Trade Secrets

Trade Secrets

It all began with a call from Chuck. It was in December 1995, at an offsite meeting of senior executives from Charles Schwab, the San Francisco-based financial services company. Midway through the day-long session, the phone rang for Executive Vice President Beth Sawi. It was Charles Schwab himself-"Chuck," as he's known respectfully throughout his company-and he had an order, which, typically, he framed as a request: develop an online trading system. Now. Schwab's insistence arose not from fear-in fact, the 26-year-old company was living large off of profits from its branch offices and call centers-but, rather, anticipation. The internet was taking hold with American consumers, and Schwab wanted to make sure his company staked an early claim in the online investing marketplace. "I want us to be up and trading online by Feb. 14," Schwab said-six weeks away.

With those marching orders, Sawi partnered with CIO Dawn Lepore, and together they recruited a 13-person task force to tackle Chuck's challenge. They missed the Valentine's Day deadline, but just barely. On March 31, 1996, Schwab's new Electronic Brokerage group went live with an Internet Trading Customer Center that quickly changed not just how Schwab's customers do business, but how the company's own employees do business. From a market of none, this system, in fewer than four years, has helped Schwab seize 41 per cent (in terms of assets) of the online brokerage marketplace-twice the share of E-Trade, its nearest competitor. Today, fully 70 per cent of the company's total trades are electronic, conducted by an ever-growing customer base of 2.2 million people who have instant, real-time access to account information, stock quotes, incisive market research and, of course, live trading. Internally, this system is credited with helping Schwab cut transaction costs, increase gross revenue, open new markets and break down traditional business/IT barriers. "I can't think of anything [other than the online brokerage] that has had more business impact in general," says Lepore.

The customer center hasn't been without its problems-it has suffered some well-publicized outages, including three in one week last October. But in awarding a 2000 Enterprise Value Award to Schwab, judges note that the system's flaws are far eclipsed by its impact on e-commerce in general, electronic investing in particular. "I do have a little question about what happens [to customers] when the network goes down," says judge Patricia M. Wallington, retired CIO of Xerox. "But there is no question that [Schwab] has changed the way trading is done."

Birth of a System

No doubt a lot of Schwab staffers had a hand in the delivery of the online customer center, but two of the primary parents were Randy Goldman, vice president of the electronic brokerage, and her colleague Vincent Phillips, senior vice president of electronic brokerage technology. Yet, because of the tight deadline when this project was first conceived, they wanted to give it up for adoption. Gideon Sasson, president of the electronic brokerage enterprise, asked Phillips to solicit bids from outsource vendors. "But no outsourcer could come near our time frame," says Phillips. "They all wanted $4 million and close to a year [to complete the project]. We had no choice but to do it in-house."

Not only did they do it in-house, they did it on time and for half the money, roughly $2.4 million. In part, the project was successful because Schwab historically had made smart IT investments. Under Lepore's leadership since 1993, the company by '96 had automated and integrated its back-end information systems so that people throughout the enterprise were sharing common data and network connectivity. These new systems were essentially internet-ready; they just needed to be capped with a new web interface. And, technically, Schwab was already an online broker with its PC product, StreetSmart, which was introduced in 1994, allowing customers dial-up access to electronic investment services. This product also helped pave the way-and prime the customers-for the new internet venture.

But equally vital was the company's own top-down business/IT integration. Schwab himself is IT-savvy, and company President and co-CEO David Pottruck is an avowed tech junky. These two leaders understand IT's strategic value, and they have encouraged Lepore to develop a staff whose members are equally at home in the IT and business organisations. Phillips, for example, was assigned from Lepore's corporate IT staff to be a permanent member of the electronic brokerage group. This close business/IT alignment helped Schwab get up to speed fast with a cross-functional team to brainstorm and build the company's online presence. "The project was typical of Schwab in the sense that it really was a [business/IT] partnership," says Lepore.

By the end of February 1996, the electronic brokerage group had a prototype demo to show Schwab, whose reported reaction was, "Holy cow!" A month later, on March 31, the company went live with its first version of the Internet Trading Customer Center. Initially, the system had limited functionality; customers could check balances, buy and sell equities and get real-time stock quotes. Period. "We definitely took a phased-in approach," says Goldman. The company didn't even advertise the product when it was launched. "We wanted to work out the bugs," Lepore says. Yet, in its first month, the system by word-of-mouth attracted 100,000 customers. By the end of 1996, Schwab's was the most fully functioning online brokerage in the marketplace. Since then, Schwab has added dozens of new features so that customers today can help themselves to:

Account Information Traders can view their account balances, transaction histories and portfolio performance. Customers also can transfer funds between Schwab and other financial institutions.

Trades Stocks, mutual funds, options, treasuries and corporate bonds can all be traded at the click of a button and then viewed on a comprehensive order-status page that shows when orders are completed, canceled or changed.

