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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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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First Year+ Strong for ACS, a Xerox Company

With a year and a half passing since Xerox acquired ACS, Xerox has appropriately defined its new tagline: “Services-Led, Technology-Driven” with revenues roughly split equally between its Services segment and its Technology segment. Of Xerox Services, BPO is leading, accounting for 55% of revenues. The remainder of its Services revenue is ITO (12%) and DO (32%).

Within BPO, its four segments are HR, F&A, customer care, and transaction processing. Focusing on HR specifically, ACS is doing well according to information shared at yesterday’s Industry Analyst Meeting in NYC.  In total, the company has secured 44 HR services deals in the past 18 months.  Its first HRO deal since the acquisition was closed was a 5 year H&W services contract with P&G in March 2010.  

Some recent HRO highlights include signing a long-term TBO contract with a wireless telecommunications company, winning its largest ever learning services contract with a pharmaceutical company, and leveraging the ACS and Xerox relationship to win a multi-process HR outsourcing (MPHRO) contract from a competitor. 

Serving more than 11m employees and retirees worldwide, the company is focused on “consumer-driven solutions” or viewing the client employee as the end-consumer.  Part of this initiative includes its client collaboration group, FutureThink, which began piloting last year and has recently expanded. 

Its plans for geographic expansion are ripening.  The company has made great progress with its first target, Europe, with revenues increasing 10% and pipeline growth up more than 100%.  Approximately 90% of this pipeline improvement is the result of Xerox synergy.  Another positive is a recent MPHRO win from this region. 

Aside from Europe, ACS is targeting Latin America, specifically Brazil and Mexico, and Asia.  In Latin America, the company has a good market presence due to its acquisition of ExcellerateHRO last year. 

Additional acquisitions and partnerships can’t be ruled out either, especially for building out service capabilities.  Finally, to support all this growth, ACS has made investments in CRM, expanding its India and Malaysia centers.

Eighteen months since the acquisition has closed, Xerox has demonstrated a successful integration of ACS and signs are pointing to a positive future for HR services.

Amy L. Gurchensky, Research Analyst, 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

Don’t Rain on My HRO Parade

The HRO community deserves a break, and the latest NelsonHall HR Outsourcing Confidence Index is here to deliver with lots of good news. Strike up the band and let’s have a virtual HRO parade!

To gauge HRO confidence, we use a scale in which 100 equals no change and 200 means all participants are highly confident. Compared to the dearth of optimism at 115 in Q2 2009, the 3Q 2010 HRO Confidence Index is at a high of 168. HRO vendors stating they are much more confident in their HR outsourcing business increased from a dismal 10 percent to a buoyant 41 percent.

We have been reporting for some time that pipelines are filling and looking better, and that continues. And yet, providers’ financial results have not yet shown a logjam break in frozen decision-making and willingness to commit in many HRO service lines.

On the other hand, this quarter we finally see an upswing in contract value growth. In fact, we have a triple play of good news underway! HRO service providers are reporting increases in:

1. New contract activity
2. Scope expansion with existing clients
3. Volume in existing contracts

New contract activity is now outpacing increasing scope with existing clients. New deals signed, given the lag time before revenues flow, will take a while to show up in results. Volumes beginning to pick-up with existing clients will show up sooner in results, especially if vendors can gear up to increasing activity levels quickly and efficiently.

RPO and payroll continue to lead the parade to revenue growth recovery, with multi-process HRO also improving. While learning has been slow, its current 3.5 ranking in NelsonHall’s 3Q 2010 HRO Confidence Index indicates a much brighter outlook as compared to its score of 2.8 in Q4 2009.(Note that we use a scale of 1 – 5, with 5 being a strong increase.) 

Benefits administration outsourcing revenue growth expectations have been stable for several quarters around 3.5, but the outlook for pipeline growth is lower for benefits administration outsourcing than other HRO areas. Expected increases in health and welfare consulting should lead longer term to opportunities, but vendors are not seeing it yet. There may be short term distraction caused by the spate of mergers and alliances this year. ADP recently reported the successful acquisition of Workscape, now an ADP company, and Aon announced the leadership slate for the soon to be Aon Hewitt team.

Global delivery remains a factor in HRO growth in two ways. First, multi-country contracts, at 34 percent of deals, continue as organizations seek to standardize payroll and other HR processes. Also, acceptance of multi-shoring HRO continues. Onshore HRO delivery is still in the lead at 71 percent, but nearshore and offshore delivery are now 29 percent of HRO contract values.

People have parades for many reasons including celebration, commemoration and optimism. Our virtual parade is for optimism with a tad of celebration thrown in. Let’s save the full celebration parade for when the earnings results match the current high level of optimism.  Hmm, when and where do you think we should have a real HRO community parade?

