John Mach Strategy at Stanley Morgan
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Assignment 1B: The Case Study of Morgan Stanley’s Return on System Non-investment (2)
John Mack is still the CEO at Morgan Stanley. In 2005 he focused on management and organisation changes to restore revenue and profit growth within the company. Describe the strategy he outlined to the organisation and discuss its effects to date (including cultural effects, if any).
John Mack needed to address the issue of a “one-firm culture”, stem the tide of departing productive brokers, improve technology and information integration, and improve profits (Laudon and Laudon, 2006).
The “one-firm culture” needed to unify Institutional Securities, Asset management, Retail Brokerage and Discover Card services. The synthesis of Morgan Stanley (SM) and Dean Witter needed to overcome the perception that former Dean Witter employees were second class compared to former Morgan Stanley employees. To do this Mack first tackled the technological divide to remove the disparity and integrate the different systems. To boost the one-firm culture “Mack altered the firms compensation scheme in favor of an equity ownership structure” (Cullen, 2003). Mack himself receives over half of his $1.6+ million salary in equity (Forbes , 2007). To reduce the me-only culture Mach also holds people accountable, removes intransigent unproductive employees, empowers young people and encourages risk (Cullen, 2003). In 2007 Mack spun off Discover Card services in accordance with Purcell’s 2005 plan (Morgan Stanley, 2005). Mack’s risk taking rewarded the company with huge profits from sub-prime investments in 2006, with Mack pocketing $40 million in bonuses. Mack did not return those bonuses in 2007 when subprime losses of $11 billion hit SM (Colarusso, 2008). Zoe Cruz took the fall (Barnett, 2007) while Mack and the board survived a vote of no confidence (Harper and Katz, 2008), (Landon, 2008).
To stem the tide of productive employees Mack invested in technology to support their work and emphasize their value to the company. Lawyers resolved many problems and saved the company $1.57 billion owed to Perelman (Bloomberg, 2007). Since Mack’s return the talent exodus, legal issues and moral have improved, but the profitability remained 3% below Goldman. Even Goldman has trouble retaining the best employees and customers as they migrate to hedge funds and private equity funds that have higher returns (Serwer, 2006). Although SM has quotes on their website (Morgan Stanley, 2007) promoting their awards for good working conditions these are small for a global company and not referenced. Goldman however listed in the Fortune “100 Best companies to work for” (Fortune, 2008) in 2006 (26th), 2007 (36th) and 2008 (9th) while SM was unlisted.
To improve technology Mach invested $500 million and head hunted James Gorman who had successfully implemented this change at Merrill Lynch. The improvement involved desktop workstation upgrades, backend integration, website upgrade, tax reporting upgrade and enterprise integration of all transactions. This transaction processing system (TPS) integrated with a customer relationship management system (CRM) to provide Decision Support Systems (DSS), Management Information Systems (MIS) and subsequently Executive Support Systems (ESS). For the clients they gained more control of their portfolios via the website and simplified the year-end tax reports. For the brokers they gained real-time information of their client’s history and portfolio and could make more informed decisions without spending frustrating overtime tackling antiquated equipment problems.
Information integration was a part of the technology integration and also included streamlining processes such that the initial four different segments of Stanley Morgan had an effective interorganisational system. By investing in systems that improve support activities the Firm’s costs are reduced, improving the efficiency of the industry value chain. Brokers become more efficient at sourcing suppliers of investment capital, become more effective in maximizing their investment through improved real-time knowledge, and distribute that money to customers whose projects will maximize profit for the investment. This profit is distributed to both the suppliers of capital and the SM firm. Without this information technology investment transactional costs and ineffective investments would continue to reduce profitability compared to SM’s competitors. SM has a dwindling lead over Goldman Sachs in the Fortune 500 (2005: 36th vs 59th, 2006: 41st vs 30th, 2007: 24th vs 20th). With Mack’s culture of risk SM’s relative losses for 2007 were far greater the Goldman Sachs’ losses.
The management and organisational changes that Mack introduced to restore revenue and profit growth for SM were both technological and cultural. Without such changes SM would continue to decline relative to its competitors. Mack has reduced the exodus of profitable brokers, improved