|BUSINESSWEEK ONLINE : FEBRUARY 7, 2000 ISSUE|
|BUSINESS WEEK E.BIZ -- COVER STORY
Tricks of E*Trade
In his drive to create a Net powerhouse, Christos Cotsakos is building a culture that's edgy, a bit bizarre--and often brilliant
It's a weird way to say ''welcome,'' even by Silicon Valley standards. Soon after Arthur Havers joined online brokerage E*Trade Group Inc. (EGRP) as vice-president for international business development, Chief Executive Officer Christos M. Cotsakos subjected him--as he does every new hire--to the company's initiation rites. At one of Havers' first staff meetings, Cotsakos asked him to stand on a chair and reveal something about himself to more than 40 people who were watching. For a moment, Havers, who describes himself as a ''proper'' Englishman who shuns the spotlight, felt his mind go blank. But then he did something completely out of character: He pulled out a penknife and sliced off the expensive Hermes tie that he was wearing. Cotsakos' game had awakened his wild side.
Think of it as being put in the E*Trade hot seat--one of many far-out tactics used by Cotsakos in his quest to build a powerhouse for the Internet era. Like other Web chieftains trying to make it big, Cotsakos pours his energy into technology, brand-building, and distinctive offerings for the online masses. But, like entrepreneurs of yore--Hewlett-Packard Co.'s Bill Hewlett and David Packard in the 1940s and Apple Computer Inc.'s Steve Jobs in the 1970s--Cotsakos believes that a remarkable corporate culture is just as crucial for catapulting a company to success.
That's why he's spending gobs of time crafting a culture for the Internet Age that at times seems downright bizarre, and at other times brilliant. But it's always pure Cotsakos: edgy, out there, theatrical, and bursting at the seams with enthusiasm. Cotsakos sums it up in five words: ''A lust for being different.'' That's shorthand for his attempt to build a company that's jammed with people who are wildly creative, archcompetitive, yet so closely knit that they're almost family.
KOOKY? To manage that tricky combo, Cotsakos has become the Mikey of Silicon Valley--he'll try most anything. To make executives move faster, he organized a day of racing Formula One cars at upward of 150 miles an hour. To create a loose atmosphere, he has employees carry around rubber chickens or wear propeller beanies. And to bond his team, he had his managers attend cooking school, where they had to depend on one another to whip up a gourmet dinner. ''It's all about getting people excited about how they can make a difference as a person and as a team,'' says Cotsakos.
These techniques may sound kooky, but management experts say Cotsakos may be on to the company culture of the future. With 10,000 new Web-site names being created every day, Internet companies are up against long odds, indeed. To beat out the other dot.coms, as well as established behemoths, upstarts have to master a rare blend of business discipline and inventiveness--all the time moving at Net speed. If E*Trade emerges as one of the online giants, Cotsakos' management style may be held up as a model.
He's already getting high marks from the experts. Take the chair-standing ritual, which seems cruel at first blush. Such antics link employees together emotionally and foster an air of openness, says Charles A. O'Reilly III, professor of organizational behavior at Stanford University's Graduate School of Business. ''If you're open and honest with each other, you're more willing to propose things that are out of the box,'' he says. Company rituals also help employees grasp strategic objectives so that they take their own initiative and make decisions quickly--a must for any Web company, says Jennifer A. Chatman, professor of organizational behavior at the Haas School of Business at the University of California at Berkeley.
So how did Cotsakos come up with a winning formula? To be sure, it's not something he read in management textbooks. Instead, his philosophy is born out of his days as an infantryman in Vietnam, where he saved the lives of his buddies--and they saved his life in return. ''It's all about loyalty and trust and who you have in the foxhole with you,'' he says. ''At E*Trade, we're an attacker, we're predatory. We believe we have a God-given right to market share.''
E*Trade has to be on the offensive, given Cotsakos' ambitions. His dream is to assemble a financial-services empire that not only overtakes online rival Charles Schwab & Co. (SCH) but also matches the breadth of brick-and-mortar giants such as Merrill Lynch & Co. (MER) and Citigroup (C). The competition is intense. Schwab is in the lead--and a handful of feisty, bare-bones Net brokers are doing trades at $8 a pop, compared with $14.95 for E*Trade. Cotsakos has to beat back the Net players and grow fast before Merrill Lynch and others bring all their marketing muscle to bear on the Web.
He knows he can't beat the big guys unless he creates one of the monster brands in the financial-services universe--a single online location where people can handle all their personal financial needs. He's partway there. Already, the company offers consumers stock and mutual-fund trading, and bank accounts. Through partners, it doles out personal loans and insurance. San Francisco's E*Offering Corp., of which E*Trade owns 28%, supplies hard-to-get shares in initial public offerings (page 30). And on Jan. 12, E*Trade closed its $1.8 billion acquisition of Telebanc Financial Corp., a leading online-only bank. That means he will be able to fully integrate his brokerage with Telebanc's array of consumer banking services.
