CONSOLIDATION CREATING NEW COMPETITIONPosted On: Dec. 7, 1997 12:00 AM CST
Although the acquisition trend in the employee benefit consulting arena has produced behemoth-sized competitors, smaller employee benefit consultants say they still can prosper by offering specialized services and a steady hand in a changing marketplace.
The landscape surrounding the world's largest employee benefit consultants has been redesigned by the many acquisitions completed since January.
Among them: Aon Consulting Worldwide Inc. acquired The Alexander Consulting Group Inc.; Mellon Bank Corp. acquired Buck Consultants Inc.; Coopers & Lybrand L.L.P. acquired Kwasha Lipton L.L.C.; and William M. Mercer Cos. Inc. acquired A. Foster Higgins & Co. Inc.
While these firms say their newly combined girth will bring economies of scale and more resources, breadth of services, and expertise to the table, second-tier sized firms say they are not worried about their new formidable competitors. In fact, some welcome the consolidation with open arms.
"I love it," said Michael J. Gulotta, president and CEO of ASA Inc., formerly known as Actuarial Sciences Associates Inc. "While they focus on consolidating their businesses, I'll focus on growing mine."
Revenues for the Somerset, N.J.-based benefit consultant are up more than 70% in 1997 to $72 million. Only 2% of that growth is attributable to the early 1997 acquisition of ISG (International Systems Group Inc.), a Toronto-based defined benefit and defined contribution plan administration firm. The rest is due to aggressive marketing, a new pension administration service, expanding its existing lines of businesses from both geographic and service standpoints, and new business that it obtained during the year, Mr. Gulotta said.
"There is a great deal of uncertainty in the marketplace" right now due to the consolidation, he said. Clients are concerned that consulting firms involved in acquisitions will be distracted by the integration process for too long before any client-service benefits resulting from the deal are realized.
For example, "There was one Fortune 50 company doing a search for an employee benefit/actuarial consultant. It went to 10 firms, including the consolidated companies. No company that had recently undergone consolidation was in the final four," Mr. Gulotta said.
"That's not an accident, that's a concern -- and that concern is being clearly telegraphed by decisions being made by large companies," he said, adding that ASA eventually won the account.
"A year ago, I would have only dreamed of working for this company," he said.
Bud Johnson, chairman and CEO of Howard Johnson & Co. in New York, said that consolidation also is creating opportunities for his firm because it allows employers to deal with pure benefit consulting firms and not with a large firm where benefit consulting is an adjunct or ancillary business.
"I don't feel threatened by it," Mr. Johnson said of the consolidation.
"There is no evidence that size brings advantage to the customer. Size brings advantage to the purveyor and maybe more market exposure by virtue of its size, but there is no evidence that size adds value as far as the client is concerned."
Estimated 1997 revenues at Howard Johnson are up 25% to $35 million.
"I don't think bigger is always better," agreed John Ehrhardt, a principal and consulting actuary at Milliman & Robertson Inc. in New York.
"I don't know what will happen," said Mike Mahoney, a principal and national director of pension practices for Milliman & Robertson in New York. "Right now, I don't necessarily find ourselves at a disadvantage in terms of size."
1997 revenues at the Seattle-based consultant are up 5.2% to $65 million.
While these benefit consultants say size does not necessarily connote being better, one former second-tier sized benefit consultant begs to differ.
"Size does matter in terms of large purchasers of services in the outsourcing field," said Robert S. Byrne Jr., CEO of The Kwasha Lipton Group in Fort Lee, N.J. It also matters if the firm wants breadth of service, he said. "You can be a niche business in certain areas only for so long."
In January, Coopers & Lybrand acquired Kwasha Lipton for an undisclosed amount (BI, Jan. 20).
As a result of being acquired, "we can now truly provide a full-array of consulting services that we couldn't before," he said. Prior to the acquisition, Kwasha Lipton focused on benefits administration and retirement consulting. Now it is "a lot more well-rounded" and can offer such services as compensation consulting, change management and systems technology, Mr. Byrne said.
Furthermore, by aligning itself with Coopers & Lybrand, Mr. Byrne said clients can put to rest any uncertainty involving Kwasha Lipton's future.
"We know five years from now, we'll still be in the business," Mr. Byrne said.
Observers say while consolidation does offer employee benefit firms the necessary resources to offer clients a wider array of services, there are still opportunities for second-tier sized firms to compete.
"Consolidation was inevitable in the employee benefit industry," said Joe Duva, president of his own consulting firm in New York and a former partner with Ernst &*Young. It's the same in all kinds of industries that are consolidating today. "The only way to grow is to consolidate for efficiency and cost."
However, "bigger does not necessarily mean better," he said. While consolidating offers efficiency to clients, "there are opportunities for smaller boutique employee benefit companies to be providing more specialized services," he said.
Donn Bleau, a principal with Global Resources Group, an executive recruiting firm in San Diego, said that he believes there will always be a place for smaller firms because many of them have built long-standing client relationships and some clients prefer partnering with smaller consultants.
"However, I also believe that some of those firms will not be with us three years from now," he said. Smaller consulting firms are "going to have an uphill battle to fight, particularly with technology."
Mr. Duva speculates that further deals like Coopers & Lybrand and Kwasha Lipton will occur. "It would be natural for some accounting firms to merge with an employee benefit consulting firm."