A Closer Look at Benefits Administration in H1 2012: Part 2

Amy L. Gurchensky, HRO Research Analyst, NelsonHall

Part 1 of my mid-year benefits administration update covered several of the largest service providers, typically engaged in TBO services. Part 2 takes a closer look at TRO providers and updates from H&W vendors.

Fidelity Investments: Although it is a private corporation, from time to time Fidelity announces some of its success. H1 2012 was the company’s strongest half sales period in the last five years. It added 838 new DC administration clients, which will add ~522k participants to the ~15.7m it is currently serving. Fidelity has made substantial investments to strengthen its offering that will likely continue to fuel its success.

T. Rowe Price: While not as large as Fidelity, T. Rowe’s Administrative segment continues to report a steady growth rate of 3%. It prides itself on a long tenure rate with its clients and has plans to keep its offering competitive by introducing technological enhancements such as the T. Rowe Price Personal App for individuals and participants in employer-sponsored retirement plans.

JLT: Across the pond, JLT’s Employee Benefits segment, which includes revenues from consulting, outsourcing, and systems / technology, had a 5% growth rate in H1 2012. BenPal, its online integrated platform, is helping the company expand its benefits business internationally, which is likely to continue to have a positive effect on its bottom line.

Benefits providers in the U.K., the second largest benefits administration market behind the U.S. according to the 2012 Targeting Benefits Administration market analysis report, should also enjoy better than average growth due to new opportunities as a result of the automatic enrollment requirement of the Pensions Act of 2008 as well as opportunities in the public sector as budget concerns open doors to outsourcing assistance.

WageWorks: Newly public WageWorks provides a look into the high-technology SaaS H&W specialty services market of consumer-directed accounts including health (i.e., HRA, FSA, and HSA), commuter, and other employee spending accounts. Total revenues increased 29% y-o-y for Q2; its healthcare segment was up 21%. This year, it added US Airways as a client, expanded its contract with GE, and signed a channel partner agreement with Aflac that will add ~5k FSA clients and ~100k participants. It also entered into a reseller agreement with Aflac, which will continue to boost revenues beyond 2012.

Empyrean Benefit Solutions: Another private company touting its success in the H&W market is Empyrean, which has been offering services since 2007. It has set a record with year-to-date new client wins in H1 2012, adding 10 large market clients. The company is expecting 2012 revenues to increase 40% y-o-y.

Service providers who are slightly behind growth targets for 2012 or those who just want to perform better are prepping to make sure 2013 is a success. For some, this means focusing on health insurance exchanges or launching health and wellness offerings, and for others, it’s about enhancing existing offering with technology improvements and educational initiatives.

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What do Benefits Administration Clients Want from HRO?

Linda Merritt, HRO Research Analyst, NelsonHall

What HRO clients want falls into several buyer profiles based on familiarity with outsourcing and organization maturity. The NelsonHall Targeting Benefits Administration (BA) market analysis was published earlier this summer by Amy Gurchensky, and I noticed Amy included differences in client decision drivers by whether they were new to outsourcing or were already experienced in outsourcing. The concept crosses all types of HRO services and matches my running conversations with service providers. Let’s take a look at the following three buyer profiles through the lens of BA:

• Standard buyers
• Experienced buyers
• Progressive buyers.

Standard buyers: otherwise known as first time outsourcers are looking for reduced operating costs, better compliance with regulations, a way to transfer or minimize risk, updated technology and best practices, and improved participant communications channels. Employee and manager self-service and reducing HR administrative burdens are also popular drivers in the initial decision to outsource.

Experienced buyers: otherwise known as second generation outsourcers already have the basics in place and may be ready to broaden the scope of services, obtain more flexible technology, or increase participation in process streamlining to enhance efficiency and improve participant engagement. Changes may include adding new BA services or even consolidating vendors, but it can also include the decision to change to another vendor completely. Cost is still the number one concern, so contract renewals will not be a slam dunk. Providers who are on the ball with changing client needs and increased sophistication should be ready for thorough discussions on price, service, and value.

Progressive buyers: or sophisticated buyers may be ready to use the firm foundation they have built with their outsourcer to create the greatest possible business impact. In BA, this may include total benefits outsourcing where either pensions or retirement plan services are combined with health and welfare services under one vendor to:

• Lower total costs
• Simplify vendor management
• Integrate technologies across the services
• Improve the participant experience.

