No errors? No progress: the Kovacevich approach to risk

RMA Journal, The, Sept, 2003

A shoulder injury in the early 1960s kept a promising ballplayer, Dick Kovacevich, from accepting a contract with the New York Yankees. But in the years since, Kovacevich has been pitching hard and fast in another industry, and he is now chairman and CEO of Wells Fargo & Company--the fifth-largest financial services company in the U.S.

In baseball, an error is a defensive misplay that gives an advantage to the competition; in financial services, according to Kovacevich, an error discovered early is something that can be redirected to help the company stay ahead of its competition.

Two words come across again and again when speaking with Kovacevich: testing and culture. Developing the right team and allowing team members to test their ideas have been themes central to Wells Fargo's success. A phrase you're likely to hear when discussing culture in particular is, "It's all about trust."

In this interview, RMA President and CEO Maury Hartigan asks Kovacevich about his "core products" approach to financial services, the necessity of reaching team to "instinctively do the right thing," and the value of testing to determine the risk/reward balance.

MHH: Many of our interview have been with lifelong bankers: however, you chose to begin your career at General Mills. I'd like to know the framework for your current position with Wells Fargo provided by, first, your degree from Stanford in industrial engineering; second your retail experience in the toy division at General Mills; and third, your position with Citibank.

RMK: I never practiced as an engineer, and those whor drive across bridges are thankful for that. Industrial engineering at Stanford was really about quantitative methods of analyzing business. We took all the basic engineering courses. The operations research, statistics, finance, and accounting classes included in the industrial engineering curriculum allowed me to skip the first year of my subsequent MBA program. Engineering helped me develop a thought process for how to approach business issues.

My business interests, however, have always been on the consumer products side of business, not the industrial or engineering side. I didn't even seriously consider financial institutions when I finished business school. For one thing, I wasn't interested in investment banking, which consisted of advising people rather than actually doing business. And secondly, commercial banking was a pretty staid business at the time. Regulation Q controlled everything, and the prospect of commercial banking was, frankly, boring.

The consumer is two-thirds of the economy, and companies like General Mills and Procter & Gamble were the industry leaders for consumer products marketing. I began working for General Mills because they committed to giving me an opportunity to run a business at the earliest time they felt I was ready.

They delivered on their promise. Within two and a half years. I was running a toy company in England. And two years after that, I was running Kenner Products, the third-largest toy company in the U.S. It was at General Mills that I learned the marketing process and discipline--focusing on customers and their needs.

The reason I worked on the toy side rather than the food side of General Mills was the product cycle. With toys, you get 10 years of experience every year--product development to manufacturing to product introduction to peak sales is a three-year cycle--whereas you can't change even the Cheerios box without the chairman agreeing.

When Citicorp was looking to increase its retail business, the decision was made to look to consumer products companies for new staff rather than to other banks. That's how I was recruited to Citicorp. While the decision to recruit from consumer product companies was, by and large, a good one, I know of a number of people who came to financial services through this route but were not successful. That's because they missed the importance of the distribution network when you are in service businesses. Product companies try to pull a product through a distribution network they do not own. They are trying to convince the consumer to buy the product from any one of a number of distribution outlets.

So while a product company concentrates on the product itself, I quickly discovered that in financial services the product is actually secondary to the way in which it's distributed. In financial services your product is actually service. The majority of banking products are virtually indistinguishable--a commodity. It's the delivery of the product that creates differentiation, and the critical element in delivery is your people. Most brand managers who came from packaged goods didn't understand that it's the interaction of your sales and service with the customer that is critical to success, not your ability to differentiate the product.

MHH: You make that point very well, both in your "Vision and Values" pamphlet distributed to all of your people and in your 2002 Annual Report: "Our number-one constituency is our 134,000 team members."