Benefits Outsourcing is Blooming

Linda Merritt, HRO Research Analyst, NelsonHall

Benefits administration is producing a bountiful crop of new and expanding services. Recent contract award announcements included ADP, Aon Hewitt, Ceridian, Equiniti, Fidelity, Mass Mutual and Merrill Lynch. A wide range of industry segments were represented: banking; food; education; non-profits; hi-tech; pharmaceuticals; and travel. This week, I have taken a look at some of the newer benefit outsourcing “crops” that are starting to grow nicely.

Managed Retirement Accounts

Fidelity’s relatively new managed retirement account offering – Fidelity Portfolio Advisory Service at Work – was designed to address the low rate of adequate preparation for retirement by many employees by combining Fidelity Investments plan sponsor customized portfolio active management services with auto enrollment and available advisory services to help bridge the gap in achieving retirement goals from a defined contribution plan. The service grew in both participants and assets by 50% in 2012. Already in 2013, another 135 new clients have been added, bringing the total to more than 1,800 plan sponsors.

• Fidelity awarded a contract for Portfolio Advisory Service at Work by ADM.

Health and Wellness

ADP’s Vitality wellness solution supports employers with between 50 and 1,000 employees manage rising healthcare costs and also reduce employee absenteeism. Vitality’s incentive-based program includes an interactive wellness portal, health risk assessments, biometric screenings and personalized wellness plans with recommended goals and activities. It integrates with social networking sites, mobile applications and fitness technologies; and when employees achieve planned goals, they earn points towards lowering their health plan contributions. The service is also integrated with ADP’s payroll services.

• ADP awarded a contract by Jackson Companies for ADP Vitality services.

Benefits Bouquet Bundles

HRO buyers want multiple related services from one vendor under one contract; and health and wellness lends itself to packaging separate services into bundles. Ceridian’s LifeWorks.com combines EAP, work-life, and wellness services into one program with its own portal and mobile access. Also available is Health Coaching – a program for high-risk employees that provides access to comprehensive health assessments and personalized guidance programs – and Client Value Dashboard – included for employers to monitor reports usage data and ROI information.

• Ball State University chooses Ceridian’s LifeWorks.com

Private Employer Exchanges

Mercer’s Marketplace allows employers to improve management of their benefits spending and administrative responsibilities for active employees. Employers determine how much to contribute toward the cost of their benefits program and can select from a range of insured and self-funded products and providers. The platform includes full benefits outsourcing and provides employees with call center and online decision support.

• Mercer recently announced names of 10 of its 20 national, regional and state carriers that have joined Mercer Marketplace for providing core medical and voluntary benefits.

A good garden has a variety of plants. Some base crops are evergreen like benefits enrollment and management services, while others are changed out to meet growing market demand. Benefits HRO: how does your garden grow? Very well thank you.

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PPACA: Pandemonium Today, Panic Later, Prosperity for HRO

By Amy L. Gurchensky, HRO Research Analyst, NelsonHall

It was pandemonium after the United States Supreme Court announced its ruling upholding the Patient Protection and Affordable Care Act (PPACA). The outstanding decision left so many in a holding pattern pending the constitutionality of the act.

Now that the decision is more firmly settled for the time being (primarily pending the November presidential election), U.S. states and organizations will have to take more definitive steps in securing exchanges and evaluating whether to offer health insurance plans or pay the tax penalty.

In fact, the state of Florida, via Florida Health Choices, set the wheels in motion earlier this week ahead of the ruling when it awarded a $68m contract to Xerox to administer a health insurance exchange for nine years. Services include:

• A web portal and online plan selection tool
• Eligibility determination and enrollment management services
• Customer contact center services.

Other states that have delayed taking action are still expected to meet the law’s timelines. The same is true for employers that have yet to make employee healthcare decisions that take the PPACA requirements into consideration. Watch for a spate of webinars by benefits service providers to remind all of us of the changes still to come in 2014 through 2018.

