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Running in Place at Marsh & McLennan

Insurance broker and consulting company Marsh & McLennan (NYSE: MMC  ) posted another lackluster third quarter, and it looks like management's time to turn the company around may be running out.

Quick review
For the quarter, earnings included a number of one-time items, including the sale of Putnam Investments' business and tax items. Excluding these items, earnings per share fell to $0.27 for the quarter from $0.38 per share a year ago (non-GAAP numbers). So what's the problem?

It turns out Marsh may need to do a lot of revamping. Overall sales growth of 10% was pretty decent, helped by strong growth in the corporate consulting and Kroll risk consulting businesses.

The problem
Instead, the biggest problem was in the core risk and insurance services business. On the one hand, external factors like soft insurance pricing and an increasing tendency for clients to retain risks (rather than hiring a broker like Marsh to find reinsurance) created headwinds.

However, most of the problems were internal. In response to the division's healthy growth in 2006, Marsh planned for robust growth in 2007 with new technology initiatives and management structures. In retrospect, the growth failed to materialize, and the technology changes were disruptive.

As a result, the head of the Marsh unit, Brian Storms, lost the confidence of his employees and was let go. Meanwhile, brokers were distracted by the new IT systems and were unable to focus on serving clients. Coupled with the lackluster growth, the new initiatives caused spending to balloon out of control.

Clearly, Marsh needs some fixing, and CEO Michael Cherkasky announced these steps:

  • Put in place the right management teams.
  • Simplify the businesses to let employees focus on their jobs.
  • Fix the IT and operational systems.
  • Cut down centralized costs in the Marsh unit to the tune of $125 million. This includes cutting down on branding and advertising expenses.
  • Implement a new "enhanced commission" fee. Because of previous regulatory problems, Marsh, unlike industry competitors (besides Aon (NYSE: AOC  ) , Willis (NYSE: WSH  ) , andIncome Investor recommendation Gallagher (NYSE: AJG  ) , does not earn contingent commissions in its insurance-broking business. This puts Marsh at a disadvantage, and it hopes to close the gap with a transparent, enhanced commission fee that meets regulations.

Will management's steps finally lead to a stronger stock price? It's tough to say, but analysts' patience is growing thin and management's backs are against the wall. Clearly it'll be pulling out the stops to make things happen, so investors might want to stay tuned to this one.

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