Equitable Finds Small Is Better
The Equitable executives whom new Chief Executive John B. Carter gathered together in June, 1983, were understandably cool to the restructuring scheme that securities manager Donald R. Kurtz was laying out.
For 10 years, the nation’s third-largest insurance company had been dabbling in one management fad after another, like some fashion-forward teen-ager replacing last season’s fashions with the latest trendy styles. So, Kurtz’s ramblings about converting divisions to independent businesses free to treat Equitable like any other client were greeted as just another hare-brained scheme to awaken the slumbering giant.
But as the meeting was breaking up, Carter turned to Kurtz and delivered a shocker: “I don’t want you to just go full speed ahead. I want you to cut all your ties (with Equitable) and then evaluate whether you want any of them back.”
“That,” recalls Kurtz, his independent investment business now two years old, “was the wedge we needed to break open the old thinking. There was no doubt in anyone’s mind at that point that this reorganization was the real thing.”
For the monolithic New York-based insurer--formally called the Equitable Life Assurance Society of the United States but affectionately dubbed Big Mother Equitable by employees--that meeting marked a watershed. What would follow was an overhaul so radical that every business, job and employee came under the microscope and Equitable’s management system and 125-year-old civil-service culture came under the knife. Only the name survived the surgery unscathed.
The “new” Equitable is a collection of 30 independent financial services businesses based far away from the home office in such places as San Diego, Atlanta and Orlando, Fla. Each has a distinctive look and distinguishing rules and pay scales designed to fit the nature of its business. Only their orders are the same: Earn at least 30 cents for each $1 of equity and be among the top five in its line of business, or get the ax.
All of these small work groups are run by entrepreneurs who, like Kurtz, sell their services to Equitable and determine which of Equitable’s services--such as legal advice and mail handling--it wishes to buy. But they are also responsible for drumming up new business from other companies, pension funds and the like.
Jobs are no longer safe, annual salary raises no longer guaranteed, a single, companywide personnel, benefits and salary program a thing of the past.
Those who kept their jobs and were able to adjust to the more hard-charging, risk-taking new culture have a shot at the same kind of financial rewards that their small competitors in real estate, leasing, securities and other businesses have had for years. As a result, hundreds of Equitable employees received more money than their bosses did last year, and more than a dozen pulled down more money than Chief Executive Carter.
Quicker Into Market
The changes have combined to make the company quicker into market with products, more innovative, better able to attract and retain employees, more adventuresome and stronger financially.
Bouncing back from the rock-bottom 2% return on equity that it reported in 1982, Equitable at midyear returned 17% on its equity. Carter predicts that it will reach 30% by year-end 1986, a year ahead of the company’s strategic plan.
Its new focus on agility and aggressiveness is also paying off. Equitable recently moved into first place in Institutional Investor magazine’s rankings of U.S. companies by the amount of pension fund assets that they manage.
Few companies were so in need of a creative spark as the Equitable that John Carter inherited in 1982.
Though the nation’s third-largest life insurance company and growing at a clip of 10% to 20% a year, Equitable had been plodding along through one year of mediocre earnings after another, consistently finishing about 50th in its industry in terms of profitability.
Worse, it had lost its competitive edge in its staple business of life insurance. Many of its products and services were outdated, and there were few innovative replacements in the pipeline.
Badly Trailed Competitor
In addition, Equitable failed to exploit all the various opportunities in the $4-trillion financial services market and was badly trailing its more astute competitor, Prudential, not to mention such powerhouses as American Express, Sears, Roebuck and Citicorp.
“We had to do something to survive,” Carter says.
Outdated salary and incentive compensation policies also were taking their toll. Turnover was so heavy at Equitable’s real estate concern that it had a completely new group of workers every five to seven years.
The average salary for someone who managed Equitable real estate loans was $60,000. Outside, competitors doing the same jobs were making $100,000 and up and had a shot at another 50% in incentive compensation.
“All we could offer,” says George Peacock, chief executive of Equitable’s real estate company, “was good, solid medical and retirement benefits.”
Further complicating Carter’s life was the culture of complacency, mistrust and averseness to risk that had engulfed the company. A 25-year product of Equitable himself, Carter, 51, knew that the penalties for failing could be severe. “There was an assumption around here,” he says, “that people were incompetent and dishonest.”
Surprised by Findings
But he didn’t fully appreciate how debilitating the environment had become until he received the sobering results of a management survey. About 580 Equitable managers were asked fundamental questions about their employer: What does it take to get ahead at Equitable? Do you like working here? How can we be better?
To succeed at Equitable, the respondents said, one doesn’t make waves, take risks or challenge authority.
His own reputation, he discovered from the same group, was little better. “On a scale of one to 100, I got a seven. It turned out I double-assigned everything without realizing it. And I was causing dissension in the ranks. There was no trust of me.”
Carter also makes it clear that, even though he had been champing at the bit for a chance to light a fire under the slow-moving company, he doesn’t relish his role in the wrenching culture shock that is still rocking the company.
“It’s a long, painful process,” he says, “one no one should undertake lightly.”
“The restructuring caused three psychological problems,” says Edward R. Herman, president of Equitable’s leasing operations in San Diego. “First, employees went through the stage where they thought we’re an old company and we haven’t failed, so why should we change? Then, once the thing became black and white, doubt crept in. Fear came in. Will I have a job? Then came self-doubt. Am I capable of doing what they’re asking me to do?”