Regardless of today’s decision, HRO and particularly benefits administration service providers have been sitting in a sweet spot.  Vendor interviews for NelsonHall’s recently published “Targeting Benefits Administration” market analysis revealed that business has been going on as usual with many employers turning to benefits administration vendors to implement services that are focused on controlling the cost of rising health care such as:

• Dependent eligibility audits to remove ineligible dependents from plans
• Wellness programs
• Improving absence management
• Switching to high-deductible health plans with associated health savings accounts.

The published report explores the current state of benefits administration as well as the future market and its growth over the next five years by geography and service line including:

• H&W administration
• Reimbursement administration
• Leave of absence administration
• COBRA administration
• Flexible benefits administration
• DC administration
• DB administration.

The analysis also looks beyond legislative implications in the U.S. and new offerings that have emerged such as health insurance exchanges to explore the automatic enrollment requirement in the U.K.

The greater unresolved issue at hand, however, is how to control the rising cost of health care that is already arguably unsustainable as evidenced by the more than 30m Americans currently without insurance.

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M&A Activity in Benefits Administration: Round 2

Following the benefits administration merger and acquisition (M&A) frenzy of 2010 that resulted in some major consolidations including Aon Hewitt, Towers Watson, Xerox/ACS and ExcellerateHRO, to name a few, are we poised to see round 2?

The second wave actually began in early 2011 and tends to consist of the more established providers, in their own right, acquiring Tier 2 health and welfare (H&W) administration companies in the U.S.  Examples include:

• Towers Watson acquiring Aliquant in January 2011
• Sedgwick, a leader in the leave of absence administration market with ~20% market share, acquiring the productivity solutions unit of Nationwide Better Health in May 2011
• Morneau Shepell, the leading total benefits outsourcing (TBO) provider in Canada, acquiring SBC Systems Company in January 2012.

As of last week, we can now add ADP to this list since it signed a definitive agreement to acquire SHPS Human Resource Solutions—a subsidiary of SHPS, Inc. ADP has actually been making key acquisitions to strengthen components within its benefits administration offering for the last 18 months. It started with Workscape, which added compensation management services, and was followed by Asparity Decision Solutions for decision support tools and analytic capabilities.

Now, the SHPS acquisition strengthens ADP’s leave administration and reimbursement account administration offerings. The HSA and HRA components will be especially important considering the rising cost of health-care and the transition toward high-deductible health plans paired with these health savings accounts.

The H&W acquisition trend is also expanding beyond the U.S. It started in September 2010, when Capita – a U.K.-based HRO vendor providing total retirement outsourcing (TRO) exclusively in the U.K. – acquired FirstAssist Services Holdings for £12.5m. Then it continued when Mercer acquired REPCA – a brokering and advising firm for health and benefits (H&B) plans – to strengthen its H&B administration offering and advisory services in France.

The remaining question on my mind is whether U.S.-based TRO providers such as ING, Great-West, T. Rowe Price, etc. plan to jump on the H&W acquisition bandwagon to provide a one-stop shop for benefits administration like Fidelity Investments.

I’m eager to see who will make the next M&A move in benefits administration.  In the meantime, it’s always fun to hear about cross-selling opportunities that resulted in contract scope expansions.  Stay tuned.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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The Evolution of TBO Deals: Part II

In my blog earlier this week, I outlined four approaches that have led to the creation of TBO deals. Let’s take a look at some examples for each approach. As you read through, note the aspects that apply to the evolution of any HRO deal and client relationship.

The traditional big bang approach: Approximately 15 years ago, Aon Hewitt was awarded a TBO contract by 3M that includes defined benefit (DB), defined contribution (DC), and retiree health and welfare (H&W) administration services. Recently, the TBO contract was expanded to include H&W administration for active employees and its retiree healthcare exchange services. In total, Aon Hewitt serves 80,000 active employees (30,000 in the U.S. and 50,000 internationally) and >25,000 retirees.

The big bang approach version 2.0: An example of this approach is Mercer’s TBO contract with an unnamed automobile manufacturer. Mercer had a long-term relationship with this client for retirement, health and benefits (H&B), and communication consulting services. This client has five locations in the U.S. that have separate benefit systems for its ~25,000 employees. The majority of its pension and H&B plans were administered in-house, while some were outsourced. Mercer was subsequently awarded the TBO contract to streamline operations and provide a consistent employee experience throughout the company.

