Wells Fargo - Guiding THE TRAIL

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1 Wells Fargo - Guiding THE TRAIL A Critical Case Analysis By Rachel Cox MBA 617

2 Wells Fargo 2 Wells Fargo Guiding the Trail I. Overview Wells Fargo was founded in Sacramento, California in 1852 by Henry Wells and William G. Fargo. They offered both banking and express delivery of valuable goods. For deliveries, they used the fastest means available including stage coaches, trains and steamships. In 1918, Wells Fargo had been serving over 10,000 communities and the federal government took over the express network. Wells Fargo was left with a single bank in Sacramento. During the 20 th century they experienced prosperity, depression and war, even greater post-war prosperity, social changes and ever faster communications technologies (Wellfargo.com). Through it all Wells Fargo has been a pioneer in bringing banking convenience to its customers (Wellsfargo.com). According to their 2013, 4 th quarter fact sheet, now Wells Fargo is the world s largest bank per market capitalization. They have over 9,000 locations, and serve over 70 million customers online and worldwide (WellFargo.com). They are an all-inclusive financial institution. They provide services to individuals, commercial interests and wholesale institutions. Their products range from savings accounts to investment accounts to insurance, all types of lending and payment processing and wealth management services. Appendix A shows a detailed pie chart of their sources of income. The banking industry has relatively low barriers to entry and therefore the competition is fierce. Its major competitors nationally are JP Morgan, Bank of America and Citigroup. Internationally some competitors are Lloyds, HSBC and ICBC. In addition, they are also in competition with insurance, investment and other wealth management institutions.

3 Wells Fargo 3 II. Organization Structure As a whole, Wells Fargo has a matrix-type structure. The practices of the lower level employees are a result of decisions made by many different departments. For example, a mortgage officer will have to answer to their branch manager and to the mortgage division manager. At the corporate level, the structure is hierarchal. The board consists of multiple directors, and a CEO. The CEO controls the second level of the organization including, the CFO, CIO, and consumer lending. The head of consumer lending controls: consumer lending, collections and home mortgages. An organizational chart showing the flow of the organization is in Appendix B. III. Culture Wells Fargo has a 160 year history. They pride themselves on being knowledgeable of their products and their ability to provide customers with products that will enhance their life. Wells Fargo urges each employee to cross sell products in order to deepen the financial relationship with each of their customers. In this high-pressure sales environment, having the right culture is critical to the company s success. Wells Fargo has a customer-focused work culture at [that] encourages innovation and rewards performance (Wellsfargo.com). This is a typical mission oriented culture statement. Organizations with mission cultures are characterized by a clear vision and purpose and focus on goals. The employees are rewarded for achieving performance targets (Daft, p.383). Mission cultures operate best when an environment is stable. The financial industry has a turbulent environment. Reading the company reviews at glassdoor.com, some store managers have adapted Clan-type subculture by incorporating casual dress days and potluck days. Clan

4 Wells Fargo 4 cultures can adapt to changes in the external environment and are employee focused and try to ensure the employees are satisfied as well as productive (Daft p.384). IV. Challenges Wells Fargo is faced with many challenges because of the turbulence in the financial industry, the nature of their organization and the cultural inconsistency. As a publicly traded company, they are under pressure to constantly increase their bottom line. This can lead to myopic or short-tem thinking where managers make decisions with little regard for the long-run. Currently, all of the goals except one are results driven, so they are more oriented for effectiveness than for efficiency. A second challenge is that the number of new mortgages has been in decline since the housing market crashed. 52% of Wells Fargo s income is from interest on loans; mortgages make up a substantial portion of that. Wells Fargo is now faced with the challenge of how to reap more profits from fewer loans. In the fall of 2013, they announced they would lay off about 5100 mortgage employees (AP Company). On February 26, 2014, they announced they would be laying-off an additional 700 mortgage officers (NBCnews.com). Only time will tell whether or not this downsize will have a positive impact on the company. By making these announcements it shows that Wells Fargo is starting to think about efficiency as well as effectiveness. Another challenge is that their persona is changing from a trusted financial institution to one with ethical misgivings. Many of the reviews on glassdoor.com mentioned employees are under intense sales pressure. A personal interview with a former employee affirmed the sales pressure. This intense pressure to perform can lead to employees making ethically poor decisions. A Los Angeles Times investigation found that employees are often faced with the decision to cheat the system or be fired. The investigation found that employees opened

5 Wells Fargo 5 unnecessary accounts, ordered credit cards without customer permission and had relatives open ghost accounts. V. Critical Evaluation The one thing all three of these challenges have in common is profits. Because of increased competition and unfavorable market conditions, Wells Fargo s actions make it look like it is struggling to maintain their profitability and market share. Compared to their major competitors Wells Fargo is not pulling in the most revenue and is trailing JP Morgan by about $15 Billion (as shown in figure 1 below). However, Wells Fargo is more effective at turning their revenue into profits and created about $4 Billion in net profits more than JP Morgan. Therefore, Wells Fargo is doing some things right in this turbulent environment. Figure 1: Competitor Comparison

6 Wells Fargo 6 VI. Recommendations Wells Fargo can increase their profits and solve some of their challenges at the same time. The following are recommended changes Wells Fargo should implement in order to raise their performance to the optimal level. First, before another round of layoffs, Wells Fargo needs to do some analysis on how many employees they really need. This can be done by using quantitative analysis s Waiting Line and Queuing Theory modeling tools. To do this, they will need to collect data on the average number of customers served throughout the day, week, or month. With these tools Wells Fargo can assess how many of each type of service provider they need on hand. This will give them a good idea of what their human resource need is. If they find they have too many employees in some departments such as mortgage officers, then they should try to cross train those employees into other positions before laying them off. Having the right number of employees is essential. First, the customer experience will improve by having the right number of employees to serve the customer demand. Happy customers will be returning customers and they will bring their friends. Second, having the right number of employees will increase the chances of meeting sales targets. Employees are going to be more apt to take their time with a customer and ensure the customer has all the products that are best for them if the employee does not feel rushed. Also, a customer is more willing to take the time to listen to a sales pitch if they have received quick service rather than waiting in a long line. In addition, having the right number of employees will boost efficiency because they are not paying unnecessary employees and it also boost effectiveness, because employees time will be better utilized.

