The Towers Perrin/Watson Wyatt Merger: What Will Happen to Benefits Admin Outsourcing?

Encapsulating the reported highlights of the much-publicized Towers Perrin/Watson Wyatt merger: Towers Watson, with a combined workforce of 14,000, is expected to have annual revenues in excess of $3.5 billion, 55 percent of which will come from benefits services – administration, solutions and consulting. The approximate cost for integration of the two firms is $80 million, with most of the financial hit occurring in the first two years of the anticipated three year period it will take the company to achieve “full realization of synergies.” But the company also anticipates approximately $80 million in pretax annual synergies.

Oh yes, this is a big deal. And of course with any deal of this magnitude there are positives and challenges.

On the plus side, the merger works for the companies in strengthening consulting areas they lacked as standalone organizations. This may facilitate expansion into new consulting markets, such as emerging countries in Latin America and Asia Pacific. The merged company will have greater geographic coverage, increased service breadth and perhaps stronger communications and survey capabilities, which will enable a more complete HR services portfolio. Further, Watson Wyatt’s technology offerings will likely enable stronger solutions, particularly within performance management and compensation, two current hot button topics due to pressures put on HR departments to achieve success without salary increases. And finally, office spread potentially allows the Watson Wyatt side to enter new administrative markets through existing Towers Perrin locations. However, this would be a longer-term strategy as one would expect that growing existing market share would take priority over new market entry per the current economic climate.

On the challenges front, the integration of two such large organizations will take a long time (and at no little expense), and will unquestionably be unsettling to employees, existing clients and prospects alike, particularly as consolidation efforts will likely have a negative impact on morale and employee retention. There will also be layoffs due to redundancy, resulting in competitor’s ability to snatch up strong talent. And, given “big fish/little pond, big pond/little fish”, there are undoubtedly prospects that will prefer to work with smaller professional services firms.

One area I think will be very interesting to monitor is the extent to which Towers Watson maintains Watson Wyatt’s level of service delivery in benefits administration outsourcing. We estimate $300 million of Watson Wyatt’s total FY08 revenue of $1,760,000 can be attributed to benefits administration services. That represents nine percent of Towers Watson’s anticipated annual revenue of $3 billion, which is no small potatoes given that it’s a recurring revenue stream, as compared to one-off consulting engagements. On the other hand, integrations of this scale promise to be bumpy, and benefits administration outsourcing service levels could, as a result, decline, even if temporarily. And attitudinally, existing clients may well be cautious about staying with such a large organization, and some may even prematurely jump ship due to these concerns. As many questions loom, we’ll be keeping an eye on this space.

Finally, we believe this represents an opportunistic merger based on the value of the deal due to current economic conditions, and is unlikely to herald a glut of such transactions within HR consultancy organizations, certainly not on this behemoth scale.

Until next time, happy sourcing!

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall

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6 Comments on “The Towers Perrin/Watson Wyatt Merger: What Will Happen to Benefits Admin Outsourcing?”

  1. Naomi Bloom Says:

    Surprised you didn’t mention sell-off of TP’s benefits admin business in two steps to EDS now HP because, absent that sell-off, this merger doesn’t happen. Also think there are important reasons for further consolidation among mega-HR consultancies, especially those with aging benefits admin platforms that will not stand up to US regulatory activism without major investments. Look for growing interest in smaller benefit admin firms with great platforms by larger firms that need platform upgrades.

    • hjneale Says:

      Hi Naomi,

      Thanks so much for your thoughts – didn’t mention the TP sell off as its been covered a fair bit in the press. Also, according to my HP sources, the sell off wasn’t related to the merger and discussions were indepedent, though make of that what you will; as you say, I would tend to agree that TP and Watson Wyatt would not have merged if EHRO shares were still owned due to competitive positions.

      I guess we just watch this space around HR consultancy / benefits administration acquisitions; I agree that there is definitely likely to be activity within the smaller organizations (ING and Empyrean failed deal a good example), but perhaps not on this scale. Potential targets may in fact be EHRO itself, though they have recently invested in their North American BeneAdmin platform considerably.


  2. I asked the CEO and president (both former CEOs of the respective firms) about ben admin outsourcing on the merger call and they estimated it at half of what you state here.

    • hjneale Says:

      Thanks, Lisa. Interesting, as the data is actually from the heads of the WW outsourcing businesses in the various different global locations. US revs are roughly half of the total, so perhaps that explains the difference?

  3. joe vales Says:

    Helen… another great post…thanks .

    Consolidation in benefits administration outsourcing is not just impacting the large market providers. Consolidation is happening with benefit and retirement adminsitration firms that serve both the small and micro size firms in the US. Too many providers serving these markets are stretched out financially and the decline in the US economy has directly hit their bottom lines . No surprise that valuations are collapsing and the stronger firms are gobbling up their small/micro sized market competitors at fire sale prices.

    • hjneale Says:

      Consolidation in smaller orgs is happening across the board, in all walks of life, economic conditions driving it, quite rightly as you say. Thanks, Joe.


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