The mass consolidation approach: Until November 2010, Office Depot relied on three different service providers: Vanguard for 401(k) and deferred compensation plans; NorthgateArinso — as a result of the Convergys acquisition — for H&W administration; and Morgan Stanley for stock-plan administration. Fidelity was consequently awarded this TBO contract and is serving 17,000 participants for retirement savings plans and 20,000 participants for H&W services.

The step-up approach: A recent example of this type is Towers Watson’s contract with The Dow Chemical Company. Towers Watson began administering Dow’s DB plan ten years ago. In 2009, after Dow acquired ROHM and Haas, it began to administer H&W services for ROHM and Haas’ ~12,000 employees and retirees. As of February 2012, Towers Watson will be administering H&W services including annual enrollment for 66,000 participants at Dow.

The demand for TBO services will continue and will likely take the shape of the latter two approaches discussed above. The overarching lesson is that HRO service providers can end up with a TBO or MPHRO deal with long-term growth from multiple starting points.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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HRO – A Healthy Option for Health and Welfare Administration

Health and welfare (H&W) benefits administration is a well-accepted foundation partner of the HRO services family. It is also the fastest growing part of benefits administration according to the last NelsonHall Targeting Benefits Administration market analysis. Amy Gurchensky, my NelsonHall HRO colleague, is underway with her research for the benefits 2012 report. (H&W HRO service providers, if you are not yet scheduled for your interview, please contact Amy. See contact information below.)

In the meantime, there are elements of H&W that we can explore now. Carol Harnett, HR Executive Online, has written several columns recently on H&W with the linking theme of flexibility and lifestyle. Her first article asks, “Should we give employees what they want?” In that piece, Harnett says that many employees are interested in a wider range of lifestyle benefits. Pet insurance, child care or elderly care subsidies, commuter benefits, and even onsite massages have value to one or another employee group. Access to products and services with special discounted pricing is valuable, if relevant and better than what is commonly available. There is even a new company, BetterWorks, which will help you find what they call “hyper-local” discounts for your employees.

From the employer perspective, consider the nature of the business as relevance will vary with the characteristics of the work and workforce. Occupational health and safety is a big H&W issue for manufacturing. Employees with long tenures will have a wider range of stage of life needs compared to a retail workforce that is largely young, part time with high turnover.

Many H&W programs can meet the needs of both parties, if packaged, serviced, and communicated well. I see a new level of packaging benefit programs together in the area of EAP and wellness, which together will help employees and employers manage productivity and healthcare costs. Ceridian recently launched its redesigned LifeWorks.com portal that combines EAP, work-life, and wellness.

HRO H&W service providers can be advisors to clients reassessing and revamping H&W offerings. In addition to strategic consulting services, vendors can also offer practical operational advice. Buyers, ask your providers what they see new and different. Ask what else they offer and if they have experience with new point solution vendors, or have preferred suppliers that may be helpful in your decisions making. Run new options by them to evaluate operational costs and issues and assess total cost. For example, consider when to provide payroll deduction services or stored value cards to access benefits compared to letting employees pay directly from both a tactical and operational cost perspective.

Every so often we need to reassess the point and purpose of employer benefits. Beyond any regulatory mandated benefits, organizations need to find a dynamic balance between what employees and their families want and what employers need to support retention, productivity, and manageable cost. In H&W, one size may not fit all, and yesterday’s programs may not meet today’s needs.

Linda Merritt, Research Analyst, HRO, NelsonHall

Interested in reading the latest HRO news from NelsonHall? Subscribe to our newsletter by emailing amy.gurchensky@nelson-hall.com with “HRO Insight” as the subject.

Playing the Hidden Object Game with HRO News

As one of NelsonHall’s research analysts, I follow what is happening in the various HRO markets. The simplest method is reading press releases, to which we add our commentary in our tracking service.  As a reader, you see a portion of this analysis in our HRO Insight Blog and HRO Insight Newsletter.

On my own time, I like to play basic computer and online games. One of my favorite types is hidden object games where you follow clues to solve puzzles. Occasionally, tracking press releases is a bit like a virtual scavenger hunt for the larger objective.

Let’s take a look at an example with Ceridian’s recent announcement of its acquisition of Versult Group, Inc. Versult Group is a workforce management consulting firm acquired to enhance Ceridian’s implementation, training, and support services for its InView Workforce Management (WFM) solution.  It is a straightforward article, easy to cover as is, and then I followed one clue to another and ended up with a richer story. HRO analyst fun!

Back in February 2011, Ceridian announced its partnership with Dayforce to launch InView.  The two partners began working together a year earlier to integrate Dayforce’s WFM software suite into Ceridian’s payroll and HR administration services and ready both teams for launch. Ceridian also made an equity investment in Dayforce, which had already raised $20m, including $10m from Bridgescale Partners in July 2010.

Versult was one of seven Dayforce implementation partners and Versult had already performed implementations with Ceridian. As a bonus to Versult’s experience with WFM system implementation, it brings its own mobile access application, Versobile, to Ceridian.

Ceridian intends to further develop this platform for its clients seeking SaaS-based HR services by integrating beyond the current HR administration and payroll services to create an end-to-end offering including: H&W, tax, pay cards, COBRA, recruiting, EAP, tuition reimbursement, performance management, and training.

The payoff so far is that Ceridian’s investments are seeing rapid initial client acceptance. The platform has already grown to 90 Ceridian customers, rapidly escalating from 20 in February 2011.

This is a good, well-thought-out strategic move for Ceridian. It gets to cost effectively expand its SaaS service portfolio, leverage the strengths of its current offerings, increase scope with its client base, and add an experienced implementation team. It also has an equity stake in WFM, an increasingly important service line given employer concerns with cost control and the capability for rapid and effective workforce scaling.

Let’s leave this chapter of the story with a puzzle. How long will Ceridian be satisfied with a partnership with Dayforce, the WFM software source, when it felt the need to acquire Versult, the implementer?

Now for HRO vendors large and small, how are you solving your piece of the HRO SaaS puzzle?

Linda Merritt, Research Director, HRO, NelsonHall

Healthcare on the Global Stage – What is HRO’s Role?

Health and welfare have been linked not just to healthcare and productivity costs, but to global economic development. In the HRO community, we tend to think of healthcare in terms of the impact on employer costs. Current U.S. healthcare reform reminds us it is an issue of national importance. We need to think even bigger.

According to a joint collaboration that began in 2009 by the World Heart Foundation, World Health Organization, and the World Economic Forum, employers are the best placed to encourage the healthy lifestyles that can positively impact chronic diseases, which are viewed as a global threat to human lives and continued economic growth and development.

Wellness is more than a “nice to do” program; it is an economic imperative, a competitive advantage, or a liability for employees, employers, and countries.

Whether the majority of healthcare expenses are borne by employers or the government, it is part of the total cost of doing business. In a study reported by HR Magazine, illnesses impacted by lifestyle cost the U.K. £17.7bn annually and could escalate to £33bn by 2025. And that is just the costs of three problems: obesity, alcohol abuse, and smoking!

Leading multinational companies are addressing health and welfare benefits from several perspectives: value-based care about employees, healthcare and benefits costs, productivity and the cost of absence, and talent attraction and retention.  Many aspects of benefit plans will continue to be shaped by local influences, but with an eye to overall equity across a global workforce.

The long view is sometimes needed to show wellness ROI. Lifestyle behaviors are not easy for many of us to change. For example, in the U.S. it has taken many years but there has been a significant reduction in smoking and smoking-related deaths.

Determining the optimum balance of centralization and decentralization and establishing a corresponding governance system is equally important as selecting the right delivery systems. HRO providers tracking client outcomes are in a great position to help build business cases for wellness and share best practices on what works and how to determine results. Clients, look for HRO vendors with a broad range of experience in change management that can help your organization move forward.

