Small Business

Small BusinessSecond Thoughts on Growth: For the past decade, Carl Schmitt's company has been a laboratory testing one simple idea -- that limited growth offers more opportunities than fast growth does

Eleven years ago, as investors scrambled to place their bets on a fresh-faced 25-year-old and his newly public company, Apple Computer, Carl Schmitt sat down to write a business plan of his own. Schmitt worked only a few towns away from Apple's bustling Silicon Valley headquarters, but philosophically, Schmitt and Apple founder Steve Jobs might as well have resided on different planets. "I just don't believe trees grow to heaven," declares 56-year-old Schmitt, who founded his company, University National Bank & Trust Co. (UNBT), in 1980 on the heretical notion that a company's growth has organic, almost preordained, limitations.

From the start, Schmitt heeded those limits by setting up a bank that would confine its geographical reach and top out around a 15% market share. While Apple's growth has stalled in the face of technological misfires and management shake-ups, UNBT enters the new decade much as it did its first: on steady footing, satisfied that slower growth is better growth. UNBT's return on assets is 45% higher than the average return of other U.S. banks. The bank, with assets of $287 million and 1990 net income of $3.6 million, "boasts that increasingly rare combination of a healthy 1.3% reserve ratio and virtually no nonperforming loans," according to a 1990 review of the country's banks in Barron's.

Schmitt credits keen observation rather than raw genius for his success. After 14 years with Wells Fargo, one of the largest banks in the country, he became California's superintendent of banks in 1975. Time and again he was struck by how small banks outperformed their bigger brethren. "Their profitability, measured as return on assets, was consistently better than the larger banks'," says Schmitt. "It stood out like a sore thumb." His theorem: smaller banks tend to have lower overhead and dedicate themselves exclusively to a specific market, making them more efficient. Unfortunately, too often these little jewels later stray from their focus, lured by the promise of a bigger market share and better profits.

All that gave Schmitt an idea. What if he founded a community bank but resisted growth's temptations? In 1979 he began sketching a plan for UNBT, declaring its market to be Palo Alto and four surrounding communities -- no more and no less. Undeniably, UNBT was plugging into one of the richest areas in the country, an uncommon mix of Stanford University and Silicon Valley. The wealthy client base had not gone unnoticed: all the big banks -- Wells Fargo, Bank of America, Crocker, Chase Manhattan -- had branches there.

Still, Schmitt figured he had an advantage or two. For starters, he had grown up in Palo Alto and enjoyed a high profile in the community. Then, too, Palo Alto's last small community bank had been acquired by a large bank eight years before, leaving, in Schmitt's estimation, an obvious opportunity. And finally, his years inside Wells Fargo had convinced him that the large banks were turning their backs on the age-old notion of service.

From the time UNBT opened its doors, it never lost sight of that opportunity. If nothing else, Schmitt wanted customers to know his bank was different. It was hard not to notice. The side of the bank building depicts an alien in a spaceship crashing through the wall. The strange beast also adorns the bank's credit card. The bank's courier trucks have the license plate UNBANK to spread the message of unusual, "Uncola banking," as Schmitt likes to say. Inside the building are free shoe shines. And if the bank's hours are inconvenient, simply make an appointment -- no matter what your account balance.

It was UNBT's extraordinary customer service that caught the attention of Paul Hawken and Tom Peters. But in focusing on the act of customer service, the business gurus overlooked one important point: staying small forced Schmitt to offer superior customer service -- it was the only way he could compete with big-league banks that offered multiple branches and multiple products. The linchpin of Schmitt's strategy is that limited growth offers more opportunities than full-speed growth -- opportunities for customer service, for employee satisfaction, for shareholder returns. "We could grow faster, but it would cost us everything," he insists. "In the bureaucracy of growth, you lose your distinctiveness."

What's more, Schmitt acknowledges what many managers would be embarrassed to admit. "I realize what I can and can't do," he says. "One thing I can't do is manage a much bigger company."

All this leaves Schmitt in a peculiar spot: balancing the expectations for growth -- expectations from employees, shareholders, even society -- and his own sense of limits. For the past decade UNBT has been a laboratory for this pursuit, testing out the formulas that work and those that don't.

It hasn't been an altogether easy endeavor. In a business environment built on a Bigger Is Better axiom, where investors hanker for bigger returns and competitors compete by adding more products and more locations, Schmitt is clearly bucking the trend. Perhaps more remarkable, he stuck to his strategy during a decade when big banks flooded Silicon Valley. Now, with many of those banks -- Citibank, Bank of New England -- pulling out, Schmitt has just had a record year.

So how does he do it? How does he motivate employees when he can't offer them a chance to head their own operations? How does he keep customers from walking across the street to a bigger competitor? How does he keep his shareholders happy? And on and on. Those are the questions Schmitt grapples with every day. "It's like you're rowing upstream," he says, "and you need a lot of paddles."