NYSE Magazine

American Express Nets the Future

A decade ago, the company known as The Blue Box was on its way to irrelevance. Then CEO Harvey Golub took to the web.

Soon after Harvey Golub became CEO of American Express in 1993, he announced his goal for the company: “To become the world’s most respected service brand.” That same week, Fortune magazine ran a feature article entitled, The Death of Brands.

Fortune could be forgiven for doubting the relevance of the Blue Box. Plenty of people both inside the company and on the Street thought that AmEx had one foot off a cliff and the other on a banana peel. The charge card business, the company’s biggest revenue producer, was under siege from Visa and MasterCard. The Centurion’s prestige was no match for free airline miles, telephone credits and no annual fees and, by the time Golub moved into the corner suite, the American Express card had lost nearly half of its market share.

Nor did it look as though the company had the resources to turn and fight. Golub’s predecessor, James D. Robinson III, had paid top dollar for acquisitions to build a “financial supermarket.” Cardmembers, however, weren’t interested in its offerings. But a corporate culture that Golub later described as “arrogant” and “inflexible” was equally uninterested in finding out what cardmembers did want. Golub observed, “Through our own view of ourselves, we created Visa, the AT&T Universal Card, and the American AAdvantage program.”

It couldn’t seem to get much worse. But then, having alienated cardmembers and disappointed shareholders, American Express angered its last major constituency. Merchants were increasingly unhappy about paying fees that, according to a 1996 Harvard Business School case study, averaged 100-150 basis points more than other cards’. In 1991, a group of Boston restaurateurs joined forces to boycott American Express. The highlight of the highly publicized “the Boston Fee Party”: a restaurateur stabbing his card with a chef’s knife. By 1992, AmEx’s stock had plummeted to half its value of five years earlier.

Today, far from being a Wall Street wallflower, the 150-year-old company has become a shareholder’s sweetheart. Its stock is up nearly TK% since TK. It consistently posts EPS of between 12% and 15% and an average return on equity of 20%.

The company that originally spurned co-branded cards (AmEx had first refusals on American Airlines’ AAdvantage program) now offers close to 100 products in the United States and more than 200 in the world, forging deals with outfits as diverse as the New York Knicks, Delta Air Lines, Wal-Mart, Costco and the National Restaurant Association, as well as with many of the financial institutions that also issue Visa and MasterCard. “One size doesn’t fit all anymore,” says Alfred F. Kelly, president of the Consumer Card Services Group, who himself carries 18 different AmEx cards in his wallet.

The company’s innovation process was so sluggish that it took AmEx 18 months to bring the Optima True Grace card to market in September 1994, a process Golub compared to giving birth to an elephant. Since then, the elephant has learned to quickstep. The timeline from idea to U.S. launch of the youth-oriented Blue card with a smart chip security application was accomplished in four months.

Most important, the company that was once in danger of being sidelined is now a major player in the Internet economy. The combination of vast amounts of invaluable consumer data, constantly refreshed and ripe for targeted offerings from the company’s card, banking, brokerage, financial planning and travel services, puts American Express in a unique situation to take a pre-eminent position on the Web even as it retains its reputation as a rock-solid bricks-and-mortar firm. “There is probably no company in financial services that, at least on paper, is capable of leveraging the Internet as successfully as AmEx,” says Goldman Sachs managing director Bob Hottensen.

Ironically, Hottensen sees as the crown jewel the network of three million merchants who accept the card. “AmEx owns those relationships. They don’t rent them from an association that thousands of banks claim is theirs. And on the Internet, they can bring a merchant customers, relationships and value that creates a better justification for a higher rate.”

The architect of AmEx’s turnaround was a senior partner at McKinsey & Co., consulting for American Express before joining the company as the head of Investors Diversified Services (IDS), one of Robinson’s acquisitions. Golub transformed IDS into a major growth enterprise and, in 1991, was asked to staunch the wounds in the card division in 1991. Two years later, the board of directors asked Robinson to step down and Golub to take his place.

Golub is known for saying that the first task of any leader is to define reality. His assessment of the company’s prospects at the time: “The iconic product that established the brand was eroding and we had a high probability of becoming a smaller, more marginalized company.”

Goldman Sachs’ Hottensen remembers wondering whether Golub could manage what he termed “a very delicate balancing act. He needed to preserve the attractive brand aspects of the card and the business—the trust in the brand, the high level of customer service, the quality of product and the experience—but at the same time significantly broaden and begin a market segmentation process that allowed the company to develop new products that were competitive with a whole slew of well-armed bank competitors without cannibalizing the core business. That was a very, very tough job.”

