The Cross-Sell Debate

The new Wells Fargo & Co. is more diversified than either of its two predecessors. The merged colossus combines the former Norwest Corp.'s 50-state consumer finance and mortgage banking operations with Wells' more narrowly-focused commercial bank, and it brings CEO Richard Kovacevich closer to his ideal of a diversified financial services company. But what's in it for shareholders?

Kovacevich, who got his start as a marketing executive with General Mills, has long argued that banks need to stop thinking of themselves strictly as banks if they want to enjoy a higher price/earnings stock multiple. In a converging financial services industry, he says, the winning strategy (at least for a few institutions) is to offer the full range of financial products – banking, brokerage and insurance – and work to consolidate customer relationships across all those services.

Wells operates the largest bank-owned insurance agency, for example, but has captured the insurance business of only 2% of its banking customers. With most of his sales infrastructure already in place, Kovacevich argues that the incremental cost of capturing this kind of sales opportunity is minimal, pointing to Wal-Mart Stores Inc. and Home Depot Inc. as models: "If you can do it with general merchandise, why not with mutual funds, annuities and certificates of deposit?"

Unfortunately, this kind of "financial conglomerate" or "financial services supermarket" strategy has not fared well in the marketplace. Citigroup, which combined a bank (Citicorp), insurance company (Travelers Group) and investment banking firm (Salomon Brothers), has yet to fulfill its promise.

Meanwhile, the 1998 merger of insurer Conseco Inc. with mobile home lender Green Tree Financial Corp. proved an unambiguous disaster; Conseco recently announced it would try to sell Green Tree – most likely at a loss. Some prominent business theorists, such as Harvard's Clay Christensen, say financial institutions are better off pursuing a specialist strategy in which they focus on a few lines of business where they enjoy a competitive advantage.

Kovacevich concedes that the specialist strategy is easier to execute. But for that very reason, he expects bigger rewards from implementing a diversified, or generalist strategy. "There are only a few companies, in my opinion, capable of executing what we're trying to do, and that is our competitive advantage," he says. "We'll outperform the rest because the specialist approach is easier to copy."

Cross-selling is the way to take advantage of a diversified product set, but the industry's lack of a sales culture has hindered most efforts. There is also evidence that cross-selling can backfire on an institution when customer relationships or the products themselves are unprofitable.

Consultant James McCormick, president of First Manhattan Consulting Group, says some banks are concerned that an excessive zeal to maximize their cross-sell ratio has increased the origination of low-revenue accounts. "While increasing revenues and broadening relationships is critical to banks' survival, more work is needed to dramatically reduce the cost of serving low-revenue accounts and households so that the profitability drain can be turned around," McCormick says.

Another skeptic is analyst Thomas K. Brown, CEO of Second Curve Capital in New York. Like McCormick, Brown applauds Kovacevich's emphasis on building a sales culture at Wells. But he points out that Norwest Bank never generated profitability at twice the industry average, as one might expect with sales ratios twice the average. "If you're only a little better than the industry in terms of profitability," Brown says, "then maybe simply raising the cross-sell ratio isn't the answer."

Kovacevich says such criticisms don't take into account special circumstances at the old Norwest. Because that bank had been an active acquirer during the '90s, he says, many of its units had not yet reached profitability levels that the mature segments had already attained. He also contends that Norwest-style cross-selling is more effective than common industry practice.

For example, Kovacevich says, selling three products to certain customers may indeed be unprofitable. "But we're willing to do that because we know, from our models and experience, that we can later sell a fourth product."

Looking at the cross-sell average across all banks, "McCormick is correct about profitability problems," he adds. "But at the higher level we are able to achieve, we believe cross-selling will almost always lead to higher profitability."

The proof will come in the execution. Wells branches in California and other western states are beginning to implement the Norwest program of consultative selling. Customers who inquire about certain products or services are asked to sit down with a branch banker and complete a financial profile, which can then be used to refer that customer to a non-branch specialist, perhaps in the insurance or brokerage units.

Employees, meanwhile, are being measured and incented based on these referrals. And finally, customized marketing messages are being sent to customers via non-branch channels, such as the Internet, phone centers and ATMs.

This entire cross-selling program has been captured by a slogan, "Going for Gr-eight" (products sold per-customer), which Kovacevich has enshrined as one of Wells' top strategic initiatives. This is typical of the marketing flair that has distinguished his career. "Going for Gr-eight" provides a snappy, easy-to-understand concept for employees to rally around. Managers delegated to implement the program concede that its morale-boosting component may be more important than the numerical goal.

"There's nothing magical about that eight number," says group executive vice president Terri A. Dial, who runs the California branch system. "But it gets the company going in the right direction."

Kenneth Cline