Last November, Herbert M. Allison Jr. was brought in as the new chief executive of Teachers Insurance & Annuity Association College Retirement Equities Fund (TIAA-CREF), the largest provider of pension plans for universities and nonprofit organizations. One year later, he's really shaking up the venerable firm. On Sept. 22, it let go 8% of its workforce in its first layoffs ever, part of a sweeping resturcturing that divides TIAA-CREF into a multitude of integrated "business groups" that will each cater to specific market segments. And Allison promises that more changes are still to come (see BW Online, 9/2/03, "TIAA-CREF: Out of the Ivory Tower").
Many observers see the strategy he's implementing at TIAA-CREF as an echo of the recent drastic overhaul at Merrill Lynch (MER ), where Allison worked for 28 years, eventually becoming president before resigning in 1999. In his first interview since TIAA-CREF made its layoffs, Allison spoke recently with BusinessWeek Finance & Banking Editor Emily Thornton and explained what's going on. Following are edited excerpts of their conversation:
Q: Do you have any comments about your recent layoffs?
A:An organization defines itself by how it treats its people. This is a painful exercise that we would have preferred not to do. We had many discussions about many different alternatives. We took pains to point out that these layoffs were due to restructuring. They were not a reflection of the performance of the individuals.
We had many meetings with all employees to explain why something like this might be necessary. We decided that it would be best for all involved if we did it all in a single day. This went as smoothly as a difficult process like this can go.
I know that change can be unsettling. But it can also produce great benefits for our participants as well as our employees. We're still at the early stage of change. That's when it's most unsettling. But these changes are necessary so that future benefits will be possible. I'm the leader, and I'm also the dart board for a lot of this. That's part of the job. I'm prepared for that.
Q: Why are you restructuring TIAA-CREF?
A:We involved many people around the company as part of Decisions 2003 to discover for themselves where the company stands. We formed six task forces. They spent six months. They pointed out that while we have strengths, our market position has room for improvement, and our expenses have risen in recent years even as asset values were declining because of the markets. One of the recommendations that came out was that we have to reduce our costs.
We also saw from our surveys that we need to get closer to our customers. Historically, we provided excellent service but through call centers. People who had enrolled in our plans didn't have much contact with us. They would look at their accounts in 20 years and be pleased they appreciated. But when it came time for them to seek out advice on their investments, we found that many of them were turning to banks, securities firms, or independent financial advisers. We have to find a way to continue to enjoy their relationships.
In order to do that, we're going to have to spend. We have to shift resources from the back office to the front office and expand the number of people who serve our clients.
We also saw that we're organized in silos. Customers calling in had to figure out who they should talk to. They want someone who can look at their overall financial needs.
We're seeing more competition not only for our participants' business but also for the institutions' business as they set up retirement-savings plans. We needed to make some strategic changes in the way we serve our clients. Also, we decided that we need to refocus our efforts on our core historic market. That's the institutions of higher education, not-for-profit hospitals and private schools K-12.
Q: How much share has TIAA-CREF lost in its core market?
A:We've seen that our share of employees on campuses and other institutions we serve has declined over the last 10 to 15 years. We still have a 50% market share. Most people would say that's impressive, but in the past it was higher -- at 70%. We've had calls from institutions asking us to broaden our product line for many years. This is just the beginning of a multiyear process to gradually fine-tune our business in ways that more closely cater to our institutions and our participants.
Q: What's your next step?
A:We just reorganized the company in nine months. After the strategy was set in May, we spent the whole summer figuring out how it would work. Now we need time for this organization to take hold and settle in, and for the businesses to define their own strategies. We've created close to 10 business groups, each of which is fully integrated and has its own support function and will be developing its own strategy along the broad strategic plan of the corporation.
One of the advantages of this new structure is that it will allow each of these businesses to focus on its own market, provide integrated service with its own resources so it can adapt, and take advantage of opportunities to grow. We'll be able to grow in a number of directions simultaneously.
The company will not be a centralized command-and-control structure. We found that authority wasn't aligned with accountability. This created a lot of anxiety and frustration because it took time to get things done. Now people in this company will have a greater chance to act on their knowledge of customer needs.
Q: How would you compare the challenges you face at TIAA-CREF to those you handled at Merrill Lynch?
A:This is a different culture with a different mission, and I think comparisons don't have much value here. We've involved people here. This is their company. My mission here is to assure that this company has a great future, prepared for growth and change.
We're returning more closely to TIAA-CREF's historic mission because we're narrowing our customer base back down to core customer groups.
Q: But you also want to distribute your mutual funds to the general public, right?
A:One way we can make sure our products are world-class is to be offering them through other selected channels so they face direct competition...and therefore are tested and proven. That will give our participants more confidence in buying them.
Q: What do you view as TIAA-CREF's competitive advantage compared with other financial-services firms?
A:Trust. This company is truly revered by many people it has served over the years. It's not-for-profit. Therefore, all of its resources can be devoted to serving participants and institutions. It does not have a shareholder base to satisfy. And we don't have any conflicts of interest. We've got outstanding people extraordinarily dedicated to service.
We have all those qualities, plus we're far from the largest financial-services company, but we're amply capitalized. By focusing on our defined market, we can devote more resources per institution. We also know that market better than anybody.
Q: There's some concern that TIAA-CREF will become a less active advocate of good corporate governance practices.
A:We are not in any way going to diminish our commitment to strong advocacy for effective corporate governance in this country and outside of this country as well. It's something I strongly believe in. And we feel a little lonely in this company in terms of our unique objectives for strong corporate governance.
Q: Public companies disclose their executives' pay packages. But your compensation has not been revealed. Will it be?
A:There will be disclosure in our proxy statement. We will adopt the same standards of the public companies we invest in. Just like other companies, we'll publish a proxy and issue a press release at the same time.
Q: Can you imagine a day when TIAA-CREF might go public?
A:Being a not-for-profit is an advantage here, and I felt that before. If you look at financial services in the U.S., I think the stars are aligning around a concept such as TIAA-CREF after many years. And I'm not changing the basic concept. It's a real advantage because of the trust it engenders in those we serve.
If you look at higher education and hospitals, together they're some of the largest employers. So we have an opportunity to grow within that core market substantially. We can make these changes without short-term pressures. We have an opportunity to actually build a culture that will enable us to take a risk on people that we might not otherwise be able to do if we were a public company.
Q: There's some apprehension regarding your plans to segment individuals [into market categories], rather than providing them all the same service.
A:We're going to improve our service to all of our segments, and here's why: Let's take people with lower assets, between $2,000 to $100,000. Most of the financial-services industry doesn't pay much attention to them. To us, they're a very important market. We're solely dedicated to giving them the best possible service. We're going to pay a lot of attention to those people's needs, so we expect they will get better service and more appropriate, relevant products and service channels than they got before. They only have to go to one place, not several.
We're not doing this to give people worse service. We're going to give them a lot better service. All we have to do is what our clients tell us.