makes us the most efficient financial institution I know of. We believe there is no more efficient way to handle communications than picking up your telephone." (Editor's note: the phones do have touch-tone dialing.)

To some degree, it's not that the bank said no to technology so much as it never got around to saying yes. Founded in 1917 to serve Seattle's largely Scandinavian fishing community, the bank's focus on passbook accounts and friendly tellers has endeared it to a client base that now includes lots of senior citizens. That raises flags for banking analyst Jerry Silva at TowerGroup in Needham, Massachusetts. "I'd question their prospects as their current clientele ages," says Silva. Referring to his 18-year-old sister-in-law, who is keen on mobile text/chat messaging, he says, "I tell bankers that those capabilities may not be important now, but they will be if they want to capture this audience in the future."

Silva says that as smaller banks approach a certain level—about $10 billion in assets under management—the personal touch becomes difficult to maintain. Customers rarely get the same teller, employee turnover tends to be higher, and suddenly IT starts to look like the answer. But that poses a problem, Silva says, because IT costs a lot of money to do well.

Even IT consultants who praise a frugal and prudent approach wonder about Washington Federal. "Based on its forward-looking indicators, Washington Federal is a little bit below [its peers] in terms of net income growth and net revenue growth," says Tom Pisello, CEO of Alinean, an Orlando-based ROI-strategies research firm. "They might be doing well in terms of generating cash, but long term they might not grow as quickly as their peers." In Pisello's analogy, a bank without a robust IT infrastructure is like a pharmaceuticals maker with no new drugs in the pipeline: they can do well for a while but may miss a market trend or shift.

Washington Federal executives are undeterred by comparisons or critiques. Some of their core strategies, such as accepting a high amount of interest-rate risk rather than attempting to minimize credit risk and a tendency to keep plenty of cash on hand, have nothing to do with IT. But other articles of faith indicate just where the company cuts its IT bills.


For example, the company does not believe in budgets. Several executives at Washington Federal note that having a budget means employees feel they have to spend it all by year-end and that they are entitled to the same amount, or more, the next year. "I've never seen a budget the same on the first day of the year as the last," says Beardall, "so the administration of the budget becomes a huge expense."

Dispensing with budgets—and the software that typically supports them—dovetails with Washington Federal's practice of making decisions without the help of decision-support technology. Almost all of Washington Federal decisions—and certainly those that involve more than $1,000—go from the branch through regional managers and ultimately to a five-member executive management committee, which meets every week.

Even the current pressure to launch a variety of initiatives for compliance with the Sarbanes-Oxley Act of 2002 leaves the S&L unfazed. Beardall says that Washington Federal's simplicity and streamlined systems make it easy to comply. "The biggest thing is producing materials to show the regulators that we're already doing what we were required to do," says senior vice president and information-systems manager Terry Permenter.

A strong do-it-yourself attitude prevails at the bank, which even eschews the mania for growth through acquisition, believing it is more economical to just open more branches. Last August, however, the company departed from that strategy, acquiring Seattle's small United Savings Bank (at a purchase price of 1.5 times earnings, it was just too good to pass up). But even then frugality reigned: no dealmakers were involved, employees handled the legal-document printing for $1,000 at Kinko's (after a $13,800 outside bid was deemed exorbitant), and, in order to exchange legal documents with its Washington, D.C., law firm, Beardall used his free Web-based E-mail account (the bank has only an internal system, with almost no Web access or external connectivity).

"Things aren't always top-of-the-line here," the CFO acknowledges, "but they don't always have to be." Case in point: tellers continued to use old "green screen" CP/M computers (a predecessor of the DOS operating system) into the late 1990s. Permenter bought old systems as scrap and refurbished them. Finally, in late 2001, new PCs and a branch automation system received the go-ahead. But economy was still the key: instead of shelling out for Microsoft Office applications such as Word, employees must make do with the WordPad and Notepad features in the Windows operating system. Obviously, no one will be writing the neighborhood newsletter on company time.

A handful of executives (including the CFO and CEO) have laptop PCs on their desks, and about 10 PCs are linked to the Internet (good news for the marketing vice president, who answers requests to the company's Website). All of which must mean that this is the worst IT job in the world, right?

"We say that true Washington Federal people bleed green, but I always say that I was like this before I came here," says Permenter. "I've been able to impact how things are done here, and pretty much my views have coincided with management's."

With Microsoft in its backyard and high-tech, fast-growing Washington Mutual, the nation's largest S&L, only blocks away, Washington Federal knows that its neighbors are incredulous about its business methods and low-tech stance. But Beardall points out that for the past 20 years, Washington Federal's annual equity return has been 21.09 percent, compared with Washington Mutual's 22.04 percent, a case in which finishing second may still permit bragging rights.

"The day may come when we have E-mail, voice mail, and ATMs," Beardall says. "But right now, there's no compelling motivation."

Connie Winkler writes about technology management from Seattle and is a former executive editor of PC Magazine.

So Much for Irrational Exuberance

If there is an IT spending race today, bet on the tortoise. "Right now, because of the economy, it tends to be the frugal and prudent companies that are achieving more—the ones that were able to scale back their expenditures," reports Tom Pisello, CEO of Alinean, an Orlando-based company that researches ROI strategies.

"How much companies spend on IT is not the best predictor of how well they'll fare in terms of productivity," he adds. "It's how the spending is applied and how well the spending is managed that counts." While there is no one characteristic that truly marks the most productive IT leaders, Alinean surveyed hundreds of public companies looking for links between IT investment and productivity and found that what matters most is the following:






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