Crain News Service
BETHESDA, Md. -- Roiled by steep financial losses and little likelihood of a turnaround anytime soon, Watson Wyatt & Co. is pulling out of Wellspring Resources LLC, the joint total benefit outsourcing venture it launched in 1996 with State Street Global Advisors.
In filings with the Securities and Exchange Commission, Watson Wyatt disclosed it will discontinue its participation in Wellspring as soon as possible and write off its $58.7 million investment in the venture during the third quarter of this year. It also expects to record a reserve of about $60 million for liabilities, such as severance payments, relating to ending its relationship with Wellspring.
While Watson Wyatt will depart as a financial partner, Wellspring expects to continue in business, although on a more limited basis, with Boston-based State Street owning 100% of the Jacksonville, Fla.-based company.
Watson Wyatt will continue to provide administrative services for benefit plans, although not in a total outsourcing call-center environment and not in competition with Wellspring, said Pete Smith, Watson Wyatt's president and chief executive officer in Bethesda.
Watson Wyatt's difficulty in the benefit outsourcing business is yet another example of the turmoil and uncertainty in the industry, with some major players exiting the business or finding new, richer partners and others making massive investments to expand operations.
"This is such a capital- and systems-intensive business that it takes a real focused approach. Some of the consulting firms are not going to stay in, because they are finding that they are spreading themselves too thin," said Donn Bleau, principal of Global Resources Group, San Diego, which does executive recruiting for benefit consulting firms.
Watson Wyatt officials say the decision to get out of the total benefit outsourcing business is part of a corporate strategy to concentrate on traditional and new strengths.
"This decision is very much of a focused strategy for the firm: concentrating our resources on what we always have done best," Mr. Smith said.
With the Wellspring situation behind it, Watson Wyatt can focus more on its traditional strengths, such as benefit plan design and strategy, human resources consulting, actuarial work and -- more recently -- helping clients design and operate their own benefit call centers, Mr. Smith said.
"We will be in the business of providing customized solutions in the HR area for clients," he added.
Others agree the exit from total benefit outsourcing is a good business move for Watson Wyatt.
"Personally, I think this is a very good thing for them. This will allow them to focus on their core business," Mr. Bleau said.
Sources in and outside of the company point to several missteps Watson Wyatt took in its development of Wellspring. One key mistake, they say, was taking on projects involving complex benefit plans before its systems were developed to handle those plans in a cost-efficient way.
"There is a big lesson in this. You have to work out what your platform is going to be before you open your door for services," said Mike Hager, president of Hager Strategic Inc. in Washington. Hager advises employers on whether to outsource benefit administration and helps employers select outsourcing vendors.
"You have to be very disciplined; you have to figure out your operating environment ahead of time and not take on business you can't handle," Mr. Hager said.
Wellspring has just nine clients, but they include some of the biggest names in corporate America, including AT&T Corp.; Rockwell International Corp.; Sears, Roebuck & Co.; and Westinghouse Corp.
Agreeing to provide outsourcing services for so many massive employers, some of which have enormously complex benefit programs, also might have been a mistake.
"They took on huge, complicated cases. That slowed down its ability to get its basic infrastructure working right," Mr. Hager said.
Still, employee benefit manager clients, while noting Wellspring at times missed project deadlines, give the outsourcing vendor high marks for flexibility and other strengths.
"They have a willingness to work with us and be flexible in meeting our requirements. They have a commitment to technology that supported a self-service environment," said Sue Wombacher, director of benefit services at U S WEST Inc. in Englewood, Colo. U S WEST outsourced administration of its health and welfare plans to Wellspring.
James Bronson, Sears' vice president of benefits in Hoffman Estates, Ill., said he was impressed with Wellspring's systems capabilities.
"Overall, we have been pleased," he said.
Sears is using Wellspring to outsource administration of its defined benefit pension program, a project it expects to complete this summer.
Watson Wyatt's problems in the outsourcing business are just one facet of the changes buffeting the industry.
For decades, employers have outsourced specific administrative tasks, such as running nondiscrimination tests on their 401(k) plans, to their benefit consultants.
But in the past four or five years, benefit outsourcing has taken on an entire new dimension. Employers, eager to concentrate on their core operations and reduce the sizes of their benefit departments, have turned over to consultants complete administration of their benefit plans.
With the need to constantly update systems, "It does not make sense to do benefit administration yourself," Sears' Mr. Bronson said.
While benefit outsourcing has become a huge growth area for consultants and other vendors, some have 'faltered. Last year, William M. Mercer Inc. largely moved out of total outsourcing, turning over its call centers and defined contribution plan and health and welfare plan administration to Automatic Data Processing Inc. as part of an alliance with the payroll administration company.
In addition, the heavy capital investments that outsourcing demands was a driving factor behind the decision of Buck Consultants Inc. to be purchased by Mellon Bank Corp., the diversified financial services giant.
On the other hand, Hewitt Associates LLC, without the aid of an outside partner, has become the largest and perhaps most successful provider of benefit outsourcing services.
More than half of Hewitt's revenues -- or more than $300 million -- now is generated by benefit outsourcing.