Concurrent with Chicago, Ill.-based Aon Corporation’s recent announcement of third-quarter 2000 earnings, the company laid out a preliminary blueprint for implementation of its “business transformation plan,” which will include a 6 percent reduction to its worldwide insurance underwriting and business consulting workforce of approximately 50,000 employees.
“The business transformation plan is changing the fundamental way we do business,” said Aon Corp. Chairman and CEO Patrick D. Ryan during a Nov. 2 conference call. “The result of that is the reduction in the workforce.”
Emphasizing the belief in the benefits the plan will ultimately reap, Ryan said that Aon’s overall strategy has been driven by two factors: meeting its clients’ needs and the competitive landscape of the financial services industry. “We are not an efficient business currently,” he said. Once the business transformation plan is fully implemented, the company expects annualized pretax savings to range from $150 million to $200 million.
Implementation of the business transformation plan is expected to result in up to $325 million in total costs, taken mostly as a restructuring charge. The major part of the charge, expected to be taken in the fourth quarter of this year and the first quarter of 2001, will be comprised of cash costs for severance stemming from the reduction of approximately 3,000 employee positions. Aon expects the remainder of the charge to be taken in the second quarter of 2001.
It was indicated that the reductions will happen at all levels on a worldwide basis, with a significant number in Aon’s largest countries, the U.S. and the U.K. Aon said all of its business segments, but particularly the largest—insurance brokerage—would be affected by the workforce reduction.
Also incorporated into the total cost for implementation of the plan are transition costs, to be incurred in fourth-quarter 2000 and the first and second quarters of 2001. “The transition expenses, related mostly to running parallel systems—will mostly offset savings in the first half of ,” Ryan said.
Ryan admitted there had been overall dissatisfaction throughout the organization with regard to its financial performance over the past two years. “But we’ve been able to achieve growth in revenues, which underscores our clients’ strong satisfaction,” he said. “We have not realized the economies of scale and scope that our organization should enjoy.”
Third-quarter 2000 revenues reached $1.79 billion, with net income for common shareholders rising 1 percent to $139 million, compared to $138 million in the same quarter of 1999. Aon’s third-quarter 2000 diluted net income per share was reported at 53 cents, up one cent from last year’s third quarter. Pre-tax income was also up in third-quarter 2000, reaching $244 million, compared to $239 million last year.
The combined organic growth in the brokerage and consulting segments was up 8 percent. Within the brokerage segment, where revenue for the third quarter was $1.042 billion, Ryan said international retail and reinsurance had experienced especially strong results, and alternative markets and Aon’s wholesale brokerage groups also had a strong quarter.
With respect to Aon’s consulting segment, revenue for third-quarter 2000 was $182 million, up 15 percent from last year’s third quarter.
Calling attention to the company’s nine-month margins, Ryan said there was “a significant trend here in terms of margin improvement—Managing human capital is a critical issue with companies in this full-employment economy—We are benefiting from our clients’ growing need for our professional advice and our growing administrative services.
“Warranty had lower revenue that impacted the overall underwriting growth,” he added. “And corporate revenue declined versus the prior year.”
In terms of other notable business developments, Ryan highlighted the recently forged agreement under which commercial specialty products developed and serviced by Aon will be marketed by State Farm Mutual Automobile Insurance Company. “We’re proud to be joining forces with this tremendous company and their outstanding agency network,” Ryan said. “We think that agency network and State Farm will benefit from Aon’s significant outsourcing capabilities, especially [property and casualty] products and the expertise that we have in developing these products, administering them and assisting in the distribution marketing through training and other initiatives.”
In addition, the acquisition announced last August of Actuarial Sciences Association Inc. by Aon Consulting Inc. has closed. Ryan pointed out the rapid growth Aon has experienced, due in large part to acquisitions. “This caused us to accelerate our expansion plans and obviously resulted in some growing pains,” he noted. “As we completed our building and consolidation phase, we simultaneously saw opportunities to leverage technology, to improve productivity, and— we’ve made substantial investments to do that. We’re now beginning to see significant benefits from those investments, and we believe we have the right platforms both to grow organically and to take meaningful costs out of our operations.
“While we anticipate our core businesses will perform as expected in the fourth quarter, factors principally affecting the corporate segment may cause our earnings to be less than previously anticipated,” Ryan continued. “We’re more comfortable at this time with a full-year 2000 earnings in the range of $2.10 per share. That’s excluding the impact of business transformation plan costs and potential temporary revenue shortfalls during the early implementation in the fourth quarter.”