Multi-country BAO deal signings saw a sharp increase between 2011 and 2013
The Benefits Administration Outsourcing (BAO) market grew at 6% from 2012-13; within BAO, the H&W administration market grew at a much faster rate, albeit on a lower base, versus the pensions administration market
In H&W, the upper-end of the mid-market saw increased adoption in 2012-2013; in pensions, mid-market formed ~60% of the deal activity in 2012-2013
Several second-generation buyers switched service providers in 2013, causing significant churn in the BAO market; this infographic explains why
More than 60% of BAO deals have an offshoring component
Recently, Aon, a leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services, announced its decision to move its corporate headquarters from Chicago to London and released its Q4 2011 results.
Moving Headquarters
Aon has stated two primary reasons for the move – to gain greater access and proximity to emerging markets in the Middle East, Asian Pacific, and to leverage London’s position as a key hub of insurance and risk brokerage business.
However, we believe an additional reason that is clearly at work but not explicitly mentioned by Aon is the tax benefits it will realize. According to the company’s filings, Aon’s global tax rate could fall to 26 percent from an expected 30 percent for 2011 due to the United Kingdom’s favourable territorial tax regime that provides tax exemptions for dividends and gains derived from non-U.K. trading subsidiaries. In addition, the move will grant Aon access to US$300 million in excess cash abroad that will not be subject to U.S. taxes.
There is some buzz in the marketplace that the move will have a negative impact on some of Aon’s U.S.-based clients. We believe that the actual business impact will be negligible. Most of its clients have an increasingly global footprint and unless there is a material change in service provision or leadership attention, a client is not likely to terminate its relationship with Aon. Additionally, only about 20 people at the leadership position will be affected by this move.
Net-net, Aon’s decision to move headquarters is both strategic and financial. Further, the strategic elements seem to focus more on its Risk Solutions business rather than HR solutions business.
Q4 2011 Results
In its February 3 earnings call, Aon’s CEO Gregory Case announced that Aon’s fourth-quarter and full-year results reflect continued progress and positioned the firm for increased growth in 2012.
Focusing specifically on the earnings call’s remarks related to its HR solutions, the business unit Everest Group primarily tracks and analyzes, our takeaways are:
Healthcare exchanges and HR BPO emerging as key growth areas. Aon is likely focusing investments in these areas to further accelerate its recent momentum in these offerings. Our analysis reflects healthcare exchange is an area with significant opportunity and is currently underserved from the supply side. Within the HR BPO business, beyond multi-process HRO (which itself is underserved given limited number of credible players left), we expect Aon to also increase its focus on single process HRO (SPHRO) areas, such as Recruitment Process Outsourcing (RPO), Learning Services Outsourcing (LSO), etc. However, it is going to face stiff competition from incumbents in these fast-growing SPHRO areas.
Challenges in the core benefits administration business. Here, Aon is facing a pricing war from disruptive competitors and has seen some client loses as well. Our analysis in the latest BAO study suggests that while Aon stills leads the overall market, some of its key competitors are growing faster. To be able to maintain its leadership position, Aon has to offer the right balance of cost and quality through innovative solutions. Its strategy to to push for high value-added point solutions, such as dependent eligibility audits and absence management services, is a step in the right direction. However, it can realize greater impact by combining these in its overall benefits administration value proposition and offering to raise the game and address the total cost of benefits question (compared to only operational cost of benefits administration).
Increased focus on mid-market. With pricing pressure and other challenges in the larger end of the benefits administration market, Aon is trying to find its next area of growth in the mid-market. We see Aon addressing this in two primary ways:
Expansion of international footprint. As the workforce becomes more global, Aon is looking to expand its footprint and solution to meet client needs. However, given some of the debacles on the global multi-process HRO front in the past, we believe the company will be much more thoughtful in terms of its approach compared to the past.
Greater leverage of global sourcing. Given the stated objective to realize higher operating margin, we expect the usage of global sourcing to continue to increase in Aon’s outsourcing business
Clearly, things are afoot at Aon. Its ability to execute some of these strategic changes will determine its success.
“The old are in second childhood” – Aristophanes
Although the benefits outsourcing market (BAO) – one of HRO’s oldest – may seem passé, it’s currently displaying the kind of dynamism typically associated with a younger market. Indeed, in the last year it has continued to innovate and evolve, driven in large part by the U.S. healthcare reform.
More than a year back, President Barrack Obama announced the Patient Protection and Affordable Health Care Act (PPACA). Against the backdrop of the act’s first anniversary, the market still seeks answers to impending questions: Has the market changed? Are buyers still skeptical? Do they now fully understand the implication of these changes? How has service providers responded to the reform?
Everest Group’s just published BAO Annual Report provides a comprehensive view of the BAO market and the impact the reform is having on all parties. So let’s take a quick look.
The study showed that the BAO market grew at a healthy rate in 2011. A closer look at this market reveals that the health and welfare (H&W) market is growing at a much faster rate, albeit on a smaller base, compared to the pension administration market. As the healthcare reform is the main driver behind the growth of H&W outsourcing, this truly indicates the extent to which the healthcare reform is fueling the growth of the overall BAO market.
The healthcare reform surely brought greater access to healthcare for Americans but what for employers? For employers, the reform has created greater compliance requirements, increased administrative burden, and mandates better information delivery to employees. While in 2010, employers were in a wait-and-watch mindset, they have now taken a front seat and begun to analyze the implications and imperatives of the reform. In today’s uncertain economy, many employers are struggling to maintain a balance between new requirements and the soaring healthcare costs, which they believe will increase further due to the PAACA’s auto enrollment provision. Additionally, many employers are realizing they lack the in-house expertise to steer through the reform. All these concerns are spurring them to seek outside assistance to navigate through the complexities of the reform.
On the other hand, the PAACA has created a pool of opportunities for BAO service providers and they are making significant organic and inorganic investments in order to capitalize on them. First, service providers are enhancing their consulting capabilities to help employers align their benefits strategy with reform’s requirements. For example, Mercer acquired Mahoney & Associates and ADP established a strategic advisory services group. Second, service providers are making technology advancements to provide better employee communication, decision support tools, online/self-service tools, and so on. The high rate of M&A activities in 2010-2011 was a result of service provider’s efforts toward strengthening their H&W capabilities, ala ADP’s acquisition of Asparity Decision Solutions. Net-net, service providers are rapidly ramping up their H&W value proposition to appeal to buyers and “make hay when the sun shines.”
Although the market has responded well to the healthcare reform, some organizations believe that the 2012 election will have an impact on the reform, driving a wait and see stance. They will continue with their current benefits strategy until 2012, and focus on tactical ways to reduce healthcare costs, remain competitive, and provide better benefits services to their employees.
The clock is quickly ticking to 2014, the year in which PAACA will be in full swing. And of course we’ll be keeping you informed on how the regulations are affecting change in the BAO market, including whether the buyer will choose “play or pay.”
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