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