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For many employee benefit consulting firms, 1997 will be marked as a year of soul-searching and change.
Several consultants lost their independence, either because of their own wish to seek a partner for expansion or due to the mergers of their parent companies.
Yet even in this climate, benefit consultants in general saw strong revenue growth, with many firms reporting robust demand for both consulting and outsourcing services.
The world's 10 largest benefits consultants, according to Business Insurance's 1997 ranking, increased their gross revenues from benefit consulting by 25.1% this year, sharply up from an increase of 13.2% for last year's Top 10.
New York-based William M. Mercer Cos. Inc. retains its long-standing position as the world's largest benefits consultant, with estimated revenues of $951 million this year. Much of that 20.4% increase over 1996 revenues is due to acquisition.
In March, Mercer's parent Marsh & McLennan Cos. Inc. acquired Johnson & Higgins, the parent of A. Foster Higgins & Co. Inc. Foster Higgins was the seventh-largest benefits consultant worldwide in 1996 with revenues of $255 million (BI, March 17).
Trailing at a distance in second place was New York-based Towers Perrin, with 1997 estimated gross revenues of $695 million and a 10.1% growth rate.
Ranking by U.S. benefit consulting revenues alone, Lincolnshire, Ill.-based Hewitt Associates L.L.C. for the first time pulled into the lead. Hewitt's outsourcing business grew by more than 40%, though it also enjoyed double-digit revenue growth in all other benefit consulting operations. With U.S. revenues of $600 million, Hewitt narrowly pushed aside Mercer, with $580 million in estimated 1997 U.S. revenues. Hewitt came in third place in last year's U.S. ranking, with 1996 revenues of $464 million.
Growth has been substantial almost across the board for consulting firms, with only one company in the worldwide Top 10 reporting less than a 10% gain and another two reporting less than a 15% gain.
Business Insurance ranks the benefit consultants on gross revenues generated by worldwide employee benefit consulting, defined as providing advice on benefit issues on a fee-for-service basis. Providing outsourcing services for benefits administration and record keeping is also counted. Only revenues from majority-owned consulting affiliates are included.
Revenues from claims administration, compensation consulting and non-benefit related work are not included.
The merger and acquisition activity among top benefit consulting firms captured the industry's attention beginning in January.
"It's by far the most rapid pace of consolidation we've ever seen," said Paul Daoust, chief operating officer of Bethesda, Md.-based Watson Wyatt Worldwide. "I've been in the business almost 28 years, and nowhere in that time has there been anything like this."
The year had barely begun when Buck Consultants Inc., the New York-based firm ranked eighth on last year's Top 10 worldwide chart, announced it was to be acquired by Mellon Bank Corp. It was the first time a financial services organization had acquired a Top 10 consulting firm. And, according to Buck President and Chief Executive Officer Joseph LoCicero, Buck's long-sought-after financing for expansion of its outsourcing services was now in reach.
Two weeks after the announcement by Buck and Mellon, Coopers & Lybrand L.L.P. announced that it was purchasing the far smaller Fort Lee, N.J.-based Kwasha Lipton L.L.C. (BI, Jan. 20).
Coopers & Lybrand's experience, size and breadth of services were key factors behind the acquisition, Kwasha Lipton officials said.
"We wanted to go with a firm that valued consulting expertise. Coopers & Lybrand is committed to its human resource advisory business and in fact had a practice that was twice the size of ours," said Robert Byrne Jr., managing principal of the Coopers & Lybrand unit that is now known as The Kwasha Lipton Group.
Kwasha Lipton was concerned that because of its relatively small size, very large clients, especially those interested in outsourcing their benefit programs, might not choose it, even if, as Mr. Byrne puts it, "they felt we were the most qualified."
Although the company was one of very few consulting firms with a profitable outsourcing operation, major potential clients were passing Kwasha Lipton up because they questioned the firm's staying power.
