Case Schwab

1 January 2017

Under Pottruck’s direction, the company suffered financial set-backs when they did not lower prices in the highly competitive market instead deciding to focus on expanding the business to include institutional trading and research, dropping individual investors on their list of priorities. The strategy again shifted to their initial strategy, focusing on the company’s long-term relationship with individual investors, providing competitive service fees, and careful allocation of resources under the reestablished management of Mr. Schwab’s.

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Customer retention, customer attainment, establishing long-lasting customer relationships, and building upon a structure that supports effective business decision are also key parts of the strategy. The strategy focused on customer relationships, competitive pricing, and thoroughly analyzed resource allocation. With the changes in strategy at Schwab, information needs increased. In regard to the strategy, Schwab needed to capture data that could successfully allow them to properly allocate resources and identify profitable areas, non-profitable areas, and cost saving opportunities.

The changes in strategy at Schwab have required more detailed data to be gathered for effective profitability analysis. The different versions of PAS (Profitability Analysis System) has satisfied the information needs for the new strategy. How? After identifying the information needs and the vital contribution of data for the support of business decision-making, Schwab developed MUSE (Model for Understanding Schwab Economics), it was the first cost system introduced and later MUSE II was developed. MUSE allocated costs among products, segments, and channels.

Special focus was given to products since they had the most baring, positive or negative, on customers, which was the focal point under the Schwab strategy. MUSE II was later introduced and reflected the original cost system with the addition of the activity-based costing principles in order to capture profitability data. The cost systems developed in pursuit of establishing a profitability analysis system served a very effective purpose. With the individual investor the root of the strategy it was important to maintain a positive relationship to retain customers.

Mr. Schwab implemented the new or initial strategy because it had proven to be the key to success for Schwab. In order to assess the satisfaction of the customers, it made sense to zero in on the product and customer engagement and results. The cost systems developed provided that information for Schwab. MUSE II was very effective in providing valuable insight for management by capturing very detailed and thorough data. With the division of segments, products, channels and customer segments, data was very specific and abundant.

Muse II provided insight into Schwab’s cost structure for effective decision-making. CAP (Customer Account Profitability) indentified individual customer profitability which was limited information as to not create an aggressive sales environment. According to the case, both versions evaluated segments and channels on revenues they generated and costs that were under their direct control. By identifying profitability they can effectively price products and equally important, they can create cost savings for customers by identifying the trade-offs.

For example, the case noted that through PAS, by waiving Schwab One customers service fees for accounts with balances of at least $25,000 oppose to the current $50,000 requirement, they in turn would have a greater retention rate of clients in this category and found it relevant to do so also because these clients stand a greater chance of not only remaining a Schwab customer but also had great potential for portfolio growth or profitability. Overall, the versions of PAS developed by Schwab were highly effective in pinpointing profitability among products, segments, and channels.

Given this information, Schwab was able to turn that into savings for customers, better product referrals, customer satisfaction, higher levels of customer retention, and create a competitive edge in the increasingly competitive market. The information provided by the PAS cost systems proved to be invaluable to Schwab’s success and position in the market and met Schwab’s strategy information needs. 2. What factors have enabled Schwab to extract value from the PAS? What elements have made it difficult for the PAS to create value?

There were many factors that enabled Schwab to extract value from PAS such as effective analysis, broken down data, capturing data from product, segment, and channel separately, linking profitability to different areas, identifying customer profitability, utilizing the data effectively for more informed business decisions, perfecting product referrals, maintaining customer retention as the focus, quickly acting on negative or positive trends to ensure their competitiveness, responding to market fluctuations including price matching, and maintaining an ongoing analysis of data and the commitment to Schwab’s proven strategy.

