Taking Stock

For co-CEO David Pottruck and Charles Schwab & Co., reinvention is the key to growth.

As a talented linebacker at the University of Pennsylvania in the late '60s, Dave Pottruck was badly disappointed when the NFL draft passed him by, leading him to decide that he hadn't worked hard enough. Pottruck was determined never again to fail from insufficient effort.

By the age of 25 he had mapped out his career goals for the next 25 years. Then he achieved them - at Citibank, Shearson/American Express Co. and Charles Schwab & Co. "Nobody I ever saw worked harder than I did," he says.

But success had a dark side. "The price I paid was two failed marriages, underinvestment in time and energy in my family and being, in many cases, a fairly one-dimensional person," he acknowledges.

Ultimately, Pottruck's single-mindedness threatened his career. When he was head of marketing at Schwab back in the '80s, then-president Larry Stupski told him he was "too persuasive." Determined to win at all costs, Pottruck often bulldozed his way through colleagues' misgivings, rather than giving their opinions more consideration.

Looking back, Pottruck, who has been Schwab's president since 1992 and co-CEO since 1998, says he was "too competitive; too driven, making everybody around me feel uncomfortable; a person whom a lot of my colleagues found oftentimes unappealing."

So Pottruck began to reinvent himself, an effort he says is continuing. As the big man with the quiet voice talks unblushingly about character, integrity and generosity of spirit, one can imagine the amount of will it took for him to subdue the physically intimidating "John Wayne style of leadership" he says he once practiced. But Pottruck knew he had no choice. "The role of leadership will either bring out the best in you or take you down," he says.

Reinventing Schwab

Pottruck's focus on self-improvement makes him the perfect leader for Schwab, a company that has been using technology to reinvent itself since it was founded by its namesake in 1971, says CIO and Vice Chairwoman Dawn Lepore.

"If you're going to be leading a fast-paced company, you've got to be learning on the fly and reinventing the company," she explains. "And to reinvent the company, you have to reinvent yourself."

Since 1996, Schwab has been recasting itself as an Internet company on a brick-and-mortar base that includes more than 350 branches. "Schwab is writing the book" on Internet integration, says John Payne, a consultant at Cerulli Associates Inc., a Boston-based research and consulting firm. "It has the attention of every financial institution in the world."

It should. Schwab currently manages about 42% of total online assets, more than twice as much as its nearest rival. The author of much of that success is Pottruck, who is in charge of executing Schwab's vision.

In 1996, the pioneering discount brokerage found itself on the wrong end of the priceline, as upstart pure-play Web brokerages began charging $25 per trade compared with Charles Schwab On-Line's $64.

Pottruck fought back with a new, no-frills division called e.Schwab, going head-to-head with the online firms. E.Schwab customers would pay $29.95 per online trade - including a $5 premium for its brand - but would sacrifice access to the full range of Schwab services at branch offices and call centers.

It worked. By 1997, e.Schwab had joined Charles Schwab On-Line among the top online brokerages.

But Schwab looks beyond its apparent success. " 'If it ain't broke, don't fix it,' is not a notion we have here," Pottruck says.

"A core principle is that Schwab focuses on what their customer wants," Payne says. "They have been remarkably adept in anticipating customers' future needs and demands."

Schwab found that e.Schwab customers wished they had access to the Charles Schwab services, while Charles Schwab On-Line customers envied e.Schwab prices.

Pottruck says he knew he had to combine low price with high service. But that would cost Schwab $150 million of its then-annual $250 million profit. "We knew it would have a huge impact on our growth and our profits and our stock price," he recalls. "We presumed it would make 1998 a very tough year. It was a very scary decision."

It was particularly scary for a company leading its market. But Schwab had decided to go down a new path - to use its multiple channels as a competitive advantage across all the competition rather than compete head-to-head with pure-play online brokerages.

Clicks and Mortar

Pottruck calls this strategy "clicks and mortar." It has differentiated Schwab from competitors and won kudos from analysts. "Schwab was one of the first to recognize that the Internet was not exclusive of their other channels (but) another choice in the lineup," Payne says.