Linda Merritt, Research Director, HRO, NelsonHall

Online Chat Usage Increasing in HR Outsourcing

Picture this: You need to ask your bank a question. After navigating through its website unable to find the needed information and then trying to determine what you think is the correct toll-free phone number to dial, the fear sets in. Will I get lost forever in an IVR queue? Will I be on hold for an interminable period of time? Will I finally reach a live person only to be transferred and put on hold…again and again? We’ve all faced this, and it’s not pretty. But recently, after spending way too much time searching for the information I needed from my bank, I had a great experience getting an actual answer – yes, it’s true! – via its live online chat feature. After I clicked the button, the online agent greeted me in less than a minute, and within three minutes I had the information I needed, including follow up questions I had.

Granted, a key component of HRO providers’ core expertise is top-notch customer service via both websites and call centers. But what if there was another, alternative method for gaining desired information? Enter a Mercer news release issued earlier this week which carried the headline, “Mercer reports significant increase in online chat usage.” The announcement stated that use of its online chat capabilities has increased 55 percent since it piloted the offering with two clients in the beginning of 2009. 11 clients are now making the service available to their employees, and a number of clients plan to roll out the capability later this year. And usage by employees of the two pilot clients has upticked by 48 percent and 10 percent, respectively, in usage volume between 1H09 and 1H10.

Such a large increase in number of online chat sessions clearly indicates desire and demand for this type of communication – whether it be for questions on defined contribution plans, defined benefits plans or virtually any outsourced HR process. One of the reasons we’re seeing this surge is that live chat marries online ease and personal touch.

My advice to HRO providers considering adding live chat capabilities to their offerings portfolios – and I know of several that are currently evaluating the possibility – is that customer support must be absolutely world-class, employee satisfaction-focused. Within seconds responses, kept-to promises of when the answer will be delivered to the employee if it’s not immediately available, highly knowledgeable and skilled reps – not only in policies and programs, but also in quelling concerns…all of these are critical to ensuring the success of online chat. Fail in any of these areas and you’ll not only have an unsuccessful offering, you’ll have those who experienced a poor interaction blogging and tweeting about it. They will…you can be certain of it. These are tech-comfortable individuals who will have no qualms – or technological challenges – in doing so. Be prepared, start with a pilot, learn from the pilot and you may have a winning service offering for you, your clients and their employees.

Care to share your online chat experience?

Gary Bragar, Senior HR Outsourcing Analyst, NelsonHall

Health and Welfare Services are a Nice Slice of the HRO Pie

Wellness programs have been around for years, but employers needing to manage ever increasing health care costs are looking for a stronger connection to results. HRO vendors and programs that can show proof of progressive results over time and an impact on health care costs will strengthen client relationships and do well in a still tight market.

Fidelity is adding RedBrick Health’s wellness programs as an optional service offering in its employee benefits and outsourcing program. RedBrick Health is a 2006 start-up specializing in wellness, disease and chronic care management programs that often include employer-funded financial rewards tied to participation in activities and programs. Fidelity selected RedBrick for the uniqueness of its interactive programs, technology, analytics and results that include rates of participation as high as 40-60 percent, compared to industry averages of five-10 percent. And it tracks health assessment biometrics that show improvements of six-30 percent in areas such as blood pressure, cholesterol and weight, which can lower the total cost of health care.

“Nice to have” HR programs are now expected to show value to employees and employers based on outcomes. HR and its HR service providers are under greater pressure than ever to show impact. Some HR services are “need to haves,” and demonstrating lower operating expenses, improved process performance and strengthened compliance are often enough proof in the pudding. Also improving the employee experience is icing on the cake.

Optional HR benefits and services outsourcing in a down economy have a higher hurdle as the looming question is, “why offer the benefit at all?” But outsourced services in the health and welfare (H&W) area that can make the connection to lowering the cost of benefits, health care and the total cost of labor have been bright spots.

Even the larger HRO vendors are aware of this trend. Hewitt has been expanding its H&W offerings with absence management, and it recently acquired HR Advance to add to its dependent verification capabilities. Others, like Fidelity, are selecting specialty partners to build out H&W services.

Where H&W services are transactional, like flex spend accounts, look for innovation in technology and processing efficiency. Other services – such as absence management – need to blend in consultative and deeper subject matter expertise, and the bench strength of the care center personnel is very important. In all cases, the quality of the employee communication and experience is critical, even if cost savings is the driver. If employees are not aware of the program, or do not understand the benefits of participating in it, outcomes will not be maximized. And you need awareness and participation to get to impact and capture a healthy slice of the H&W pie.  