Golub is also known for saying that the second task of a leader is to define where you have to go. Business and morale were so soggy that, Golub recalls, “I could not give a vision, at least not in the beginning, because it would have had zero credibility. But I did need to provide a sense of clarity so that we could fix what was broken.”

His to-do list couldn’t have been clearer: Restore confidence in the brand. Regain the trust of cardmembers and merchants. Change the corporate structure from a bloated holding company composed of separate, largely autonomous businesses, each with its own chairman and CEO, to an integrated operating company. Get costs under control and deliver value to the long-suffering shareholders.

After scribbling some calculations on the back of an envelope, Golub concluded that if AmEx wanted to match Visa’s rates, it had to whack out $1 billion in costs. Moreover, Golub insisted, he didn’t just want to tighten the screws. “If we wanted to build the card business and gain market share, we had to introduce products that were what people wanted. To introduce products, we had to build an infrastructure that would allow us to get economies of scale at 25,000 cards instead of three million.” He concluded: “We have to change how the work is done.”

In retrospect, Golub described the massive re-invention process that ensued as similar to the story of how Michelangelo created “David.” “We cut away the pieces of marble that aren’t David, and what’s left is our statue.” His tool: reengineering.

How he went about it heralded the beginnings of a new era for the company. Golub didn’t have time to gather support within the company for the radical initiative. “I simply announced it,” he says. “And that cut short the discussion.” Having made the commitment, Golub personally took charge of ensuring it would be followed through. “My behavior had to match the message. I went to reviews; I was present at project meetings; I attended training sessions. I contributed ideas and illustrated how to think about redesign. I ensured that monitoring and reporting systems were put in place, and expanded the compensation criteria to include reengineering. And I talked about reengineering all the time. That was hard for me. About the time I’m bored with a topic, others are beginning to understand it.”

First to go were any assets that didn’t support the brand or were not consistent with the value, quality and security it represented. Within months, The Boston Company, Shearson, First Data Corporation and Lehman Brothers were put on the block. Corporate silos were broken down and business criteria changed from decisions based on economics to those focused on leveraging the brand. IDS was renamed American Express Financial Advisors (AEFA) and, in a move that directly contradicted conventional wisdom, became the first mutual fund company to eliminate cold calling. Golub’s reason: “It doesn’t fit the brand.”

The first wave of re-engineering cut $1.4 billion. It was, recalls Chenault, then head of the consumer card division, “a matter of survival.” But Golub and Chenault weren’t satisfied. The present success, they argued, could last at best two years. “Harvey and I said, we need to define the reality of winning.”

A second, more radical wave began in 1994. It eventually knocked out another $2 billion, which became the war chest for funding new technology and products. By the time it was over, the company had been fundamentally transformed into a single integrated business with a single unified strategy: to engage only in businesses that build the brand and to offer superior products and services at a cost base that is the best in its class.

Those operating principles are at the root of AmEx’s three-pronged growth strategy for the future: expand the company’s card network through banks and financial institutions; cast a wider net through its financial and investment services; increase market share in specialty segments, including small businesses and overseas market. The platform will be technology, either through the Web or “smart cards,” credit or charge cards embedded with a data-mining computer chip.

Over the years, Golub and Chenault have worked as a team not just to define the reality of winning but to realize it. Their partnership itself is just one indication of how the face of leadership at the company has changed. The antithesis of the patrician Robinson, Golub, now 61, is the straight-talking, Brooklyn-raised son of an immigrant pocketbook manufacturer. Chenault, 49, the pleasant, polished CEO-designate, is one of the highest-ranking African-Americans in corporate America. Their working relationship is, by all accounts, seamless. “All business reports to me and staff reports to Harvey, but I get involved in staff issues and Harvey gets involved in business issues,” Chenault explains. “Both of us are very focused on details and performance, and both of us love ideas.”

It was Golub, though, who instigated the fact-based approach that now pervades the company and has been the key to its turnaround. He does not suffer fools gladly—or at all, in fact—and doesn’t hesitate to inform his people, “I want to know if what you are saying is a fact or a personal opinion. And if it is a personal opinion, I want to know what it is based on.” However, Golub is a great believer in establishing principles and modeling them by his own behavior. He consciously tries to follow three rules: “Never beat up on anybody who brings bad news, never beat up on anybody who says ‘I don’t know,’ but do beat up on those who bullshit.”

