Downsizing: a CFO's strategy.

• Position: Interview with Aetna Life & Casualty chief financial officer Patrick W. Kenny. - Management Strategy - Interview

It's painful, true, but downsizing has become a necessity among many large companies. Is there a right way and a wrong way to downsize? Read how Aetna Life & Casualty's CFO helped lead the firm's reorganization.

NEARLY EVERY FINANCIAL EXECUTIVE IS faced with downsizing initiatives in today's turbulent corporate world, but few take a proactive stance to help their line executives identify where the cutbacks should be made and how they should be handled in line with future business needs.

Aetna Life & Casualty's CFO, Patrick W. Kenny, is one of the exceptions. He has presided over both a major reorganization to a business unit structure and a cost-reduction campaign to trim 7,400 jobs from Aetna's bottom line. The net result will be about $300 million annual pre-tax savings once the programs are fully implemented. The initiatives have cost Aetna $156 million after tax over the past two years.

Kenny, who has been CFO for nearly five years, led the committee that pulled together cost-efficiency initiatives in 15 business units to develop a coherent downsizing plan for the company. The key to his success involves delegating a significant amount of financial responsibility to business unit-level "CFOs."

Here's Kenny's story.

FINANCIAL EXECUTIVE:

What's the level of downsizing at Aetna?

KENNY: We've actually had two different initiatives. The first was a top-down reorganization, announced in October of 1990, involving 2,600 employees. During that process, we eliminated our divisional structure and replaced it with a strategic business unit (SBU) structure. It resulted in a charge to third-quarter 1990 earnings of $60 million after tax, with projected annual savings of $100 million pre-tax.

The second initiative took a bottom-up approach. Each of our 15 new SBUs has the mission to be as cost-efficient and streamlined as possible. So the SBUs began a series of initiatives in 1991 to examine their operations and make reductions where appropriate. These initiatives culminated this year with the announcement in June that Aetna would eliminate 4,800 jobs by the end of 1993. The four primary areas affected are property-casualty claim operations, property-casualty field operations, information technology and our health plans.

FINANCIAL EXECUTIVE: What were the financial impacts of the second reorganization?

KENNY: In the second quarter of 1992, we took a charge to earnings of $96 million after tax ($145 million pre-tax), and when the savings are totally realized--that is, all people are off the payroll by the end of 1993--we expect to see annualized pre-tax savings of about $200 million.

FINANCIAL EXECUTIVE: What motivated the SBU heads to trim their staffs ?

KENNY: We have an operating philosophy that says that we want to be the best of the breed in the businesses we're in. We define that as either being one of the top three companies in that market or having some other purpose for being in the market, such as being an adjunct to one of our other businesses. To achieve this, each business unit head has to decide what he or she has to do to become best of the breed.

The secret of this is not to do the same things with fewer people. Doing the same thing with fewer people is probably not going to optimize customer service. The secret is to reengineer the processes, conducting business differently and with fewer people.

FINANCIAL EXECUTIVE: How are you able to do business with fewer staff members?

KENNY: Here's an example: In the past our claims operations were divided between our personal lines and our commercial lines, and we did the work in 65 claims offices around the country. Now we'll do it with 22 service centers handling both personal and commercial property-casualty claims with a new, fully automated claims system that puts the customer in contact with the claims adjuster much faster than in the past.

People call an 800 number and personal computers, connected via local area networks, receive the calls. Before that, the business was diffused between two lines, 65 locations and two different claims systems. The reengineering of the claims operations lets us process relatively the same number of claims, but with fewer people.

FINANCIAL EXECUTIVE:

What's the ultimate goal of these downsizing efforts?

KENNY: To become more profitable and to better serve our customers. We want to streamline the work process by consolidating certain functions and manage costs more aggressively. Besides consolidating claims operations, we've been downsizing the company in unprofitable lines of business, too, such as workers' compensation.

FINANCIAL EXECUTIVE: What has your role been?

KENNY: My role was to challenge the SBUs. We went back to some of the SBU heads and asked, "Can you really do business with this many fewer people, and, if so, why...