Elements that have made it difficult for the PAS to create value include interpreting behavior costs once CLI (Cost Leadership Initiative) measures were implemented and determining whether costs were fixed or variable which is not provided through the PAS. Though the PAS provides valuable data, this data once analyzed has revealed cost saving opportunities; however, persuading customers to alter practices is not easy. For example, the case discussed consumer behavior in regards to trading activity. They found it was necessary to charge for transactions performed at off-peak times for IT cost purposes.

Although this information was helpful and fees were attached to influence more desirable transaction times, customer trading patterns did not change and also induced back-office processes due to the IT fee structure. Would you advise Velez to pursue the idea of providing different levels of service to customers in the same segment, depending on their profitability? More specifically, in page 10 of the case Velez mentions the possibility of differentiated call routing as a function of customer profitability.

Keeping in mind that one of the factors determining profitability is the frequency of calls to the call center, please consider the following dimensions of the policy: – What are the advantages and disadvantages of providing different call waiting times for customers in the same segment, as a function of customer profitability? – How would you implement this differentiated call routing? – Would you inform customers in advance about the different levels of service? If so, how? How long should Schwab observe a customer’s behavior before routing him/her to the “long wait” queue? – Do you believe that the new routing will affect customer profitability? In particular, how would you calculate the cost of call center capacity for different customers? If priority call routing was implemented then the more profitable segments would be better served and have a better perception of Schwab in their ability to execute and resolve their needs. An advantage would be the more profitable segments would be less likely to jump ship and maintain loyalty to Schwab.

Priority routing would enable Schwab to serve and assist their most profitable clients and improve their client relations which could lead to new clients as a result of their reputation. A disadvantage of priority routing would not improve their less profitable customer segments perception of Schwab. Although the less profitable customer segments may not trade as often, they are still a customer and if they do not feel valued by Schwab then they would not feel the need to reciprocate loyalty and turn to a competitor.

Seeing that the less profitable segment does not trade as often, Schwab would be missing out on the few opportunities to create a positive customer interaction. With the lack of significant interaction the customer is likely to base their opinion on service during the few transactions they make and having to hold for long periods result in unsatisfied customers. Perhaps it would be more effective to inform customers in advance about the ‘higher’ level of service for those ‘dedicated customers’. I would steer clear of the term ‘different levels of service’, that would not be received well at all.

By telling/advertising to customers who perform frequent transactions that because of their transaction activity, they would be assisted promptly for their convenience, lets the customer know they are valued thus, creating greater customer loyalty. Schwab should observe a customer’s transaction history over about a six month period to capture reliable information in regard to their profitability. Recent activity should also be analyzed to determine a possible change in the customer behavior which would prove to be an exception in an effort to improve relations with the customer for retention purposes.

The new routing system could potentially increase the profitability of the already profitable customers. The profitable customer segment will be more willing to perform more transactions based on the efficient service they experience being a high priority client. To determine the total cost of call center capacity for different customers, first indentify total calls by segment and allocate a percent of cost based on duration of interaction while identifying transaction type (trade, inquiry, or balance transfer). 4.

Describe the compensation system for the division manager [for example, John Clendening] and the branch manager. What metrics are at the root of the variable compensation system? What are the advantages and disadvantages of this system? The variable compensation system provides compensation for higher levels of management based on a series of measures such as customer satisfaction, customer retention, market share, successful transactions, product engagement, quality of customer interaction, capacity or productivity, and alignment with business strategy, all of which are reflective by specific branches.

The variable compensation system is subjective to a number of factors; therefore, what to compensate is unclear. Selecting meaning and fair metrics can also pose as a problem since there are external factors that change business trends and may misrepresent the branch’s performance figures. With the added pressure, management may be inclined to manipulate the figures for a better representation of branch operations.

Variable compensation can motivate management to ensure their branch or district is producing positive performance figures. By offering management stock options, shares, or even bonuses, Schwab encourages management to act in the best interest of the company. Through variable compensation, what is good for the Schwab is good for management. The incentive-type monetary compensation like any motivates Schwab’s management to out-perform competition and maintain that operations are in alignment with Schwab’s strategy.

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