Coopers, with its breadth of offices and practice areas, gave Kwasha Lipton the opportunity to attract and win clients that would have been difficult on its own, Mr. Byrne said.
And business wise, the acquisition has worked. Over the past eight months "business has grown by leaps and bounds," Mr. Byrne said.
"All the accounting firms have been trying to get into this business for years, and the only one that has made a dent was Coopers," said Buck's Mr. LoCicero. "Their move with Kwasha, on their part, was brilliant. Kwasha is a great firm that gives them a lot more credibility."
In two other cases, major consulting firms combined this year when their owners, leading worldwide brokerages, completed mergers with other brokers.
Chicago-based Aon Corp. bought Alexander & Alexander Services Inc. and acquired The Alexander Consulting Group Inc. benefit consulting unit in a deal completed in January. That move increased Aon's gross revenues from benefits consulting by more than 115% by the end of this year. "They just mesh together beautifully," said Daniel T. Cox, chairman of Aon Consulting Worldwide. A&A brought its well-developed provider practice to the table, while Aon brought its well-known actuarial practice, Mr. Cox said.
"All the offices are integrated," Mr. Cox said. "All the people are in place. To say we were not distracted by a merger of this size would be incorrect. We certainly took some time to go through our internal needs. But now, for the last three months, the focus has been very much to the outside, to increasing our clientele."
Marsh & McLennan Cos. Inc.'s purchase of Johnson & Higgins resulted in the marriage of M&M's Mercer with Foster Higgins consultants.
After all this activity, virtually all consultants interviewed said they were not interested in their firms becoming a candidate for a corporate merger in the near future, nor did they want to acquire another consulting firm themselves. The lone exception was Mercer, whose executives said they might be interested in acquiring consulting firms outside of the United States if the opportunity seemed right.
The outsourcing business took another shift when Mercer announced it would form an alliance with Automatic Data Processing Inc., a large Roseland, N.J.-based processor of payroll data, and in essence turn much of the responsibility for outsourcing authority, and its staff, over to ADP.
"We are fully committed (to outsourcing)," said Vikesh Mahendroo, president of William M. Mercer Inc. in New York, Mercer's U.S. operating company. "We just don't think we should be the sole provider of those solutions ourselves."
The merger allowed Mercer to mostly remove itself from the outsourcing business after years of difficulties in the field.
"Whether it truly makes us bigger, in a year or two the marketplace will tell us that," Mr. Mahendroo said.
ADP, with more than $4 billion in global revenues, had 600 outsourcing customers after the merger. Both ADP and Mercer said the future of outsourcing is integrated processing of benefits, human resources and payroll data.
"The definition of outsourcing, from our perspective, has moved by quantum leaps since this time last year," said Timothy J. Lynch, chairman of William M. Mercer Inc. The new alliance, called Administrative Solutions Group, is twice as big as Mercer's previous operation, and has a total of 1,300 workers and four outsourcing centers. The alliance, Mr. Lynch said, is necessary to compensate for the great cost of technology.
Indeed, decisions surrounding outsourcing again dominated the strategic deliberations of consultants this year. As much as last year, consulting firms differentiated themselves by their degree of tenacity and skill in the outsourcing sector, and whether or not they wished to enter the fray at all.
Buck's Mr. LoCicero had made no secret of wanting to find a strategic partner to build the outsourcing business.
Buck, whose merger with Mellon became final in July, is trying to avoid clients who really "don't understand" outsourcing, Mr. LoCicero said.
"Our business growth in that already has been substantial," he said. "What hasn't changed is it's still a very difficult business to be good at. We're looking for new business, but we're being selective. We want to make sure it's good business. We want to make sure it's business we can make money on."
As important as outsourcing is and will become, Mr. LoCicero acknowledged that outsourcing will never be Buck's key to fortune, even with Mellon's aid.
"Can we make money on outsourcing? The answer is absolutely yes," he said. "Will it ever be a very high-margin business? The answer is no."