7 Wells Fargo 7 A second recommendation is for Wells Fargo s management team to set more realistic sales goals. A former employee on glass door reported, Ridiculous employee turnover, unrealistic pressure and goals. When reporting unethical activities, management turns their eye away as LONG AS the branch meets its goal. It does not help the company for employees to push services customers will not use. Maintaining unused accounts and services is expensive for banks. Wells Fargo is using the sales goals to assess daily progress and for performance evaluations. Employees are not eligible for raises or promotion unless they consistently meet the sales goals. Wells Fargo should consider using a balanced score card approach instead to measure employees performance. A balanced scorecard would give a more complete picture of how the employee is performing on multiple levels. The intense sales pressure of unrealistic goals does lead to high turnover like the employee suggested. Studies of turnover have proven that it is more efficient to keep employees satisfied than it is to be replacing dissatisfied ones. This is because it costs upwards of twice an employee s salary to find and train a replacement (WSJ). That is a lot of profit being thrown out the door. By lowering the sales pressure, they will come out ahead by reducing turnover. A third recommendation is for Wells Fargo to develop a better ethics program. Wells Fargo has a good training program. They already teach their employees how they want them to interact with the customers and how to perform their duties. By having an enhanced ethics program Wells Fargo will be able to protect the image they have spent the last 160 years creating. The new ethics program should include a whistle blower policy so that an employee can notify regional management if they notice a colleague or manager not abiding to policies. A new

8 Wells Fargo 8 ethics policy will help Wells Fargo increase profits because there will be less negative press associated with the company and happier stockholders. VII. Change Acceptance Change is never easy. Even the best ideas will not be implemented without some struggle. All of these recommendations fall into two categories of changes. They are either strategy and structural changes or culture changes. Both categories involve changing employee mindsets and changing the way they think about processes. These changes should all be started at the top. By using transformational leadership styles and allowing enough time to implement the changes, the changes can be successful. The first step would be preparation letting everyone know this is what is going to happen. The second step would be acceptance leaders help employees understand the changes. The third step would be commitment which involves both installation and institutionalization. At Wells Fargo, if they adapt these changes, they will find most of the barriers to change happen during the implementation phase. This is because this is when the changes become reality for employees and they know that corporate is serious about them and it is not just talk. Also, employees that are working well within the current system are going to have a hard time changing. Wells Fargo s management is likely to see the following barriers: failure to perceive benefits, lack of coordination and cooperation and fear of loss. The can mitigate these barriers by keeping lines of communication open and by listening and responding to employee concerns. To help the transition through the changes smoothly, there are many techniques Wells Fargo can employ. First, they should select a coalition of leaders to guide the company through the changes. Second, they need to adapt their vision to match the changes they are implementing.

9 Wells Fargo 9 Third, the leaders need to plan ahead and develop plans to overcome the resistance. Finally, they will need to communicate and train employees on all of the suggested changes. VIII. Conclusions Even though Wells Fargo has some challenges, they will work through them and they will become a better company because of it. Wells Fargo has a good level of net profits now but by following these recommendations, an optimal level of performance can be reached. As a reminder, the recommendations were as follows. First, use quantitative analysis to meet their efficiency goals and it can boost their effectiveness. Second, relax the sales pressure and evaluate employees with another measure such as a balanced scorecard. Third, update the ethics program to include a whistle blower clause. The future looks bright for Wells Fargo. They will continue to guide the path for the other financial institutions around the world.

10 Wells Fargo 10 References 2013 Q4 Review. Wells Fargo. Retrieved from About Us. Wells Fargo. Retrieved from AP. (2013, 19 September). Wells Fargo to lay off 1,800 mortgage employees. Retrieved from Author Unknown. (February, ). Wells Fargo lays off 700, including 203 in MN. KARE11.com. retrieved from Daft, Richard L. (2010). Organization Theory and Design. 10 th Edition. South-Western Cengage Learning. Print. Glassdoor.com. (2014, 2 March). Retrieved from Fargo-Company-Reviews-E8876_P13.htm Reckard, E. Scott. (2013, 21 December). Wells Fargo's pressure-cooker sales culture comes at a cost. Los Angeles Times. Retrieved from Reuters. (2014, 14 February). Wells Fargo edges back into subprime as U.S. mortgage market thaws. Retrieved from html;_ylt=AwrSyCS7HxVTzQQArLOTmYlQ Unnamed Source. (2014, 28 February). Interview. WFC Competitors (2014, 6 March). Yahoo Finance. retrieved from WSJ. (2014) How to Reduce Employee Turnover. The Wall Street Journal. Retrieved from

11 Wells Fargo 11 Appendix A - Types of Income

12 Wells Fargo 12 Appendix B Organizational Chart of Wells Fargo