My Smartest Mistake: Success Through Failure (Hemispheres)

Charles Schwab, Chairman and Co-Chief Executive Officer of The Charles Schwab Corporation

 

In the 25 years since I started this company, I’ve made a whole series of mistakes, but they have always been consistent. They were all an attempt to give our customers highly current financial information to help them do a better job of saving and investing. We’ve made so many of these mistakes that we even have a term for them within the company: We call them “noble failures.”

 

Many of those noble failures were unsuccessful technological ventures. The reason for that was probably geographic. The company is centered in San Francisco and I live within half an hour of Silicon Valley and have many friends involved in business around the Valley. So it was serendipity that I was introduced to technology early on in my career. If we had been centered in Manhattan, I probably wouldn’t have had those opportunities.

 

One of the first of our noble failures was Pocketerm, a handheld device that was like a portable Quotron machine. At the time, early 1982, Schwab was providing hundreds of thousands of free stock market quotes every day to our customers. Each of those quotes was given out by a live person. But for every five quotes we gave out, we got only one transaction. That’s a very expensive way to do business. So when some entrepreneur came to me with the idea of Pocketerm, I was intrigued. (Pocketerm was, by the way, a great name but the device itself was more the size of a shoebox.) We tried to place it with a few customers only to discover that it was too full of bugs to work. So we scrapped it fairly early.

 

We hadn’t made a big investment in Pocketerm but we did on our next venture, Schwabline, which we also introduced in the early 1980s. This was a fantastic device. It was a programmable desk-top product that you could set up so that it would spit out a paper copy of your portfolio with the latest values as often as you wished, as well as quotes and information about companies you were interested in. It was like having your own ticker tape. Unfortunately, the device was electromechanical with lots of springs and things inside, so there were all kinds of opportunities for screw-ups. And it was subject to big-time bugs. I remember coming back to my office once to find that the machine had gone haywire. The floor was covered with paper, and the machine kept spitting more out until my office was immersed in it.

 

That was just one problem. We had 20,000 manufactured of the devices over in Hong Kong, so we had people going back and forth to Hong Kong. Our major vendor who provided the market quotes was very cautious about giving us up-to-date, real-time information, so everything was 24 hours old. It was like getting The Wall Street Journal after you’d already read it. We thought it would be a great way for people to connect to Schwab, get information about the market and their portfolio, and enhance their relationship with us. It did all those things but people thought it was too expensive and we weren’t making any money on it. Then, too, it broke down frequently and servicing the product just wasn’t our business.

 

A lot of our business decisions get impacted by market decisions. There was a dip in the market in 1982, and we had to cut expenses. Schwabline was one of them. Meanwhile, we were getting into another area.

 

We really bit into Financial Independence in 1984. Financial Independence was a software package that offered a comprehensive way to manage all of your financial stuff—your household budget, your insurance policies, your bank accounts—with seven handy floppy diskettes. It was sort of a precursor to Quicken, and was just a great way to organize yourself if you were computer savvy and had all day to work on it since, it turned out, the seven handy diskettes were not very handy. Its other failure was that it didn’t allow you to do any financial transactions.

 

There was a clear lack of customer acceptance of Financial Independence. We got feedback that customers loved the concept but hated the reality. It might appeal to half of one percent of the population. That wasn’t big enough for us, and we couldn’t find those people, so we forged on in our attempt to provide customers with better ways to handle financial information.

 

Schwab Quotes was somewhat of a diversion. Quotes are very expensive. In fact, we have a continuing battle with the New York Stock Exchange about the price of quotes. We think quotes should be free—they’re a report of a transaction that occurred, like today’s weather or news of an automobile accident, so they’re in the public domain. The NYSE took the position that they own the information and can divulge it when they want and at the price they want. We tried to circumvent that, and make real-time quotes available for our customers by a touch-tone trading system. But circumventing the delay and maintaining the system was very complicated. In the end, Schwab Quotes worked only 95 percent of the time. That wasn’t good enough, so we abandoned it.

 

Throughout the 1980s, one of the things we were trying to do was replicate our internal computer system externally. Schwab had gone online internally in 1979, the first brokerage firm in the world to do so. If you called Schwab, our brokers would take your verbal order and put into our computer system, then give you back a report in a couple of seconds. We wanted to extend that capability into your home or office.

 

The Equalizer, which we introduced in 1985, was the first attempt. It was a software-based on-line transactional information device; you installed it on your computer by floppy disk and come into the Schwab system through private lines, like CompuServe. The Equalizer was the first time Schwab technology entered the home of the customer, although you had to be a really avid committed investor and a computer savvy person to use it. There were many disks to install and bugs to be worked out but it worked pretty well for those chosen few.

 

We kept going down this path with new versions of “The Equalizer”—the Windows version, called “StreetSmart,” came out in the early 1990s—and then one day a couple of young people invited me to a conference room to look at the rudimentary capabilities of the Internet. When I saw what could be done, I was flabbergasted. I said, “Look, you’ve got to prove a couple of things. One, there has to be absolute security, meaning a customer’s financial information cannot be violated in any way. And two, there has to be high reliability.”

Even after they proved they could do these things, I still had some suspicions about the Internet. I didn’t think the Internet had enough capacity, and I thought things would get clogged up. But the benefits were unbelievable. “StreetSmart” cost us well in excess of $1 million every time we put out a new edition. And you can come up with new improvements on software almost every day. You can eliminate all that with the web. You can add improvements and additions overnight at very low cost. That really hit home to me.

 

So we committed to moving very quickly to implement our Internet offering, www.schwab.com. That was done in April 1996. As a result, our stock price has since gone up more than 700 percent and we’re now a $2.7 billion company. We have more than 2 million active on-line accounts with assets of $174 billion.

 

Of course, we’ve had to write off significant monies along the way but we never really thought of the failures in negative terms. In fact, we budget for these ventures. In addition to traditional accounting methods, we do managerial accounting, which provides us with a number that we use for development in our technology, investments in our systems, and all of our new product development. We spend a lot of managerial time trying to allocate the best possible way for those monies to get the highest returns, and it’s worked pretty darn well.

 

We were always centered on customer satisfaction. So each time one of these ventures came along, we evaluated its potential and measured how many of our customers would find it attractive. Even though the ideas were not always efficiently executed and satisfy our customers at the proper price, they all had great intentions to serve customer needs. And each time, we were helping more and more customers.

 

The fact that we were involved in these failures made us a place where people realized that innovation was going on, and that in turn attracted people who would help us move ahead. You become known as a place where people are not afraid to take chances. We were a haven for people who innovated and we still are.

 

The noble failures always kept us pushing the barriers. We never accepted the status quo. We were just single-minded and unrelenting in our mission, which I think is still part of our philosophy and way of doing business today.

 

 

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