Chenault remembers being impressed by the quality of Golub’s questions back when Golub was still at McKinsey. The questions have only gotten more probing since, and senior management meetings can be both exhilarating and nerve-wracking. “He has an amazing curiosity,” says Ruediger Adolf, senior vice president of strategic planning and development. “He wants to understand and on a very detailed level—which at times can be painful.”

Like Golub, Adolf, too, is a McKinsey alumnus who believes that a good consultant analyzes a problem from many different angles before coming up with a view of the opportunities or challenges. Adolf is no slouch, but Golub’s intellectual horsepower left him agog. “The first couple of times I worked with Harvey, I was amazed that whenever I walked in, he would have a new perspective. I would play a game: He’s not going to continue out-thinking me. So every time I went into a meeting, I wrote down all the aspects of the problem I could think of. After a couple of weeks, I just gave up.”

Like a tough professor, Golub likes to challenge people to break out of business-as-usual thinking. He routinely reads about 50 customer letters a week and peppers his managers with subsequent memos. He posed the “Why not?” questions that led to AEFA’s decision to offer free on-line trading, to partner with banks and other financial institutions, to cross-sell financial services to cardmembers, to expand internationally through proprietary card products, to combine “smart chips” and charge cards, and to turn the company onto the Internet. “He generates enormous amounts of ideas,” says Kelly. “He is an idea machine.”

In a way, Golub’s interest in the Internet wasn’t surprising. More than merely curious, he is a living example of the continuous learning process and is happiest when operating at what he calls “the margin of ignorance.” He explains, “It’s almost like a physical exercise. If you’re going to get stronger, you have to operate at the margin of your strength. I think the same is true of your mind. The idea is to take any task and do it in a way that creates new learning, new ideas and new growth. That will stretch the individual. And on a personal basis, it keeps me from getting bored.”

Management meetings these days usually either start or end the PC in Golub’s spacious corner office with its million-dollar view of the Hudson River and New York Bay. He has configured his “My Amex” home page for a consumer, a merchant, a large business owner and a small business owner. “I try to see what kinds of problems I encounter and then see how we can get out of them,” he says. “It’s a personal usability lab.”

Golub took personal leadership of AmEx’s Internet initiative. He had become a dedicated web surfer on his home PC, checking out competitors’ sites and just exploring the possibilities of improving customer service. The epiphany hit in 1998: “I concluded there was a high degree of probability that the Internet would profoundly change what American Express was and how we worked. I know how difficult it is to change a company and how difficult it is to cannibalize yourself, but I knew that if we didn’t, someone else would.”

Golub created a process to teach every layer of the company about the Internet, from the board of directors on down. “I told them that we had no time to train them. We were going to go ahead, so they had to learn by themselves.”

Every senior manager was asked to get hands-on experience by analyzing other companies’ web sites and strategies. “We looked at the sites of leaders in this space who were entirely outside the financial services business, we analyzed competitors’ sites and we looked at some of the start-ups who were making a real impact on the industry,” recalls Adolf. “The process forced every manager to think through what should be our approach to the Internet and how they would manage it if they were in Harvey’s shoes.”

Those shoes will soon be filled by Ken Chenault. Having succeeded in one fundamental transition, Golub is preparing for the next. Last year, he announced that he plans to retire in April 2001. “In a sense, there is no ideal time for retirement,” he wrote in a memo to employees. “There is always more to do, always more challenges to meet, always opportunities to capitalize on and problems to deal with.” He claims he never thinks about his legacy and has no intention of scaling back. “I’ll be CEO of this company until the day I’m not and I’ll have a long-term time horizon until the day I leave,” he declares.

“They accomplished something phenomenal: to rebuild market share without discounting,” says Goldman Sachs’ Hottensen. “It’s a return to basics, where the higher price is justified with greater value and market growth from segmentation, which expands and promotes a more vibrant brand that is more relevant to a larger cross-section of people.”

Having almost been given up for dead a decade ago, American Express has come roaring back, stronger and more relevant than ever. Yet it continues to face significant competition from MBNA, First USA and other Visa powerhouses, as well as Internet portals and mergers of wireless telecommunications with financial services. Golub had helped his company to traverse tough terrain by teaching his people to think differently. Ultimately, his most lasting legacy will be teaching them to think for themselves.