Nevertheless, 1998 was a tough year. Schwab's earnings initially fell short and its stock price tanked, losing nearly one-third of its value before a surge in new customers brought back equilibrium by year's end.

The upward spiral continues. Although Schwab makes smaller commissions for online trades, those trades cost far less for Schwab to execute than traditional trades. Meanwhile, its Internet volume has spiked. Last quarter, 79% of all Schwab trades were made online, up from 65% a year ago. Schwab had 3.7 million online accounts with $418 billion in online assets, up 48% and 91% respectively, from a year earlier. "Schwab is an asset-gathering machine, and it has leveraged the Internet to help them gather those assets," Payne says.

Observers laud Pottruck's ability to anticipate change and act on it. "Schwab is a culture of change - of continual reinvention," says Harvard University Professor F. Warren McFarlan, who has studied the company's culture. Pottruck, he says, is "passionate about change, and those personal skills (around self-reinvention) are critical to that."

For Pottruck, it's elementary. "You cannot be successful in the technology world if you're not willing to change," he says. "You can't be a one-trick pony."

Pottruck practices what he preaches. "He's always had drive and energy, but he's matured as a leader," says Beth Sawi, Schwab's chief administrative officer and executive vice president. Back in the '80s, when she worked for Pottruck in marketing, she found his hard-driving style difficult. "Every time I saw him, I'd come away with a long, long list of new things to do," she remembers. "It was just overwhelming. I felt like I couldn't win with this guy."

Others felt the same, and in a desperate effort to make him prioritize tasks, Pottruck's staff presented him with cutouts of a light bulb - for ideas that were just things to think about - and a gun - for things they had to "get done or else," Sawi recalls. "We said, 'You don't even have to say anything, just wave whichever one it is.' "

Pottruck took the hint. "He has a very good sense of humor, and he's very good at accepting feedback," Sawi says. "To this day he says, 'This is a gun; this is a light bulb.' "

Pottruck moves the company along as well. Lepore recalls that shortly after she was promoted to CIO in 1993 and joined Schwab's executive committee, Pottruck asked her how it was going. "I said, 'Everything is so male!' "

"We were always 'punting' and 'passing the ball' and comparing industry people to sports figures," she says, "and half the time I didn't even know which sports they were talking about."

Pottruck took action. "The next time a sports analogy came up, he talked about what that analogy meant, not in a condescending way but in an inclusive way," she says.

Nurturing IT Loyalty

Lepore and Pottruck go back 16 years, and she says he has taught her about the importance of building strong relationships and personal loyalty. "He leads with his heart as well as his head," she says.

IT strategy is rooted in Pottruck's image of Schwab as "a technology firm that happens to be in the financial services business." Pottruck learned the ropes as an IT project manager at Citibank during the '70s and has kept up with tech trends ever since. "He has such a keen knowledge and appreciation for technology that he's a wonderful thinking partner," Lepore says. "It's a big boon to my job."

So is his willingness to move forward without a complete road map. "I don't worry about failed projects," he says. "I worry about missed opportunities."

For example, Schwab's software-based online trading services started back in 1985 with a "very clunky, not very functional or user-friendly" DOS-based PC application, Pottruck recalls. By 1992, Schwab had a friendlier Windows-based product, followed in 1995 by the Web-based e.Schwab.

That long road was a learning curve, he says, and as other players were just beginning to realize the Web's potential, Schwab already had 10 years of online experience under its belt. "We're not afraid of trying when we don't know all the answers," Lepore says. "We had to get in there and learn about this stuff."

Pottruck says that Schwab has a long way to go to achieve its goals. "But we have a very clear sense of what we need to do," he says, "and we have been pursuing that path with relentlessness."

Relentlessness but not ruthlessness. Pottruck says modeling ethical behavior is a prime part of every business leader's job. "This is not an easy thing to do because we all have our weak moments," he says. "But we strive to be the best we can be.

"That's the responsibility that comes with the job," he concludes. "If you don't want the responsibility, don't take the job."

Copyright © 2000 IDG Communications, Inc.

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