Hewitt Associates Inc. says it plans to develop its benefits outsourcing business by offering back-office services as more companies turn to outsourcing to supplement their core businesses.
"The emerging trend in business is to outsource functions that aren't necessarily core or that someone else can do at a lower cost," said Bryan J. Doyle, a global leader for Hewitt. "We can provide more services. In the HR area, it started with benefits and a little in payroll. In the past 18 months we have seen increased interest in total HR outsourcing. The business is growing."
The Lincolnshire, Ill., company has been supplying benefits outsourcing for 65 years. Ten years ago benefits outsourcing made up one-third of its revenue. Today it contributes 65%.
Mr. Doyle said that in the past two years more financial services companies have chosen to outsource their benefit services to third-party providers. Hewitt serves National City Corp., MetLife, and Northern Trust benefits programs, he said.
"Many of these financial services companies, including banks, want to be in the 401(k) business for the asset management and asset accumulation, but most of them don't want to invest in the back-end costs," Mr. Doyle said.
John Stadtler, a partner in PricewaterhouseCoopers' Northeast investment management practice, said a global trend is building toward outsourcing.
"I think there is a perception that the U.S. has been quicker to outsource, but we are seeing that the rest of the globe is interested in catching up to that trend," Mr. Stadtler said.
Hewitt's competition for the benefits outsourcing business is stiff. Mellon Global HR Solutions, the Boston fund giant Fidelity Investments, and CitiStreet, a joint venture of State Street Corp. and Citigroup Inc., have all made big commitments to the business. Fidelity projects that half its revenue will come from benefits administration by decade's end.
More than 90% of U.S. companies outsource some functions in an effort to reduce overhead and exposure, said a study by Cutting Edge Information, a Durham, N.C., research firm.
Gartner Inc., a Stamford, Conn., research and advisory firm, has reported that employee benefit outsourcing is a $27 billion industry in the United States. It predicts that the industry will grow 15% annually through 2005.
Ann C. Marhdt, an analyst at Spectrem Group in Chicago, said benefits outsourcing is primed to grow because companies increasingly are looking to use it.
"I think it has started at the high end with the very largest of companies and you will see it shift down as economies of scale build up," she said.
Mr. Doyle said more companies, including banks, are trying to get into benefits outsourcing as a way to differentiate themselves from competitors. However, he said, as new competitors enter the marketplace, established companies like Hewitt are generating more business.
"We see a lot of potential to grow," Mr. Doyle said. "Of the top 10 401(k) administrators, Hewitt is the only independent firm. Firms want to work with us because we aren't competing for their assets."
"Firms either have to decide that they want to be like Fidelity and provide total benefits and total HR outsourcing, or if they want to be a niche business," he said. "With the technology investment, they will be squeezed unless they partner with someone like us."
Hewitt began offering total HR outsourcing 18 months ago and has signed up four of its larger customers. Mr. Doyle said the company is cross-selling to its existing clients and prospects.