Quotes and Research Customers pay for real-time access to stock quotes, charts and news, including the watch list feature, which tracks their own stocks. Schwab's analyst center provides industry news and reports from Schwab's research center as well as from Credit Suisse First Boston and Hambrecht & Quist. A mutual funds center offers information on types of funds, return figures and the top 10 holdings of the funds.

SchwabAlerts This customizable e-mail service informs traders of their account activity, stock performance, securities news and daily market updates.

Planning Tools An asset allocation tool kit helps customers analyse their portfolios, using model portfolios to answer questions about risk tolerance and investment returns.

Other Services Customers can change their basic account information, update their password and even open new accounts-all functions that previously had to be conducted in a Schwab branch office.

"We've worked extremely hard to develop a customer-friendly system," says Goldman. In the latest [fifth] version of the customer center, no fewer than 500 customers were polled about their preferences. A recently launched retirement planner (see "Planning for Planners," below) is one example of a service added to meet customer needs. Upcoming, Schwab plans to add more research data from market analysts as well as new tools to help customers benchmark their investments.

The online brokerage marketplace has become increasingly crowded since 1996-Gomez Advisors, which ranks e-commerce companies, currently tracks 50 electronic brokers-and Schwab is hardly the least expensive option. Schwab's electronic commission fees begin at $29.95, for example, while E-Trade's start at $14.95. Yet Goldman feels Schwab's system distinguishes itself with its wide variety of customer services. "We provide the most options above trading," Goldman says, "and the reason our breadth of products is greater is because we are the best offline company of all our online competitors."

Indeed, price has not been a barrier to Schwab's success in the online brokerage ratings. J.D. Power and Associates, in its first-ever review of online traders, ranked Schwab highest for customer satisfaction in 1999. And Gomez, in its most recent (December 1999) review, ranked Schwab first out of 50 internet brokers, ahead of rival E-Trade. "Cost continues to be a factor as the company remains one of the highest priced brokers," Gomez reports, "but investors should overlook the high commissions to take advantage of the site's features."

Clearly, Chuck made the right call. His company today isn't just the largest online brokerage; it's the largest by a lot. Beyond the 41 per cent of total assets, Schwab owns 21 per cent of the online investing market in terms of total trades, which is at least twice the share of any rival. In the past year alone, Schwab has increased its online assets by 96 per cent, to $264 billion.

At the same time that Schwab has boosted revenue, it has cut costs. Online transactions cost one-fifth as much as those conducted with Schwab employees in branch offices or via telephone, so Schwab has been able to take effectively 80 per cent of the costs out of 50 per cent of its trades-roughly $439 million in 1999 alone. And then there is cost avoidance; no new call centers have had to be built to handle the additional transaction volume.

The Internet also has been Schwab's ticket to enter new global marketplaces. The company maintains only two branch offices in Europe (as opposed to more than 200 in the United States), yet via the web, Schwab serves 600,000 European customers-and total European volumes are growing 25 per cent a month.

Also, Schwab recently used its basic web template to offer the first Chinese language trading site, and the global expansion continues with new sites tailored for Hong Kong and the Cayman Islands.

Internally, CIO Lepore estimates that 60 per cent of all Schwab employees use the customer center for their own investments or to assist customers. Leaders credit the internet with all but erasing the already blurry line between the company's business and IT staffs. "The key is that there aren't any barriers [between business and IT]," says Phillips. "Although I report to Dawn [Lepore], I feel like a part of the electronic brokerage team. Sometimes I refer to the rest of the IT organisation as 'the IT organisation,' and I have to remind myself, 'hey, I'm a part of IT.'" "The lines are very blurred between technology and business," Goldman agrees, emphasizing the point by asking Phillips, "I'm sort of IT, aren't I? I'm almost a techie."

"You're a techie," Phillips grins.

Planning for Planners

Next-generation web tools help Schwab evolve from investor to adviser One of the newest features on Schwab's Internet Trading Customer Center is a planner that helps customers track their retirement savings.

Beginning with an investment in one of Schwab's retirement accounts, customers can enter their projected retirement date, estimate how much money they will need for their golden years, then calculate how much to sock away now in savings. With a few clicks, one can also play "what if?" by entering different retirement dates or savings amounts. "This is a starting base for Schwab to begin offering help and advice to customers," says Randy Goldman, vice president of Schwab's electronic brokerage.

Indeed, until recently Schwab's services have been geared mostly toward the informed investor. But now, encouraged by the success of its web tools and the growth of the online trading marketplace, Schwab wants to begin educating and counseling rookie traders. In addition to offering investment tips, Schwab plans to load its customer center with more market research from analysts as well as tools that will help customers judge how well they are doing-and how well they could be doing if they honed their investment strategy.

Schwab's goal is to be the one-stop shop for all online investment needs. So even though competitors might charge less, Schwab's customers derive greater value. "The value for our customers is beyond price," Goldman says. "Our value is a combination of control, access, convenience and the whole democratization of information. Our goal is to provide better value over time."

-T. Field

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More about Charles SchwabCredit SuisseCredit Suisse First BostonEvolveFinancial InstitutionsGoldmanGomez AdvisorsSchwabXerox

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