Posted tagged ‘HR consulting firms’

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

July 3, 2009

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

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

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

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

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

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

Until next time, happy sourcing!

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall