ADP: Analyst Day Priorities

Last week, ADP held its annual industry analyst day in NYC. Its priorities for the event included communicating its identity and progress as a global HCM company, its innovations in talent management, and its benefit services. Of course no ADP analyst day would be complete without product demos.

To begin the day, Carlos Rodriguez, CEO, spoke about the company’s vision to become the global HCM market leader. With workforces expanding globally, talent shortages, and the need to be more strategic, the international HCM opportunity is huge and ADP is determined to be at the center of it all. Given its large client footprint for its payroll and time and attendance solutions, integrating talent management functions including learning, compensation, and performance will be paramount for global domination in the HCM market.

Well-timed with the analyst event was ADP’s announcement that it launched an integrated end-to-end platform for talent management. In addition to talent acquisition, compensation and performance management, and succession, the talent management suite now leverages advanced learning management tools, learning content from Bersin and Associates, and an enterprise competency framework, and will be available for both its GlobalView and Vantage platforms.

ADP’s HCM toolbox is loaded and ready to be used. The GlobalView platform is available in 81 countries; the general availability date for Vantage has moved up to June; and WorkforceNow, which includes integrated HR, payroll, time and labor management, benefits, and talent management will soon support Canada. On the back-end, it would be great to see some HR BPO opportunities beyond payroll arise, and the company has been busy making enhancements to this portfolio as well.

In addition to its acquisition of the The RightThing, which brought in RPO capabilities, ADP has been quite busy building up its benefits business. There is great potential for benefits outsourcing due to changing regulations and complexities, not to mention the fact that an HCM market leader would not be complete without a strong benefits offering. Investments began with the Workscape acquisition, and continued with Asparity (for decision-support tools, analytics, and reporting) and SHPS (for reimbursement account administration and absence management). Finally, it added a Strategic Advisory Services offering to provide value-added analytics and advice to clients.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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Benefits Administration Poised for a Good Year: Part 1

If last quarter’s earnings reports are an indication of what will continue in 2012, then benefits administration service providers will have a good year.

Some of the financial highlights include Morneau Shepell’s record growth for Q1 of 22% year-over-year (y-o-y). Modest growth was reported elsewhere, but it’s significant in light of the economy and pending health care reform legislation. Providers with modest growth include Aon Hewitt, Towers Watson, Mercer, and T. Rowe Price.

Aon Hewitt’s outsourcing segment reported 3% y-o-y growth, 3% organic growth. Its organic growth began last quarter after four consecutive quarters of either flat or negative organic growth. New client wins are for its retiree health care exchange offering, dependent eligibility audits, and absence management services.

Towers Watson’s benefits segment reported 2% y-o-y growth, 3% organic growth. Its technology & administration solutions (TAS) line of business, which incorporates majority of its benefits administration revenues, had mid-single digit constant currency growth. Towers Watson also reported some new client wins for pension administration services within its retirement business.

Mercer’s outsourcing segment reported 0% y-o-y growth, 4% organic growth. The good news is that its outsourcing segment has recovered from its steady decline of organic growth that began in Q3 2011; the bad news is that growth was from 2011 client wins that came on this quarter, so this positive level might be temporary.  However, Mercer’s health & benefits consulting segment reported strong growth of 7% y-o-y, 6% organic, as did Towers Watson, which reported low double-digit constant currency growth for its health & group benefits segment. This is significant in that this strategy work may flow downstream and result in benefits administration contract awards later this year.

T. Rowe Price, although not a TBO service provider, reported 3% y-o-y growth for its administrative segment, which includes revenues from retirement plan services (RPS). RPS consists of DB, DC, and non-qualified plan administration services.

A new company to monitor is WageWorks, a H&W service provider offering reimbursement account and COBRA administration services. It commenced its IPO of 6.5m shares of common stock for $9 per share on May 10^th.

Tune in later this week to learn about the additional signs pointing to a good year for benefits administration service providers.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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Benefits HRO and the Impact of Changing Benefits Trends

This week, we look into the world of benefits from the 10^th Annual MetLife Study of Benefits Trends. The long-running employee benefits research highlights the changes in trends due to the changes in the economy and their impact on the generations of employees.

Employer goals and objectives for benefits remain the same: control costs, attract and retain employees, and increase productivity. It is what employees, especially younger employees, value now that has been changing. And that may call for a change in strategies and approaches to maximize the dollars that employers spend on benefits.

Traditionally, younger employees were not very focused on long-term financial planning and retirement; now, 52% of those 21- to 30-year-olds are concerned about long-term financial security. Even though employees know that they must accept greater individual responsibility (63%) and are likely to face additional cost shifting in the future, nearly half (49%) of those surveyed say that because of the economy, they are looking to their employer to help them achieve financial protection through a range of employee benefits. The Generation Y percentage looking to the employer for help is even higher at 66%. Today’s employees of all ages are more aware than ever of the value of employer benefits, both traditional – like medical and dental – and voluntary benefits, where the employee may pay more or all of the cost. Take advantage of this awareness to increase communication, education, decision support tools, and even branding of the benefits you are providing.

Seventy percent of surveyed employers are planning to retain current benefit levels and only 10% may cut benefits, but 30% may need to continue cost shifting to employees. Few employers are planning to spend more overall on benefits, but employers are open to shifting priorities. For example, there are plans to increase the number of wellness programs and voluntary benefits offerings like long-term care, critical illness coverage, optional life coverage, and optional disability coverage.

Another reason why I wanted to bring this study to your attention is that it separates the employer data into progressive and standard. Progressive employers more attuned to changing employee needs – such as wanting more choices and life stage options – and likely to make adjustments to achieve cost control, attract and retain employees and increase productivity. This split is similar to other areas of HRO where one client wants the latest in transformation to optimize value and achieve business results and another wants improved technology and processes to lower costs and increase efficiency.

Employee benefits needs are growing, changing and challenged by uncertain economic conditions. All benefits HRO clients should expect to have a partner in adapting to changing conditions. Whether that means access to full-scale consulting for a revamp of benefits spend, policy, and offerings, or basic access to vendor research and client networking opportunities, what matters is the match of client expectations and the service provider’s ability to deliver.

Linda Merritt, Research Analyst, HRO, NelsonHall

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Opportunities Expand for HRO: Health Care Exchanges

Private health care exchanges are a hot topic, and the number of HRO service providers with such an offering is expanding. In addition to current providers including Aon Hewitt, Extend Health, and Xerox/ACS, Mercer announced a suite of health care exchange offerings last week.

It’s no surprise that health care exchanges are increasingly popular since the benefits extend to both employers and employees. While employers reduce liability and administration while accessing better plans or prices, employees obtain access to competitive pricing, employer subsidies, and assistance with selecting the plan best-suited for their needs.

Here is a brief synopsis of the existing health care exchanges in the market.

Retiree exchanges: These exchanges typically help retirees select a Medicare plan and/or supplemental insurance products based on their medical needs and budget. Service provider offerings typically include:

• Call center services to assist retirees in selecting a plan including assessing needs, evaluating options, and enrollment into a plan
• An online portal for shopping plans
• Written materials / communications such as booklets, letters (e.g., appointment, confirmation of coverage, and annual enrollment letters), appointment reminders, etc.

Retiree exchanges were the first type of exchange to appear in the market, and as a result, there are a few service providers with such offerings available. Extend Health has its ExtendRetiree exchange. Aon Hewitt added its retiree health care exchange in March 2010 when it acquired Senior Educators, Ltd. In 2011, the exchange was renamed “Aon Hewitt Navigators.” Xerox/ACS launched its retiree exchange, “My Medicare Advocate,” in October 2010.

Among the exchanges it announced last week, Mercer launched its Retiree Medical Exchange. Its exchange leverages any employer subsidies available for coverage by converting current and future retirees to a DC model where they purchase individual coverage most-suited for them.

Active employee exchanges: While the retiree exchanges are focused on individual coverage, the exchanges for active employees are focused on group plans.

Aon Hewitt’s offering, for example, provides employees with a credit to purchase health coverage that can be accessed through its private exchange. Once employees log-on to the exchange, they will select health care coverage from group options that are standard levels of coverage with varying levels of reimbursement.

The Mercer Benefits Choice Exchange (MBCE) allows employers with 100 – 1,000 employees to contribute a set amount to a HRA. Employees then use decision-support tools to select coverage and enroll online.

Mercer’s other offering, Mercer Health Advantage (MHA), allows self-funded employers with >3,000 employees to enroll employees in new medical plans beginning January 1, 2013 that will save the employer 5% or more. Employers will also get access to dedicated MHA clinical care management with ongoing oversight and audit capabilities.

Benefits administration is a major and mature HRO service line. Health care exchanges present a welcome new growth opportunity for HRO and more options for employers and active and retired employees. Expect more benefits service providers to add to the available service offerings.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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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 I

I am deep into research for the next NelsonHall Targeting Benefits Administration market analysis, and I noticed that like multi-process HR outsourcing (MPHRO), total benefits outsourcing (TBO) often stems from a desire to consolidate the number of service providers. The benefits of MPHRO are realized mostly by client employers with self-service convenience provided for the employees. The benefits of TBO extend beyond the client employer to its employees and retirees who get an enhanced participant experience from the services being integrated, which not only offers convenience and ease of use but may also increase the value of the offered benefits to the individual participants. 

While the drivers and benefits of TBO are often similar with clients, how TBO deals have come into existence have greatly varied.  The four different methods we’ll further discuss include:

• The traditional big bang approach
• The big bang approach version 2.0 (i.e., converting existing consulting clients)
• The mass consolidation approach
• The step-up approach.

The traditional big bang approach: This is the oldest method in existence and is quite recognizable in the market, especially with large multi-nationals. It doesn’t happen often, but it definitely creates a big bang when a large employer outsources defined benefit, defined contribution, and health and welfare program administration for the first time—with all going to one service provider!

The big bang approach version 2.0: The big bang approach version 2.0 differs from the traditional approach in that the client and service provider already have a pre-existing relationship, typically on the consulting side.  Also, the client may or may not already be outsourcing some benefits administration services to perhaps test the waters, but the majority of services remain in-house.

The mass consolidation approach: In this approach, the client has already outsourced all benefits administration services to a variety of service providers and is now seeking one vendor to manage all services. Consolidation is sometimes done by a larger vendor management strategy but is often triggered by mergers and acquisitions (M&A). Client M&A activity is a real two-edged sword for all suppliers including TBO providers. Even if separate benefit vendors are initially kept in place, the danger zone remains open for years—especially during times of contract renewal.

The step-up approach: The step-up approach is the newest method and is exactly as the name implies.  It is where clients begin using a particular service provider for one benefits administration service and then, based on performance and satisfaction, add other services accordingly.

Later this week, we’ll take a look at examples of each type of TBO deal.

 Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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NorthgateArinso Proving Success with Legacy Convergys Clients

When NorthgateArinso acquired Convergys’ HR management business in March 2010, my first reaction was that this was a really good deal for NorthgateArinso because it would be gaining some big brand name clients in the U.S.  Some wondered whether NorthgateArinso would be successful in retaining these legacy clients, but I was optimistic for two reasons.

First, it is mainly the same legacy Convergys employees supporting these clients, most transferred to NorthgateArinso with the acquisition.  It is well-known that the most successful ingredient in an outsourcing relationship is how well the client and service provider can work together and have an effective relationship / partnership.

Back in October 2008, I attended the Convergys Industry Analyst Day in Cincinnati where Thomas Neltner, VP of HR at Fifth Third Bank, was a guest speaker.  Thomas spoke about why Fifth Third chose Convergys, its services outsourced, and benefits obtained, including 99% utilization of employee self-service and 40,000 transactions turned paperless.  So it is no surprise to me that this week Fifth Third agreed to extend its contract with NorthgateArinso for an additional seven years.

The original contract with Fifth Third was signed in October 2003 for five years.  Services provided to the bank’s 20,000 employees included:

• Payroll administration and processing
• Compensation administration
• Performance management support
• Benefits administration
• Time and attendance management
• Implementation of recruitment technology and a self-service web portal.

