When Schwab first launched his discount stock brokerage company, he made it a habit to outsource his back office information technology to other companies. At the time, that was the standard practice throughout the industry. But by 1979, Schwab began to realize that if he was going to grow and gain competitive advantage, he was going to have to own that very technology.
“Will we own the technology?” That is one of the very first questions Schwab asks nowadays before making a move into any new venture. It was a lesson he learned back in 1979, when he bought out the back office information technology company Beta System for $500,000. At the time, Schwab’s entire company was worth an estimated $500,000, so the acquisition was a risky one for him. But, it was a risk he felt was necessary to take.
Once Schwab had acquired Beta System, his in-house computing capabilities gave him a number of advantages over his competitors: he could be faster in getting items to market; he had the resources and technology ready to go by the time people knew they wanted it; and, he could push the boundaries and ask what more could be done for his customers.
For Schwab, technology was his competitive advantage and he knew it. If he was not in charge of his technology, if he had to depend on others for his core processes, he knew there was no way he would be able to beat his competition to market. That is not to say that Schwab refused to outsource anything, but not when it came to his competitive advantage.
Schwab understood that owning his competitive advantage would let him reinvent his business in ways his competitors could not. It would allow him to cut down time, both in terms of communication and getting things to market. And, most importantly, it would offer him the flexibility he needed to try new things.
After the purchase of Beta Systems, Schwab’s market presence could be felt almost immediately. He began to unleash innovation after innovation, demonstrating the cutting edge nature of his company. For instance, the 1996 introduction of e.schwab signaled the first-ever online stock trading technology. It would soon be copied by others, but not before Schwab had already become the world’s largest financial services firm, managing more than 25 percent of the stock trades within the U.S.
Because Schwab had the foresight to own the technology behind his operations – his competitive advantage – he could forge ahead at new speeds and in new directions. Within just a few years of the Beta Systems purchase, Schwab was worth more than Merrill Lynch and had over three million online accounts.
He had given himself the flexibility and freedom to experiment with and improve his operations. He could hit the market faster than anyone else, and before anyone else could even see it coming. He could create his own rules of the game and let his customers reap the rewards as a result.
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