CEO Cherkasky sees firm retaining top dog status

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Marsh & McLennan Companies plans to make up for revenueslost when the company surrendered hundreds of millions incontingency commissions by driving costs and inefficiencies out ofits system rather than jacking up fees for clients, the firm's CEOemphasized last week.

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In an exclusive interview with senior editors from NationalUnderwriter, Michael G. Cherkasky–MMC's president and chiefexecutive officer, as well as chairman and CEO of its Marshbrokerage subsidiary–said the firm is in the midst of an efficiencydrive, including the elimination of tens of thousands ofunprofitable accounts, after a layoff of some 5,500 employees.

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“You don't make it up in revenue, you make it up in cost[cuts],” said Mr. Cherkasky, when asked how the firm plans toreplace the loss of some $840 million in market service agreementcommissions it agreed to return to corporate insurance buyers. Therebate deal was part of a settlement with New York State AttorneyGeneral Eliot Spitzer of a civil suit alleging bid-rigging andsteering of business to trigger contingency fee deals.

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“We have already taken out 5,000 people, and by taking out30,000 or so non-profitable accounts and then taking out the peoplewho service those accounts, we can take out enormous cost and atthe same time not forfeit any service to our full-service accountswe want to keep,” he said.

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However, MMC is not simply dropping those clients–usuallygenerating $10,000 or less in revenue–but is working to place themelsewhere, passing along the names or referring clients to otherbrokerages and agencies anxious to take the business.

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“These are not bad clients,” he emphasized. “We are just not asefficient as we need to be to handle their business.”

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On the issue of raising service fees to buyers to make up forlost contingency fee income, he said clients will choose whetherthey want to deal on a commission or a service fee business, andMarsh will not focus on one or the other option.

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“We will be looking for only profitable business,” he continued.“We are only being paid by one side now. We need to be paid atsomething that is fair value, but we have to also understand thatwe can't just walk in [to see our clients] with the bloody nosethat we have and say, 'pay us more.' It just doesn't work thatway.”

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At some point there will be an increase in fees, but he said itwould be minor and would not take place until the firm iscomfortable that its customers understand the services it providesand their worth.

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One area Marsh needs improvement in is technology, according toMr. Cherkasky. He characterized the firm's tech infrastructure as“not world class” and said its systems need to be substantiallybetter–both for internal auditors and clients needing access toinformation in an era where disclosure is a criticalrequirement.

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He envisioned the day when customers will be able to do much oftheir business online as well as access all of their accountinformation over the Web–options that are not possible today.

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The upheavals that led to Mr. Cherkasky taking the helm at MMCbegan in October 2004 after Mr. Spitzer filed his civil suit. Inlate January, without admitting guilt, MMC announced a settlementwith Mr. Spitzer for $850 million, along with substantial changesin business practices. The money will be paid into a restitutionfund over a three-year period, going to clients whose accounts weresubject to contingent commission payments.

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Mr. Cherkasky said that 110,000 letters have gone out alertingclients about the fund. So far, about 30,000 said they would takepart in the agreement, which means they will accept payment in lieuof suing the company over the issue of contingency fees. Only oneclient has declined the agreement thus far, he noted.

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As for his own future, Mr. Cherkasky said he plans to remain atthe head of MMC for the long term. “I'm committed to the longhaul,” he stated.

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He conceded that Marsh has lost some good accounts, which hesaid the company finds “upsetting,” but added that overall, underthe circumstances, client loss has been “very low.”

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As far as keeping key players on board, he said MMC has managedto retain many of its most valuable employees.

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“We have had phenomenal success in keeping the people we need tokeep,” he said. “You always have about a 4 percent turnover, and weare running a little higher than that, but compared to all of theturmoil there has been in this company, it is remarkably low.

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“What I keep asking everyone is, what company do you believeoffers the biggest upside opportunity, and everyone answers, it isMarsh,” he said. “With all the blemishes and issues, if we get itright and handle it right and manage it right, we'll do justfine.”

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Quotebox, with Cherkasky mug:

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“We need to be paid at something that is fair value, but we haveto also understand that we can't just walk in [to see our clients]with the bloody nose that we have and say, 'pay us more.' It justdoesn't work that way.”

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Michael G. Cherkasky

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MMC President & CEO

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