This is the time to bring out the most sophisticated offerings and analytics and focus on business value; leverage the value of benefits in employee attraction and retention; and optimize total program cost. Once again, existing BA vendors will be vulnerable to pricing concerns and client perceptions about the provider’s top-end capabilities and client retention will remain at risk.

As HRO matures and more clients gain experience in managing outsourced services, expect to see client needs change over time. Service providers can and do quickly tell which HRO profile a new prospect falls into by the language used, initial discussions on services, and outsourcing objectives, etc. It can be a bit harder to see when an existing client, even one satisfied with day-to-day services, is moving from one buyer profile to another. For clients new to BA, if you intend or even just hope to move up to the sophisticated buyer level, consider if the vendor who meets your initial needs will also meet your needs as your organization matures.

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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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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

 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.

Getting HRO Deals Done Today – Start Yesterday

This week ACS announced a five year deal with Ford Motor Company to provide Total Benefits Outsourcing (TBO). While financial details were not released, it is a major contract that will provide all three benefits administration services – defined benefit, defined contribution and health and welfare – to more than 400,000 U.S. Ford employees and retirees.

What allows a major deal to get done in this still tough economic environment, especially in the automotive sector? If a deal can get done there, a deal can get done anywhere.

Ford is the only U.S.-based auto company that has not sought special government financial assistance. Alan Mulally, Ford’s CEO since the fall of 2006, has driven a focus on Ford’s cars and trucks. Bill Ford Jr., Chairman and family representative, selected the industry outsider from Boeing because he saw the need for the same type of business and cultural turn-around Mulally led at Boeing. Under Mulally, Ford has sold off non-core brands like Land Rover and Jaguar, and invested in not just needed model refreshes to core brands like Ford and Lincoln, but in new technologies and means of manufacturing to lower the cost of production and support faster responses to changes in the global marketplace.

Continuing focus on the core and cost pressures has brought new, open-minded thinking to what can be outsourced, breaking the mental barriers on what must be internally managed. That opened the door for Ford to outsource TBO for the first time.  Throughout the competitive vendor selection process, Ford had several clear objectives including a partner with a record of quality and progressive thought-driven innovation and investment, and one who would offer an “evergreening” of technology. Of course cost was also an issue, and Ford considered both long-term cost avoidance – what it would need to invest to continue to offer current state services in-house – and short-term cost savings – reductions in current spend.

TBO was already a big part of ACS’ Human Capital Management (HCM) Solutions services’ revenues. It is also a major growth focus under Rohail Khan, ACS’ Executive Managing Director Total Benefits Outsourcing. ACS has committed to investing $50 million through 2011 in upgrades to and expansions of its HCM offerings, technology and global customer service center network. According to Rohail, more than $20 million has already been invested in technology and capabilities that strengthen TBO. He considers the underlying technology design, which enables faster and lower cost changes and enhancements, as a key to strategic advantage and a means to protect profitability.

Having already made investments, enhancements and upgrades, ACS was test drive ready. Ford kicked the tires and selected ACS as the competitor who best demonstrated a match for its objectives.

However, to leverage its fast start off the line, ACS will need to address concerns about the Xerox acquisition. When the HCM unit becomes part of “ACS, a Xerox Company,” will it be considered a non-core unit like Jaguar at Ford, or will it be a strategic business line that is invested in and vitalized?

NelsonHall’s October BPO Index continues to show that buyers have revised strategies and budgets, as have providers. The Index further indicates buyers are on the path to getting deals done in 2010; they are identifying BPO opportunities (25 percent), expect to issue RFPs (48 percent) and make awards (37 percent). 

Competing for major deals starts way before the RFP arrives. Which services will be offered within a bundle and will be strong enough to stand alone against best-of-breed providers, and what investments will add both to competitive advantage and sustainable internal margins? Those best positioned to take advantage of the economic recovery and new growth opportunities will have already vetted strategic plans, made the investments, and now have shiny new cost competitive and compelling services offerings ready to roll off the lot.

The question is not just what you are doing today, but what did you do yesterday?

Linda Merritt, Research Director, HRO, NelsonHall