Buck, with three outsourcing centers and Mellon's financial services network carrying on similar work, hopes to see its retiree outsourcing business increase soon. Mellon cuts the checks for many retirees for retirement accounts and also handles debiting of accounts for retiree medical customers. Some companies are bound to want one outsourcing vendor to handle it all, Mr. LoCicero reasoned.
"To be truly top-tier, you have to be in the outsourcing business," he said.
If the outsourcing route doesn't meet expectations, however, Buck is keeping enough consulting avenues open. "We don't care where the trend goes -- we're going to be successful," he said. "We don't want to be (only) an 'outsourcing company.' "
Other consultants were equally hesitant about putting too many eggs in their outsourcing baskets.
"It's part of Towers Perrin, but it's not going to dominate our revenues," said Alan H. Dugan, managing director of global employee benefit services in Stamford, Conn.
"It's something that's very important to our employee benefit services clients to have a complete set of services we can give to them, but we're not looking at it as a business that will be a majority of Towers Perrin revenue," Mr. Dugan said.
Aon, which increased its outsourcing revenues by 30% to 35% in 1997 over 1996, has noted continuing trepidation throughout the industry.
"I think all the firms continue to have reservations," said Donald C. Ingram, chairman of Aon Consulting Americas in Chicago. "You had some early entries in the field where you had attempts to build huge outsourcing centers, and in some cases companies have gone almost diametrically in the other direction."
Hewitt, generally seen as the most successful in outsourcing, is bullish about the business. More than half its revenues now are flowing from outsourcing, and J.C. Penney Co. Inc. recently became its 100th outsourcing client. Hewitt has outsourcing centers in Lincolnshire; The Woodlands, Texas; Toronto; and Orlando, Fla. All four of those centers, because of the "success we are having in the market," are being expanded, said Thomas Schmitz, a member of Hewitt's office of the chief executive.
"What this is really about is workforce management, outsourcing some of the activities that are not strategic, not core to an employer's business. Since we handle benefit outsourcing for more than 100 companies, we can make
investments in technology that would be cost-inefficient for an individual employer," Mr. Schmitz said.
While nearly all of Hewitt's outsourcing business involves benefit programs covering U.S. and Canadian employees, it believes there are opportunities to expand outsourcing beyond North America. In fact, Hewitt plans to open
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an outsourcing center in the United Kingdom next year.
Still, outsourcing is a hugely expensive business, and profits for many firms remain elusive. For example, although Watson Wyatt continues to add major outsourcing clients through its joint outsourcing venture -- Wellspring Resources L.L.C. with State Street Bank -- "it continues to be more of an investment than we planned for or expected," Mr. Daoust said. "We aren't making money yet. We're still investing in the outsourcing business, and we think it's going to take a while before that turns around.*.*.It takes a lot of stick-to-itiveness."
Some other consultants continued to show little or no interest in outsourcing, either because of the expense and risk or because it doesn't match corporate strategy.
"We decided from the first day that we weren't going to be in that business, that it didn't fit strategically," said Howard Fluhr, president and CEO of The Segal Co. "We wonder why consulting firms have gone into it."
New York-based Segal is trying to carve a niche for itself: outsourcing consulting without the outsourcing. It will conduct studies of whether employers need to outsource and, if so, recommend vendors.
Other than outsourcing, consultants reported that a good economy combined with sufficiently thorny benefits issues drove many plan sponsors to seek consulting help in 1997. Firms mentioned these services in particular as being in demand:
*Managed disability, both short-term and long-term. Employers are seeking out ways to get employees back to work and minimize absence due to illness or injury.
*Comparison of managed care options. Consultants still are finding many opportunities to analyze plan sponsors' HMOs and report on quality and employee satisfaction.
As health care premiums and costs rise, consultants will surely find more opportunities for work, said Mr. Dugan of Towers Perrin. "I don't think it will be the feeding frenzy that we had in the early '90s, when costs (increases) for almost everybody were double digits," he said.
But because consultants have more data now to measure quality of care and worker satisfaction than ever before, "The second round of managed care consulting is coming on," reports Buck's Mr. LoCicero. "Many companies put in managed care programs four to six years ago and now they're starting to reassess them."
Higher premiums "will help our business tremendously," said Mr. Cox of Aon Consulting Worldwide.
*Investment consulting and investment performance monitoring.
Consultants are aiding in the search for the ideal investment manager for an employer and monitoring its performance.
*Strategic realignments of benefits to influence the type of employees the company attracts.
An employer who wants a mobile workforce that won't put demands on the company might, for instance, be advised to put in place a shorter reward program such as a defined contribution plan with rapid vesting.
Consultants are advising how occupational, non-occupational and workers compensation medical care work together efficiently.
Also, according to Mr. Dugan of Towers Perrin, more clients are trying to find out their total health costs, including everything from medical insurance to lost employee productivity. This requires a broad, holistic view by consultants because the sources of information reside in many different parts of the client company.
*More defined contribution plan consulting.
"We're seeing more and more employers turning back to the consulting firms for consulting advice about being in compliance with defined contribution areas," said Aon's Mr. Ingram.
And Mr. LoCicero reports an upswing in defined benefit pension studies at Buck. "They're not doing it out of the goodness of their heart," he said of employers, but rather out of a realization that annuity checks throughout a lifetime are more attractive to job candidates than an unpredictable stock market.
More than ever, consultants are being called on by HMOs, hospitals, and physician groups to redesign their businesses to make them profitable.
Leading consultants were busy establishing new offices in foreign countries in 1997 and beefing up their presence in others. Consultants, witnessing the rise of multinational plan sponsors needing worldwide consulting networks, responded in several markets.
Mercer, which derives about 40% of its revenue from outside the United States, is seeing that proportion increase annually, Mr. Lynch said. Mercer is particularly interested in increasing its presence in Latin America and establishing a consulting practice in Venezuela and Colombia, where it is absent.
Watson Wyatt is looking to build on its already considerable presence in Asia, in addition to its practice in the United Kingdom, said Mr. Daoust. The company, which had "the best year ever consulting worldwide" in 1997, saw most of its expansion happen outside North America, including the opening of offices in China, India, and Sao Paulo, Brazil.
Buck, with 25% of its business outside the United States, is keenly interested in strengthening its global consulting network to appeal to international employers, Mr. LoCicero said. Through its purchase of the benefit consulting unit of Willis Corroon (BI, Nov. 18, 1996), Buck has increased its presence in the United Kingdom to 300 employees from 100. Other Buck strongholds include Australia, Canada, Ireland and other parts of Europe.
Aon's acquisition of Alexander Consulting Group gave it a substantially larger slice of the actuarial consulting pie in Canada and the United Kingdom, and a good base on which to build in Europe, Australia and New Zealand, Mr. Cox said.
"The larger clients are going to look for global reach and depth of service," said Mr. Dugan of Towers Perrin. "They may not use all the services, but they want the ability to tap into it." In Latin America and Europe, a new demand is arising for provider consulting where young private health systems are supplementing weak public health structures, he said.
Memphis-based Sedgwick Noble Lowndes, ranked as the 7th largest consultant, derives 77% of its estimated benefit consulting revenues from outside the United States.
Several consultants spoke of the need to offer clients "global reach" or to achieve "critical mass" overseas, and of the hazards of appearing limited or local to employers. Seeming big, it now appears, is a key drawing card when it comes to luring customers.
Does that mean bigger is better? The consultants were slow to answer.
"Size in and of itself is hardly a determinant of winning or better service," said Mercer's Mr. Mahendroo.
"I think small firms can compete," said Mr. Byrne of Kwasha Lipton. "It just depends on the quality of their people and the breadth of their services. To the extent they have a niche business, they'll still be able to compete."