Wells Fargo's Kovacevich

CEO Profile: Wells Fargo's Kovacevich banks on success as a one-stop shop
3/26/2007

By Greg Farrell, USA TODAY
SAN FRANCISCO — In hindsight, Dick Kovacevich's rebuff of an offer from the New York Yankees was just the first of many shrewd business decisions.
Kovacevich, a pitching star at his high school in a small town in Washington state, was contacted by a scout after graduation. But instead of pursuing nearly every boy's dream of being a Major League ballplayer and signing, he accepted a scholarship to Stanford.


AUDIO: Kovacevich on his formula for acquisitions
There, he blew out his pitching arm, ruining any chance at a professional career. But Kovacevich stayed on at Stanford to get his MBA. In 1967, he began his business career as a different kind of pitcher, selling toys, among other things, for General Mills.

Forty years later, as chairman and CEO of Wells Fargo (WFC), the nation's fifth-largest financial institution, Kovacevich may well be the best banker you've never heard of.

In an interview at his office here, Kovacevich says the secret to Wells Fargo's success is that the bank does a better job selling multiple product lines to its existing customer base than any other financial institution.

This isn't as simple as it sounds. For decades, bankers have preached that in the future, people will want to centralize their financial services activities in one place, a "financial supermarket." And for decades, the bankers have been wrong.

In general, Americans like to spread financial activities among multiple banks and brokerages. At Wells Fargo, Kovacevich has come closer than any rival to figuring out how to get people to bring all their money to one bank. The average Wells Fargo customer household uses 5.2 different bank products, about twice the industry average, and 20% of customers buy eight products from the bank.

"We're really selling commodity products," says Kovacevich, 63, a lanky man who looks like a younger brother of the late Jack Palance. "Don't tell anyone, but Bank of America's checking account isn't any different from ours. It's the way you distribute the commodity products that makes it unique."

In the past five years, Wells Fargo shareholders have enjoyed a 14% average annual return on their stock, compared with 6% for the S&P 500. Over a 20-year period, it's been 21% vs. 12%. The bank has also outperformed its peer group. Since 2002, Bank of America (BAC), Wachovia (WB)and JPMorgan Chase (JPM) have posted strong growth numbers, while Citigroup (C) has been flat. But in the 20-year span, Citi is the only bank that comes close to Wells Fargo's track record.

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"What we're able to do with cross-selling is make banking much more convenient" for customers, Kovacevich says.

It's also less expensive. "The cost to us of selling a product to an existing customer is only about 10% of selling the same product to a new customer," he says. Because Wells Fargo is not constantly trolling for new customers, it spends far less on advertising than its peers — less than half, Kovacevich says — and that money can go to the customer as well as to the bottom line.

Former colleagues say Kovacevich had a vision for what a successful financial services firm could be before his peers did. "He was one of the first ones to realize that we were running a business and not a traditional bank," says Dan Saklad, now retired. "He understood the importance of sales and marketing."

Kovacevich's banking philosophy has drawn praise from no less than Warren Buffett, whose Berkshire Hathaway (BRKA)(BRKB) owns 6.5% of the bank's stock. In his latest annual report, Buffett singled out three CEOs to salute for 2006: Jeff Immelt of General Electric; Ken Chenault of American Express; and Kovacevich.

The returns enjoyed by Wells Fargo raise an obvious question: If cross-selling is such a successful way to build business, why isn't everybody doing it?

"It's hard to do," Kovacevich says. "The question was never, if you could do it, was it superior?" he says. "It's, can you get 84 businesses to work with each other?"

"It's simple in concept but very hard in execution," says board member Robert Joss, dean of Stanford's business school and a Kovacevich classmate. "It takes an incredible amount of discipline and alignment. It seems boring to some people, but it's a tribute to Dick. He has a great capacity to motivate people."

'The Citi never sleeps'

Kovacevich's cross-selling strategy evolved over three decades, going back to the time when he was a young executive at Citibank in New York, and his job was to get people to use newfangled ATMs.

In October of 1977, Citibank introduced ATMs in Manhattan, but consumers, wary of dealing with a box instead of a teller, didn't rush to embrace the new service. Executives at Citibank, including John Reed (at that time the head of the consumer group) and Kovacevich, were confident that customers would eventually come around, because all the research indicated that people wanted convenience.

In the winter of 1978, a blizzard engulfed New York City, closing schools and most businesses. At the time, Kovacevich says, Citibank had a film crew visiting from Brazil. Stranded by the storm, he and the crew went onto the streets of Manhattan, found customers making their way to Citibank's ATMs on skis, shot a commercial and had it on the air in 48 hours with the bank's tag line, "The Citi never sleeps."