As a linchpin in the healthcare value chain, top tier benefits service providers can bring a powerful cross section of approaches including: research, consulting and design, investment financial advice and services, benefits administration, employee communications and decision support tools, emerging total absence management and employee advocacy services, third party vendor management, and analytics. HRO benefits leaders can also become influential advocates on the national and international stage impacting policy and regulations for millions.

Are you and your benefits vendor partner ready for the global healthcare stage?

Linda Merritt, Research Director, HRO, NelsonHall

Benefits Administration Outsourcing — Mercer has an Ace in the Hole

Mercer held its cards during the 2010 benefits administration merger poker marathon while others drew cards to fill in service lines, add scale, and expand geographically. Satisfied with its service mix and global coverage, Mercer decided to play its own hand with a benefits portfolio of consulting, outsourcing, and investment management to leverage growth.

Revenues for Q4 2010 were $910m, up 5% in constant currency and outsourcing was up 5% to $180m. Full year revenues came in at $3,478m, up 2% and outsourcing was up 3% to $671m. The U.S. led with the largest share of growth and Canada, U.K., Latin America and Asia Pacific also showed gains.

Mercer’s hand is stronger than it may appear from the 2010 results. While the first half of the year was slow, Q3 and Q4 showed accelerated recovery from the recession. Health and benefits consulting revenues increased 8% for the second quarter in a row. Rewards, talent, and communications consulting was up 15% for Q4, compared to only 2% for the year. The recent positive trends indicate that employers are ready to address employee benefits issues.

Mercer was awarded 25 new outsourcing contracts in 2010, which crossed the full service line-up of DC, DB, and health and welfare. One deal was for TRO (DB + DC) and four were for TBO (DB/DC and H&W). FOX Entertainment and Halliburton will be new global services clients. In 2009, Mercer also signed 25 new contracts. The key difference between the past two years is the number of participants added. In 2009, it was ~400k and in 2010 it doubled to ~800k. In addition, renewals are exceeding expectations, which together with the new clients should up the ante on outsourcing revenue growth for 2011. This is all good, but the real magic in having a balanced portfolio of services is if you can cross leverage each component to strengthen the whole.

The added advantage for Mercer, its ace in the hole, may be its capability to coordinate and collaborate across service lines on behalf of its clients. For example, it is seeing an uptick with bundling consulting and outsourcing services because of the close relationship. Escalating health care costs and compliance complexity (even with the U.S. health care reform wild card) continue to attract joint consulting and service opportunities, especially for the mid-market where the new business pipeline is filling nicely. Areas under cost pressure that can bring hard dollar savings, like total absence management and wellness initiatives, should also be places to double down for growth.

Mercer’s clients have a single relationship manager, no matter how many services and locations supported, who is measured on client satisfaction, not revenues. The same set of consistent performance elements and satisfaction with all areas touching the client are rolled up at the account level.

Mercer’s client focus is more than business strategy, it is cultural and structural. What’s your HRO ace in the hole?

Linda Merritt, Research Director, HRO, NelsonHall

The Benefits Administration Complex

One of the emerging trends identified in NelsonHall’s 2010 “Targeting Benefits Administration” market analysis is the pending globalization of benefits administration and health management programs. While provided benefits vary by culture and country mandates, total benefits costs are of concern to every employer.

Global payroll and the integrated employee data it can facilitate has been a theme for a while now in HRO and payroll outsourcing. Total labor cost has many elements, and benefits, wages and salaries are the biggest drivers of on-role employee expense. Once the tools are in place to establish today’s workforce status, the next challenge is to better manage the investment and prepare for tomorrow’s needs.

For example, balancing total relative compensation equity and a locally compelling employee value proposition requires extensive internal and external data, as well as depth of knowledge in changing regional workforce trends and issues. An HRO service provider that supports integrated global employee data, enhanced reporting and analytics with up-to-date sources of in-country and regional knowledge can be a value added strategic partner for internal HR operations. 