Linda Merritt, Research Director, HRO, NelsonHall

Health Care Reform – Who’s Got Your (HRO) Back?

There are HRO service providers that can do a wonderful job in a stable environment, efficient and effective. But who can do the job in an uncertain financial and regulatory environment? Which vendor partner/s has your back in times of change?

Today I watched as President Obama signed the historic health care reform bill. If you’re an employer, are you prepared for what the recently changed regulations will do to your business and how they will impact your employees? Are you comfortable that all of your employee and delivery systems are ready for compliance – across internal and, potentially, multiple third-party vendor systems?

As recently as February, Mercer found that seventy-one percent of U.S. employers have done nothing to prepare in advance. This is reasonable since no one was assured what new regulations, if any, would be passed. But prepared or not, some elements will go into effect in 2010, and every impacted employer and their HRO partners are going to need to scramble. 

At the end of the day, compliance is an employer’s responsibility, and wholesale benefit policy and plan reviews require big “C” consulting. However, an experienced HRO vendor partner with top-notch subject matter expertise can advise on changes that are required to keep your information and systems in compliance. And a primary multi-process provider can help work across the often myriad of systems, programs and interfaces that will need to be updated.

 I just took a quick scan of some of the HRO service provider websites. As you would expect, major benefits administration vendors like Hewitt, Mercer and Towers Watson have been long active on the topic; research, web info, bulletins, podcasts and webcasts. And today, Hewitt is hosting one of its bi-weekly healthcare reform webcasts, and Mercer is hosting one on the recent changes to mental health parity and addiction equity regulations.

ACS, via its consulting arm Buck Consulting, has prominent health care reform information available. ADP also has an easy to find section with weekly updates, and is already listing when some health care reform regulations are going into effect over the next few years. And Aon has a website area with weekly briefings and access to health care reform information.

If you are a current HRO client of benefits health and welfare administration, payroll, employee self services, or recruiting – who has kept you informed along the way? Who has called you today?

Linda Merritt, Research Director, HRO, NelsonHall

The Compliance Rules, They are a Changing (and Present Opps for HRO)

Compliance is not always the most exciting topic, and being the manager of workforce safety, leave of absence and FMLA were on Kris Dunn’s Workforce.com list of the Five Worst Jobs in HR. Exciting or not, compliance is important to both employees and employers, and is a major regulatory focus of the current U.S. administration. It is also an opportunity for HR outsourcing.

I was reading the just-published U.S. Department of Labor’s Fall 2009 Regulatory Plan agenda (really, I was…I need to get a more exciting life!) and the list of proposed changes is very long and touches on many HRO service areas. Here are a few examples of proposals:

•  LOA/FMLA: review the implementation of the new military family leave amendments to the Family and Medical Leave Act, as well as other provisions of the FMLA regulations that were revised and implemented in January 2009

•  Benefits: Clarify the circumstances under which a person will be considered a fiduciary when providing investment advice to employee benefit plans and their participants and beneficiaries, and require defined benefit plan administrators to provide all participants, beneficiaries and other parties with detailed information regarding their plan’s funding status  

•  OSHA: collection of additional data to help employers and workers track injuries at individual workplaces

•  Wage & Hour: update decades old recordkeeping regulations in order to enhance the transparency and disclosure to workers as to how their wages are computed, and to allow for new workplace practices such as telework and flexiplace arrangements

While large-scale HRO is not usually driven by compliance issues, it is a benefit of outsourcing increasingly valued by buyers.

Continually updated regulatory compliance support and reports can be designed into HR services delivery systems and make any audits much easier to support with thorough documentation.

Training and coverage of required reviews are also a part of a compliance system. On Monday, my NelsonHall colleague Gary Bragar and I were catching up on the learning activities of a multi-process HRO provider and we briefly discussed compliance training. Too often it is funded at the lowest possible level and designed to meet the letter of the regulations and to document participant coverage. It can entirely miss the larger point of application in real work situations as well as the value and spirit behind the regulations.

Significant expertise is required to manage benefit and health and safety programs. Having an HRO partner that keeps up on the regulations and can help buyers design and administer a cost effective program brings real value to the business, HR and to employees. Compliance tracking and reporting can indeed be tedious, but compliance coverage and training need not be.

Learning vendors — be creative  and show clients how they can leverage outsourced compliance training services to provide coverage that really works and is still low cost. 

At the end of the day, compliance is about value-based fairness, and impacts the real lives of employees and communities and an HRO provider partner can help companies maintain the balance between compassion, compliance and cost.

Linda Merritt, Research Director, HRO, NelsonHall