Selected Trailblazers
To make the transition, Carter first invited in management consultants to identify employees with latent entrepreneurial instincts. During a three-day session at New York’s St. Regis Hotel, these employees were exposed to what Carter calls “real life entrepreneurs” with a net worth of at least $1 million. These pumped-up managers would be Equitable’s trailblazers, breaking away from the parent to turn a money-using division into a money-making company.
Carter’s next move was to enlist the managers who had assigned him the low rating to write a set of rules by which the “new” Equitable would play. The seven “rules of the road”--such things as “we encourage innovation, we value candid communication, we recognize and reward performance”--were published in the employee newsletter and are printed on Equitable stationery and note pads.
He then invited thousands of employees to the ballroom of a nearby hotel, where he took questions for seven hours. They say catharsis is good for the soul, but “I knew it was going to be a long day,” he sighs, “when the first question was ‘how do you expect to build a new company with the same incompetent senior officer corps that got us into this mess in the first place?’ ”
Changing people’s attitudes, Carter says, was about 90% of the challenge. But the other 10% was just as demanding.
Formalized Planning
Strategic planning was formalized first. “Our plans for every business through 1987 are already finished,” he said in August. “Before, planning was a joke. We wouldn’t have the 1986 plan until December, 1985.”
Then, “we recognized that we had to isolate and ignore all sacred cows to a depth never before done,” Carter says. He ordered a review of 1,555 major group insurance cases, each to be analyzed 89 ways, to determine where the profits and losses were housed.
Next under the microscope were all 10,000 Equitable life insurance agents and their 3.5 million policies. The process, completed just this summer, took three years.
With the findings, Carter began a tough assessment of which businesses could survive in the fast-paced world of financial services and which had to go.
When one business was eliminated because it failed to meet profitability goals, “it was a real shock to people,” Carter says. But it was a signal of management’s determination.
Management’s first approach to decentralization didn’t go far enough. Managers were dispatched to run their businesses differently and meet difficult financial objectives, but they didn’t have control over some of their biggest costs.
So, the free-standing subsidiary concept was born. Each could make its own rules, establish its own salary and benefits system, control every penny of its overhead.
The first operation to switch over to a stand-alone business was Kurtz’s, which at the time managed securities portfolios for Equitable and its pension clients--and nothing more.
Had No Motivation
“We were managing money for all Equitable accounts, plus outside accounts Equitable brought in, but we had no motivation to go out and drum up business on our own,” Kurtz says. “We were missing a lot of business opportunities.”
So, in the year before Carter formally took over as chief executive, he and Kurtz developed a plan to spin Kurtz’s division into an independent business.
“We had always tried to get bigger and bigger,” Carter says. “Well, I think we can get bigger by allowing a lot of us to get smaller and smaller. Also, free-standing entities get a better look at their bottom lines, they’re less encumbered by allocation of overhead, and people in downstream subsidiaries have an opportunity to stretch--to express an entrepreneurial flair in a way that’s always been in them but has been bogged down by the big corporation.”
After the important 1983 meeting of the executive team--two months after Kurtz was named president of the new Equitable Investment Management Corp.--Kurtz began negotiating fees for legal support, mail handling and other services that he had received free of charge before. Now, he had to buy them.
“It was heresy to many people,” Kurtz says. “For about a year, nobody believed we were actually going to work this way.”
Today, Kurtz’s company manages nearly $8 billion in investments for pension and profit-sharing plans, insurance companies, mutual funds and Equitable.
Unit Lacked Focus
Equitable’s leasing operation was another trailblazer. Because it had always concentrated on the small-business market, it had high credit risks and, therefore, high rates. When the economy turned down, it was among the worst hit. Plus, it was trying to be all things to all people. “They’d lease you a pizza oven or a crematorium, whatever you wanted, totally oblivious to the costs,” says Herman, the chief of leasing.
As a result, Herman says, the leasing business had never once achieved even average industry earnings and was returning only 6% on its investments.
Herman, who has started, grown and sold several small leasing companies, agreed to run it as a stand-alone business and turn it around, provided he could close down the Minneapolis part of the business and move the headquarters to San Diego.
At Equitable, Herman saw a challenge: “Don’t build another successful company that will just be bought out by a giant,” he told himself. “Build a successful giant.”
Thirty days after he was named chief executive of the new Equitable Life Leasing Corp., he laid off a quarter of the work force. Morale tumbled and turnover in the leasing company’s marketing department soared to 80%. The following year, there were more layoffs, plus a reining in of the company’s franchises and a consolidation of the sales force--first to six service centers, later to four.
Had Desired Effect
Even with the cutbacks, the company’s new approach had its desired effect. Sales rose to $412 million in 1984 from $252 million in 1982--and $180 million of that year’s sales were from the Minneapolis operation that was shut down in 1983. Net income rose 59% to $10.8 million in the same period. Plus, the company finished 1984 with $190 million of backlogged orders, up from zero in 1982. In addition, turnover in the marketing staff has slowed to 12%.
The payoffs are different for Robert E. Wilkinson, president of Equitable’s agribusiness company in Atlanta.
“I spent 17 years with the Equitable in New York and three-fourths of every day I was in some sort of meeting. Here, I deal with my board four times a year--not every day. It frees me up to concentrate on running a business.”