In May 2007, the contract was extended for an additional five years for 21,000 employees and services were added including recruiting and specialized staffing and employee and manager self-service.  Now, the seven year extension through 2019 also includes upgrading the banks current SAP HCM platform to NorthgateArinso’s euHReka technology platform.

euHReka is also based on SAP but is a preconfigured multi-tenant platform that is fully integrated in providing HR and payroll services. In addition, it is used as a multi-country payroll solution, although that won’t be needed with Fifth Third, but you never know what the future may bring, which brings me to the second reason why I was optimistic about NorthgateArinso’s ability to renew legacy Convergys clients.  That is, similar to how customer service is a core competency of legacy Convergys, the same is true for technology and systems integration at NorthgateArinso.  This is a strong combination that NorthgateArinso can capitalize on when other contracts with marquee clients such as DuPont and Johnson & Johnson come up for renewal in the years ahead.  It will also help with winning new business!

Gary Bragar, Lead HRO Analyst, NelsonHall

Mercer 2011 Analyst Forum – Style and Substance

I enjoy HRO analyst forums, particularly the in-person presentations and the chance for casual conversation with service provider executives and fellow analysts. Live events showcase the personality of the host company. Personality comes through in who is invited, what is said, what is not said, and the venue itself. All have a tone that subtly provides context for content. Some are very nice and some are almost austere. None are luxurious parties.  Apparently HR BPO analysts do not rate that high!

Mercer’s session was on the high-end of venues; the meeting was seemingly casual and relaxed while still guiding attention where desired. The analyst meeting and accompanying client conference was well-prepared and well-presented, providing a consistent profile of Mercer, its style, and confidence. Even the smallest touches reinforced the company’s image of management competency, teamwork, and expertise in HR benefits.

Mercer is a $3.5bn benefits service provider with 27k clients and 20k employees with offices in over 40 countries, serving large market clients primarily based in the U.S. and mid-market clients worldwide. Consulting services bring in the greatest revenue at 2.4bn, followed by outsourcing at $700m, and investment services at a rapidly rising $400m. The largest outsourcing client segment is DC, followed by DB, and H&W. The company has seen significantly more interest in the last 18 months in its newest segment, absence management, with a small but growing base of clients. Mercer Q1 2011 revenues were $922m, up 9% year-over-year, 5% in constant currency compared to Q1 2010, outsourcing was flat in constant currency.

Strategically, Mercer is focusing on increasing revenues and building scale by leveraging existing client relationships to cross-sell, expand into select adjacent market opportunities, and build bundled solutions. These are not uncommon HRO strategies, but it is ability to execute that sets apart the leaders.

Reliance on its ability to work collaboratively across its business segments will be a critical success factor, a style that was amply present throughout the Mercer sessions and is also seen in its several new product offerings.  One is a new solution called Human Capital Connect, which is bringing together consulting and research expertise, software and web technology, and various forms of education to address metrics and analytics in a way that will help HR teams establish the needed foundation of HR information, data and report access, and understand and provide a roadmap to more advanced levels.

According to the soon to be published Mercer 2011 “What’s Working” report, employees are putting more importance on the value of benefits in the mix of total compensation. And we know that employers continue to be very cost conscious even as they return focus to talent management.

With a crowded field of top-tier benefits providers, including Mercer, which one will be able to best capitalize on the opportunities?

Linda Merritt, Research Director, HRO, NelsonHall

HRO – How the Garden Grows

Everything seems pretty moderate and modest in the garden of HRO so far this year. After the abundance in 2010, perhaps that is not so bad. Reasonably steady business gives service providers a breather and a chance to attend to growth opportunities by leveraging current capacities while cultivating new capabilities selectively.

In benefits outsourcing, the contract levels were good with some key wins and renewals. Fidelity continues its blossoming growth with major 5 year renewals for total retirement outsourcing contracts with HP and BP, and a new defined contributions contract with the University of Oklahoma. In the U.K., Mercer was awarded a 7 year defined benefits renewal by Saint-Gobain and it won a new pensions administration client, Loomis UK.

RPO saw a smaller crop of new awards, but is still growing, especially in North America and the U.K.  My colleague, Gary Bragar, will be heading off soon to the RPO Summit as a presenter and I look forward to hearing the latest views.

Smaller M&A and partnership activity remains perennial, continuing the pattern of growing footprints in terms of geography and specialized services. GP was the most active with the acquisitions of Ultra Training in the U.K.; RWD Technologies with offices in the U.S., U.K., and Colombia; and Communications Consulting in China. Manpower Group acquired Web Development Company in India to add to its IT recruiting in Asia Pacific. Finally, Raytheon Professional Services partnered with Baptist Health to increase training in healthcare systems.

With the blooming of HRO platform managed services, we have two trends. First is the belief that the time for HRO mid-market is finally here. Vendors are confident enough to invest in and launch new platform service offerings specifically for the mid-market. The second is growth into new fields beyond the base of payroll and HR administration systems. Examples of both trends:

• Payroll – NorthgateArinso launched agoHRa for companies with up to 500 ee’s per country
• Learning – IBM launched the mid-market Smart Business Learning Services and has launched Smart Business Learning Content Services
• RPO – Mid-market grew from c. 20% of total revenue in 2008 to c. 33% in 2010
• RPO – SourceRight Solutions launched RPO One for organizations with 100 – 5,000 employees, providing a dedicated service team, pre-configured ATS, and reporting and analytics.

Contract activity adds evidence that customers agree these services are desirable options. NorthgateArinso was awarded a 5 year managed payroll services and HR software contract by Historic Scotland utilizing ResourceLink Aurora. Historic Scotland is responsible for data entry, while NorthgateArinso will handle processing, pay runs, and produce electronic payslips. Edvantage Group won a 3 year managed learning services contract with Rieber & Son in Norway, which included Learning Gateway, Edvantage Group’s SaaS LMS, and e-learning courses. Edvantage Group also recently announced two contacts for its SaaS LMS. 

Learning has been slower to recover. Hopefully, 2011 will be the year for its bountiful harvest.

Linda Merritt, Research Director, HRO, NelsonHall

Benefits Administration Outsourcing – Driving Business Value

Managing the annual benefits enrollment process is a core value of benefits administration outsourcing (BAO) and for years large companies have taken advantage of its cost and convenience. According to Towers Watson’s Annual Benefit Enrollment 2011 survey, 78% of large companies outsource enrollment, while almost half of midsized companies still insource. The scale will continue to tip towards outsourcing as three fourths of the responding midsized employers that currently insource indicated plans to outsource enrollment.

What is causing this tipping point? I think it is the addition of complexity to the healthcare equation for both the employer and the employee. Start with the ever rising healthcare costs driving increasing use of consumer driven health plans and healthcare savings accounts, add in the U.S. healthcare reform changes, and the options and implications start to multiply exponentially.

Even with the success of web-based enrollment, now at 89% according to Aon Hewitt’s 2011 Annual Enrollment Insights, calls to service centers are still in demand. Change and uncertainty increase the need to talk to someone as helping employees understand new plan features and any changes in pricing create communication challenges. Service providers see increasing use of decision support tools (DSTs) to help employees. For those using BAO, Towers Watson reports 69% DST usage compared to 44% that insource.

BAO also makes the process of accommodating changes for healthcare reform a bit easier. Aon Hewitt saw a jump in enrollment of 15% in the number of covered dependents as participants added children between 19-25 who are now eligible for coverage under one of the first major reform changes. Even a change that is relatively simple to implement has broader implications including increased employer interest in ongoing dependent eligibility rather than just as an audit, and some are moving to per child pricing over family pricing.

New best practices will emerge in response to benefit changes.  Service providers highlight the importance of incorporating a participant’s actual health claims data into decision support tools. Aon Hewitt has already seen that 48% of participants using advanced DSTs changed their elections. This is another opportunity to strengthen the value of BAO as Towers Watson indicates that 83% of the survey respondents have not yet integrated claim data.

Another emerging best practice is incorporating wellness communications into the enrollment tools and process stream. One reason for this is pure practicality as enrollment is a prime time to think about wellness. Another reason is that more employers are making completing assessments or participating in condition management plans a requirement to receive incentives or participate in premium benefit levels.

The BAO sale can be made on cost, convenience, and complexity. With a crowded market of quality providers, the differentiating theme that should run throughout the year is how to drive behavior change that creates business value.  Does your benefits service provider add business value?

Linda Merritt, Research Director, HRO, NelsonHall