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Posted On: Jul. 27, 1997 12:00 AM CST

ROSELAND, N.J.-William M. Mercer Inc. is turning over control of much of its employee benefits administration and outsourcing business to Automatic Data Processing Inc. as part of a new alliance with ADP, the payroll processing king.

Roseland, N.J.-based ADP will take over Mercer's call centers as well as defined contribution plan and health and welfare plan administration services, with Mercer's 600 employees involved in those areas shifting to ADP. Mercer will manage defined benefit plan administration for the alliance, which has not been named, as well as through its own offices. Mercer and ADP expect that the alliance will be in place by September. Mercer, though, has not yet decided what it will do with J&H/KVI, a Des Moines, Iowa-based benefits administrator, which was majority owned by Johnson & Higgins. Marsh & McLennan Cos. Inc. purchased J&H earlier this year in a $1.8 billion transaction.

While neither Mercer nor ADP will disclose all financial details, the transaction, according to ADP, will give it more than 600 clients and swell revenues by more than $50 million. ADP now has more than $4 billion in worldwide revenues.

Mercer and ADP executives say clients will be the ultimate beneficiaries of the link between the world's largest employee benefit consultant and the world's largest payroll processor.

"We have done a lot of research, and increasingly, companies want integrated systems-those that combine human resource administration, payroll and benefits. Through this alliance, we can offer those kind of integrated services to clients," said Mercer Chairman Timothy Lynch in New York.

"This fills out a service line and adds significant critical mass to our growing business," added Tim Lamb, president of ADP's national accounts division in Atlanta.

Some independent observers applaud the new link, noting that each firm could benefit. The combination boosts ADP's position in defined benefit plan administration. It also provides more talent in other benefits administration areas, talent ADP has tried to bring in through several acquisitions, including the purchases of benefit consultant and administrator Williams, Thatcher & Rand of Bethesda, Md., and administrator Health Benefits of America in Salt Lake City. It also gives ADP a foot in the door to Mercer's huge client base.

For Mercer, the alliance not only gives its clients the opportunity to get an integrated package of benefit and payroll services from a single source, it also essentially gets Mercer out of several benefits administration areas in which observers say it has stumbled.

"This has all the earmarks of a necessary and outstanding move. It is a necessary move because Mercer has learned the hard way that its expertise is consulting, not outsourcing and other facets of benefits administration. It is an outstanding move because of the range of services-through the alliance-that Mercer can offer clients," said Donn Bleau, a principal of Global Resources Group, an executive recruiter in La Jolla, Calif., who has done recruiting for benefit consultants.

The new alliance comes as benefit consultants are caught in an outsourcing dilemma. On one hand, employers increasingly want to outsource administration of their employee benefit plans as a way to reduce overhead and concentrate on their core businesses. Consultants fear that if they fail to meet their clients' outsourcing needs, they will lose those clients to competitors.

On the other hand, the financial investment in technology has been so enormous that outsourcing generally has been unprofitable for consultants.

"I don't know if anyone is making money. The early players did not understand how much investment is required. It is very capital-intensive," said Jon Palmer, chief executive officer of benefits administrator and outsourcing firm Wellspring Resources L.L.C. in Jacksonville, Fla. Wellspring is a joint venture of Watson Wyatt Worldwide and State Street Global Advisors.

"Basically, all of the consulting firms have underestimated the investment required in technology," concurred Mike Hager, president of Hager Strategic Inc. in Washington. Hager advises employers on whether to outsource benefit administration as well as selecting outsourcing vendors.

Other problems consultants faced as they ventured into the outsourcing business have included far greater difficulty in organizing clients' benefit plan information so their call center staffers can provide quick answers when clients' employees phone with questions about their benefit plans.

"Pension plan data may be in boxes, and cleaning it up and organizing it, getting it into a database and in a form in which answers can be provided is a challenge," Mr. Palmer said.

From the beginning, Mercer faltered in benefits outsourcing, at least in part, observers say, because its early clients' benefits programs were so complex that the conversion to outsourcing proved much harder than expected.

"Mercer spent a lot of time and had a lot of resources tied up with one client. In a new area, you would not want your first clients to be so complex and tough," Mr. Hager said.

Mercer, like other consultants that have gone into outsourcing, may have invested in technological systems that were not well-suited for benefits outsourcing, some say.

"Basically, Mercer underestimated the need to take a completely different approach to technology," said Mr. Hager, a former Mercer consultant. Mercer's Mr. Lynch declined to comment.

While outsourcing has been, as Mr. Hager puts it, "a tough nut to crack," it is a business consultants say they can't walk away from because of competitive pressures as well as what they think is the opportunity over the long run to make it a very profitable business.

"It is a huge opportunity. The market is eagerly looking for world-class delivery of services at affordable prices," Mr. Palmer said.

"Employers want to focus on their own operations. There will be growth in this business and it can only grow larger," Mr. Lynch concurred.

But the cost of developing such a capability may be too great for any one firm to do alone.

"I see more alliances developing" as clients are looking for total solutions to benefits, HR and payroll administration, Mr. Palmer said