Now he's going broader and deeper. Cotsakos is about to launch the first phase of a two-year, $100 million project that will transform the E*Trade site into a multimedia extravaganza. He calls it ''digital financial media''--the center of which is a site tailor-made for each person, dishing up just the stock quotes, news, and financial information that matches the customer's interests and income. Live, TV-quality video feeds will carry news and interviews with CEOs. Researchers, loan agents, and financial advisers will be tapped for real-time video-conference chats. And ads and promotions tailored to individual interests would appear, showing frequent travelers, for instance, the latest airline discounts. The first piece arrives in April with the introduction of a new electronic calendar that alerts customers by e-mail or notices on the Web site of upcoming news, such as earnings-release dates on companies in their portfolios.
GETTING RESULTS. When Cotsakos is done, his customers will be able to tap into their financial Grand Central Terminal from anywhere--not just the PC in the den. He's cutting deals so that the services can be zapped over cable TV, satellite-TV systems, and wireless handheld gadgets. And he wants to set up E*Trade-branded TV and radio programming. ''He's always one step ahead,'' says analyst Gregory W. Smith of investment bank Chase H&Q. ''E*Trade is truly separating from the other brokers.''
Cotsakos has the results to prove it. In just three years, he has made E*Trade the No. 2 online stockbroker, claiming a 15.1% share of average daily trades--lagging behind only Schwab's 23.3% share. The company's tally of customers has exploded, from a trickle of 73,000 accounts to a gush of 1.9 million. Only Schwab and Fidelity Investments have more online accounts--about 3.3 million each. Cotsakos' drive has made E*Trade the fourth-most- potent brand name on the Web, up there with Amazon.com, according to Opinion Research Corp. International.
And this year looks as if it could be another winner--but don't expect E*Trade to make a profit anytime soon. The company reported revenues of $246 million for the quarter ended Dec. 31, up 112%, and the $5 million net loss was narrower than expected, in part because of rapid account growth. For this year, E*Trade is forecast to post revenues of $923 million, up 48%, according to Credit Suisse First Boston (CSFB). Still, E*Trade's stock--along with that of the rest of the online brokerages--continues to sag some 60% from its spring highs as investors worry about all the rivals piling in. Long-term, analysts expect the stock to fly high when it translates its account gains into profits. ''They have a fantastic future in front of them,'' says analyst James Marks of CSFB.
If so, give some of the credit to Cotsakos' offbeat past. He had no experience in the financial-services industry before he arrived at E*Trade. Instead, he had spent 19 years in the shipping business with Federal Express Corp. and four years at market researcher AC Nielsen Corp., ending up as co-CEO there. His outsider status has made it easy for Cotsakos to toss aside many of the stuffy practices of the traditional brokerage business. He uses, for example, sassy attack advertising. ''If your broker is so great, how come he still has to work?'' was the punchline for an early set of ads.
His personality sets him apart, too. Unlike the buttoned-down Wall Streeter, he almost never wears a suit, preferring to choose from his wardrobe of 150 sweaters. He's a raucous jokester, sometimes sprinkling his shtick in employee meetings with some good-humored profanity. ''We're hot s--t!'' is a frequent bit of pep talk. And he's a touchy-feely guy, routinely cheek-kissing and hugging employees, both female and male.
FURTIVE SIP. Cotsakos has always been a rebel. He grew up the fourth of five children born to poor Greek immigrants in Paterson, N.J. His mother and father worked as a store clerk and a cook, respectively. He was bored in school, ending up with near-failing grades. He cut classes and hung around the street--which led to fights with other boys. His favorite weapon: a roll of quarters he would clutch in his fist. As ringleader of his block, ''you had to be more aggressive, because otherwise someone would bump you off,'' he says.
A turning point came at 13. Cotsakos was captain of the altar boys at St. Athanasios Greek Orthodox Church. One Sunday morning, as he was helping himself to the communion wine, the priest spotted him and called him up before the congregation for a scolding. He turned Cotsakos' misdeed into a lesson about leadership responsibilities. Although the young Cotsakos was embarrassed, he was also transformed by the priest's attention. ''I felt honored that he talked about me as a leadership example,'' Cotsakos says.
He got to play that role for real as a 19-year-old Specialist Fourth Class in Vietnam. In March 1968, in battle near Hue, Cotsakos crawled 50 meters through a sugarcane field under enemy fire and used grenades to kill four Vietnamese soldiers who had pinned down his unit. That earned him a Bronze Star. Later that month he was caught in crossfire between U.S. and Vietnamese forces and was shot in the left thigh, ending up in the hospital for four months.