Health care costs are continuing to rise, and premiums are expected to be up 14 percent this year in the U.S. Use of consumer-driven health care programs is still growing, and increases the need for effective communications, decision support tools and flexible spend accounts. Also, look for the use of flexible benefits plans to increase as employers adapt to not only global but also multi-generational diverse workforces.

Even when employees are in a country where the employer does not directly fund health care coverage, labor costs are driven up through expenses related to paid absences as well as through the additional staffing or contingent workers needed to maintain coverage. A disruptive amount of absences can lead to increased turnover and decreased customer satisfaction and financial results.

As I have mentioned in prior blogs, health in general is a growing employer concern. We are seeing more proactive programs that cross from managing health expense for insurance and illness into employee wellness and workforce productivity. The opportunity this represents is huge, but not without risk for employers and service providers.

All of the points above, and more in the full report, demonstrate the increasing complexity of even basic benefits administration. There is going to be less and less room for plain old operational benefits administration that is little more than automation of paperwork and record keeping.

Buyers, look beyond operational cost, as important as that is, and select a service provider that can also offer true total benefits outsourcing. HRO and benefits providers, have you made the investments, expanded your geographic footprint and service offerings, and fully tapped the knowledge sources of your employee and supplier networks to become the partner of choice in the new world of the benefits administration complex?

Linda Merritt, Research Director, HRO, NelsonHall

The Changing World of Benefits Administration Outsourcing

I am pleased to report that NelsonHall recently published its “Targeting Benefits Administration” market analysis, and that it is chock-full of valuable findings on where this market segment is and is going over the next several years. To begin with, we expect a moderate growth rate of 4.8 percent for overall benefits administration through 2014. The Health & Welfare (H&W) segment, which covers H&W administration, reimbursement accounts, leave of absence and COBRA/HIPPA administration, remains the most dynamic part of the benefits administration outsourcing market, and will continue to bring the most opportunity for growth at a robust rate of 11.6 percent.

Total retirement outsourcing (TRO) is currently the largest portion of the benefits administration market at 67 percent. But that share will decline to 54 percent by 2014 as H&W’s share increases from 31 percent to 43 percent. With its maturity, the continued decline in defined benefits plans and economic pressures on defined contribution plans, the opportunities for growth in TRO will be hard to come by.

On the other hand, many of the major benefits administrators are also major benefits consultants, and the opportunities for consulting will offer more growth. Plan sponsors still need to reduce administration costs and provide a quality employee experience, and it is likely that more plans will close. Combined with the activity driven by the boomer generation moving through the retirement process, this should lead to improvement projects that help offset the lower covered participant populations.

Investment consulting is another growth area for plan sponsors and participants. In the U.S., regulations have changed to allow both greater information provision and automatic enrollment. Hewitt (now Aon Hewitt) is capitalizing on this trend through its acquisition of EnnisKnupp to add to its investment advisory services, and Mercer is partnering with Robert Powell to increase financial analysis and retirement advice.

The high rate of M&A activity in 2010 was largely about growing H&W capabilities through acquisition and partnership. Consumer directed benefit capabilities, wellness, advocacy, dependent audits, retiree health care services, absence management and flexible spend accounts were all subjects of acquisitions and partnerships this year.

With the highest growth rate, expect continued H&W activity into 2011. ADP’s CEO, Gary Butler, was quite open during its recent 3Q 2010 earnings call that the company is assessing further movement into the health care arena, even as its integration of Workscape is underway. Given that H&W continues to be one of the hottest areas of NelsonHall client inquiries, I am sure it is not the only HRO service provider considering further expansion plans in this area.

Some of the drivers for benefits administration outsourcing have been reprioritized and new concerns added, reflecting the continued slow and uncertain recovery amidst ever escalating health care costs. While the number one driver, reduce operating costs, has not changed, new is access to quick ROI-related results, which has really opened up the market for point solutions like dependent audits and leave administration. Jumping up in priority is help in navigating the complexities and requirements of regulatory compliance and changing legislation.

Look for more on the changing world of benefits administration outsourcing in upcoming HRO Insights blogs.

Linda Merritt, Research Director, HRO, NelsonHall