AUDIO: The success of the 'Citi never sleeps' ad
The ad, combined with the word-of-mouth support generated by bank customers who used the ATMs during the blizzard, helped Citibank jump-start its banking business in Manhattan. From 1977 to 1982, when Kovacevich was in charge, the bank's share of consumer banking in New York grew from 4% to 11%.

"We were entrepreneurial," recalls Kovacevich with a grin. "We got this commercial out, and the rest is history."

But when John Reed took over from the legendary Walter Wriston as CEO in 1984, he chose Richard Braddock, one of Kovacevich's rivals, as president. In 1986, Kovacevich pulled up stakes, leaving the financial capital of the USA and a bank with $150 billion in assets to become vice chairman and chief operating officer of a midsize Minneapolis bank, Norwest, that had $21 billion in assets.

At Norwest, under the direction of CEO Lloyd Johnson, Kovacevich had the opportunity to build a bank the way he wanted to. While he valued the lessons learned at Citibank, he also saw the limitations of a culture where bankers competed internally for business.

"By the time I moved to Norwest, I was convinced that it was all about financial services," Kovacevich says. "The problem was that with Citibank, we weren't very good at teamwork. It was a dog-eat-dog environment.

"I headed to Norwest and said, 'The first thing we've got to do is not have silos,' " he says. "We had to design our culture and systems to focus on the customer, not on the product line. Somehow, we've got to reward the behavior we want, which is getting all of our customers' business."

Laying off the layoffs

Kovacevich's system took root at Norwest, even as he grew the bank through numerous acquisitions of other banks in the region. In 1993, he was named CEO.

In 1998, a year in which some of the biggest mergers in the history of U.S. banking took place — Citicorp merged with Travelers to form Citigroup, and NationsBank merged with Bank of America — Kovacevich made his own move: Norwest merged with Wells Fargo.

Investors, including Buffett, didn't like the deal initially. While Buffett was concerned about whether the two banks made a good fit, short-term investors hated the fact that it would take years before the combined entities would be able to grow. In most big bank mergers, the new CEO announces massive layoffs to achieve a large, one-time cost savings, then promises to produce 15% growth within a year or so.

In announcing the merger with Wells Fargo, Kovacevich said layoffs would be kept to a minimum, and it would probably take as long as three years to return to Norwest's pre-merger growth rates.

"The investment community threw up when we announced that," he says with a laugh. Citibank had promised savings of 30% for its deal, and Bank of America predicted a hefty bonus from layoffs. There would be no such short-term gains at Wells Fargo.

But over time, the merger would prove to be more successful than the other deals struck in 1998.

At the time of the merger, Norwest customers averaged 3.3 product lines from the bank, almost one full point ahead of the industry norm. Since the merger, Wells Fargo has grown that number to 5.2, almost twice the industry average.

The reason Wells Fargo does a better job is its employees, say Kovacevich and others.

"Dick understood that everything we achieved was achieved through people," says Saklad, who followed Kovacevich from Citibank to Norwest. "Anything that I develop today, you can replicate within three months. It just isn't an issue. The issue is getting my teller or branch manager to out-execute and sell better and service better than the next person."

"Kovacevich's greatest skill is his people capability," says Richard Bove, an analyst at Punk Ziegel who has followed Kovacevich's career. "I'm convinced it's the force of his personality, which is so strong and so positive that it infects other people."

The final lap

Now, two years away from a mandatory retirement age that he put in place, the Dick Kovacevich era at Wells Fargo is about to end.

Asked about succession plans at the bank, Kovacevich — who has been passionately talking about his business model for 90 minutes — suddenly becomes circumspect, carefully choosing his words. He won't say who is destined to take his place, although outside observers expect it to be his No. 2, John Stumpf, the president and chief operating officer.

All he's prepared to share is that he doesn't want to turn the decision over who will replace him into the type of public horse race surrounding former GE CEO Jack Welch in 2001.

Kovacevich is even less interested in talking about his personal life.

He may have hung up his baseball cleats four decades ago, but he's an avid skier and an excellent tennis player, his friends say. He's a pretty good golfer, too, having played in the AT&T Pebble Beach National Pro-Am tournament several times since moving to California following the Norwest/Wells Fargo merger.

But Kovacevich can't be coaxed into talking about that. Instead, he deflects a question about how he spends his free time by saying that he views himself as a "quarterback" at Wells Fargo, whose job is to put the best people possible out on the field.

And that is perhaps his strongest attribute, Bove says. Kovacevich wants to have strong players on his team and doesn't feel threatened by them.

Bove mentions several famous former bank CEOs by name, saying they got rid of executives who showed promise, dumping them at the earliest opportunity. "Kovacevich doesn't do that," he says. "He can stand having very strong people around all the time. Most people can't."