His military exploits, though, didn't make up for his poor high school record when it came time to go to college. After Cotsakos arrived home from the war, he had to rely on a family connection to get him into Paterson State College in New Jersey. He majored in communications because, he says, he needed to improve the way he dealt with others. ''I did such as lousy job of it in high school,'' he adds.
The lessons took. After graduation, even though he was hours late for the interview at Federal Express, he managed to talk his way into a job as a package handler, at $3 a hour. He moved up fast at FedEx, then a scrappy startup, sometimes working around the clock, and got promoted into management after just one year. FedEx named him to head its West Coast region--before sending him abroad to run European operations in 1988.
Cotsakos stayed in Europe for his next job, in charge of European operations for AC Nielsen, then a unit of Dun & Bradstreet Corp. He rose in the executive ranks there, despite stepping on a lot of toes. For instance, Cotsakos would nail down potential acquisitions on his own and bring the deal to his boss for approval at the last minute. ''Christos didn't follow the rules,'' says Robert Weissman, D&B's former CEO. ''He made people feel unsafe.'' Still, Cotsakos' style was one of the reasons Weissman promoted him to be Nielsen's co-CEO in 1995 and asked him to whip the company into shape prior to a spin-off from D&B.
''DISGUSTING.'' It was a miserable nine months. He disagreed with his co-exec, Robert J. Lievense, currently Nielsen's president, about everything from management style to where Cotsakos should put his office. Nielsen said in a written statement that the two men worked ''under some very difficult circumstances attempting to turn around'' the company. One of Cotsakos' low points was when Nielsen had to lay off 3,500 people. ''I will never do that again,'' he says. ''It was disgusting.'' Today, Cotsakos pledges that he will forgo his entire salary before workers at E*Trade loses their jobs.
In spite of his difficulties at Nielsen, Cotsakos showed no self-doubt when he took on the job at E*Trade in March, 1996, just a few weeks after it started offering brokerage services on the Web. E*Trade was an offshoot of Trade Plus, a stock trading service started in 1982 by William A. Porter that operated over a private network. When Cotsakos interviewed for the CEO job, he quickly spotted the opportunity for E*Trade. Still, ''he wasn't hired because he already knew the Internet,'' says Rebecca L. Patton, E*Trade's former vice-president for marketing. E*Trade hired him, she says, because ''he knew how to excite the troops.''
''Incite'' is more like it. Teamwork isn't just a slogan for Cotsakos. It's do or die, just as it was in Vietnam. At E*Trade, he says, ''people will die economically'' if they don't give their all for one another. The CEO's rhetoric may be over the top, but his management lessons deliver results. His brand of teamwork helped E*Trade pull through a huge crisis: a computer outage in February, 1999, that affected about 5% of customers. With computers down, customers jammed the phone lines to place trading orders, overloading the phone staff. But others jumped in to help. Jerry D. Gramaglia, E*Trade's senior vice-president for marketing, sent the 15% of his staff of 120 who were licensed to take stock orders over to handle phones. And top managers, including Gramaglia himself, pitched in to call E*Trade's best customers to apologize.
Cotsakos was deeply involved in fixing that mess, too. On smaller matters, he makes people solve their own problems--though he sometimes tips the scales. About a year ago, Debra J. Chrapaty, then the company's chief information officer, got into a beef over her budget with Chief Financial Officer Leonard C. Purkis. She got so mad that she ripped up Purkis' proposal in his face, whereupon he stormed out of her office. Chrapaty turned to Cotsakos for help, but he told her that she and Purkis had to work out their differences. However, Cotsakos secretly sent a bouquet of roses to each of them, making both think the other had sent the flowers. The card on each bouquet bore the message: ''We're a team. Let's work it out.''
That did the trick. Face-to-face once again, Chrapaty and Purkis resolved their differences. Purkis came to understand the importance of Chrapaty's computer projects, while Chrapaty learned more about the impact of tech spending. Nowadays, the two are pals. ''It isn't the bean counters vs. the propeller heads,'' Purkis says. Working together to resolve the dispute ''was much more impactful than if Christos had resolved it himself.''
Cotsakos typically pushes decision-making deep into the organization. For instance, he asked the human resources team to come up with a new employee recognition program to replace one that was a burden to managers. To get the creative juices flowing, HR Manager Linda Kelleher gathered a small group from marketing, Web site development, and HR for a brainstorming session in a hotel room in Palo Alto, Calif. She broke out bags of M&Ms, opened bottles of wine, and popped a South Park video into the VCR. Cotsakos ''was telling us to be creative, and he gave us the freedom to do it,'' she says. The result: Employees now nominate one another for awards throughout the year. Employees who are cited get entered into a weekly drawing to win a $500 gift certificate.
POP QUIZ. Cotsakos' style, though, can also rub people the wrong way. A few months back, he lost a top executive hire when he insisted that the new guy participate in the stand-on-a-chair ritual. Another time, he served up a pop quiz for managers about details of the company's Web site and business relationships. Nearly everyone flunked. Cotsakos, who was trying to show that managers need to be prepared for anything, knew he would catch people off guard. ''I remember the stark look of fear on everyone's face,'' he says. He admits that some people found the exercise demoralizing. Three managers even said in an employee survey that he ought to be fired, Cotsakos says. Still, he doesn't regret using the test, which he said had ''shock value.''
In fact, Cotsakos rarely backs off. In the summer of 1998, he proposed to his board a quadrupling of E*Trade's advertising budget. The upshot: Cotsakos' plan would turn E*Trade, one of the few Internet companies that was making money, into an unprofitable one overnight. The directors sat in stunned silence. ''There was a hollow feeling in our stomachs,'' recalls E*Trade Director William E. Ford. They balked. But Cotsakos spent hours walking them through his rationale: Competition was mounting, and E*Trade should spend big to lure customers early in the game. Ultimately, he won them over. E*Trade plans on spending up to $350 million on marketing in the fiscal year that ends in September. It's getting results, too: The company landed nearly 400,000 new accounts last quarter.
Cotsakos rarely calls time out. Chief Operating Officer Kathy Levinson runs day-to-day operations, but Cotsakos is still a whirling dervish of activity both inside and outside the company. Over the course of one day in October, for instance, Cotsakos held a pre-dawn conference call with a board committee, met with two potential acquisition candidates, discussed the new employee rewards program with his human resources staff, reviewed an upcoming earnings announcement with his finance staff, met with a new hire, and had dinner with a venture-capital fund manager.
It's the same at home. ''I wouldn't say he's wonderful at relaxing,'' says Tami, his wife of 26 years, who adds that Cotsakos occasionally toys with the idea of pursuing another graduate degree after he completes his doctorate in economics at the University of London in the next year or two. He spends about 40 hours a month on his doctoral thesis about corporate governance in newly public companies--working on planes and at home late at night. He admits he sacrifices free time to pursue the PhD. ''Why should I sleep when there's so much to learn? I do want to have it all,'' he says.
How does he do it all? ''It's crazy,'' he admits, ''because it's all 7 by 24 by 366.'' He reads only the first three sentences of any e-mail message. He attends just 20 minutes of a meeting, unless the subject is extraordinary. And he encourages the staff to operate the same way. He asks them to think in ''quick bursts.'' To spark creativity, he has installed electronic whiteboards on the walls so people can jot down ideas they hit on. Visiting employees can snag offices designed to look like phone booths. To remind employees that their successes may be fleeting and they've got to keep running hard, he had garage doors installed throughout the facility. ''They're more symbolic than functional,'' says Cotsakos. ''The only thing I'm really afraid of is two kids in a garage.''
BATTLE LOOMS. When you're running so fast, though, it's easy to stumble. Already, E*Trade has been hobbled by a series of embarrassing service interruptions, such as the one last February. If the company is still grappling with computer outages for the existing core service, how will it deal with the new technical demands of the souped-up personalized multimedia service that Cotsakos envisions? Cotsakos says he's spending heavily to upgrade E*Trade's computer systems to avoid future outages. In the fiscal year that ended Sept. 30, E*Trade spent about 12.4% of revenues, or about $76.9 million, on technology, up from 10% of revenues a year earlier. And that will keep going up.
The competition isn't getting any easier for Cotsakos, either. The number of households that trade online is expected to grow from 4.3 million in 1998 to more than 20.3 million in 2003, according to research firm Jupiter Communications Inc. But as of mid-1998, the number of firms selling trades over the Internet was 140, up from 69 a year earlier, according to industry researcher Gomez Advisors Inc. And the biggest battle is yet to come. Powerhouses Merrill Lynch and Morgan Stanley Dean Witter are coming online. ''That's where you'll see blood'' shed by the brokers already operating online, says an analyst at one of E*Trade's institutional shareholders.
So far, Cotsakos is more than holding his own. And with the rich array of offerings now on the Web site, competitive pricing, aggressive marketing, and a unique corporate culture that keeps teamwork and creativity at fever pitch, E*Trade should be a formidable competitor when the online brokerage skirmish turns into all-out war. Cotsakos shows no fear. ''I'm gonna be remembered as one of the innovators, one of the guys who changed all the rules,'' he says. Nothing else will do if E*Trade is to become a giant, and Cotsakos the architect of a corporate culture custom-made for the Net.
To hear more about Cotsakos' views, see a Q&A at ebiz.businessweek.com
By Louise Lee
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BACK TO TOP
Tricks of E*Trade
TABLE: Cotsakos' Financial Empire
RESUME: Christos M. Cotsakos, CEO, E*trade.com
CHART: Online Trading Takes Off
Call It a Burnt Offering
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