As a human resources consultant in the late 1980s, he watched companies flock to managed-care health plans to stem the rampant increases in health care costs for employees. Today, as vice president and director of growth and development for Watson Wyatt Worldwide in New York, Caldarella again sees companies facing 12 to 16 percent increases in health care costs — but this time there is no obvious solution.
"We've seen unprecedented activity in organizations asking for help with controlling costs in their health care programs," Caldarella explains. "Right now, the sense of urgency is going up, because in the absence of a solution there's going to be cost shifting to employees."
The foreboding health care crisis is one of several re-emerging economic conditions fueling the human resources consulting market in the United States. High-profile attention given to executive compensation scandals and risky stock option plans, coupled with warnings of an imminent labor shortage, have buoyed the human resources consulting market in an otherwise dismal year for the consulting industry.
For most of 2001, while the rest of the consulting profession suffered during the economic slump, the average human resources consultancy grew at a relatively healthy clip, averaging about 8 percent growth, according to Kennedy Information Research Group. In 2002, growth slowed to about 3 to 5 percent, with clients' budgets slashed and projects related to culture and communications put on hold. Now some of those projects are coming back to life, and many human resources consulting firms are forecasting continued growth in 2003.
"HR consulting, and particularly benefits-related consulting, has outperformed the overall consulting space in 2002," says Kelly Flynn, an analyst at UBS Warburg in New York, who expects a modest recovery for human resources consulting in 2003. "Stock market turmoil and recent high-profile developments in pension-related issues have caused companies to seek more consulting services."
With human resources issues clearly threatening the business bottom line, 2003 could be the year that human resources executives "step up to the plate, " Caldarella says, "after years of rhetoric over their seat at the executive table and their input to strategy." But some industry-watchers are saying "not so fast," human resources executives will have to wait. "Corporate executives still have other issues, like growing revenue again," says Greg Gould, an analyst at Goldman Sachs & Co. It is true, though, that human resources departments have taken on a greater cost-cutting role, he adds.
Four Drivers
With corporate cost-cutting as their overriding theme, human resources consultants face four business drivers in 2003.
1. The Health Care Crisis. With health care costs rising as much as 20 percent, human resources executives are looking for practical consulting, says John Mathis, analyst at Goldman Sachs & Co. "How do I get costs out and take advantage of new developments in areas like consumer-driven health care plans, where I push more of my health care costs out to employees?" Concerning health care providers, "How can I reorganize my plan so that I'm reducing my cost profile?"
In response to client demands for health care benefit consulting, Watson Wyatt has added more "senior players" to its 1,630 employees in the benefits area and has reorganized the practice under the leadership of Maureen Cotter, who took the position in late 2001. The firm expects its health care and retirement benefits consulting business, which represented 59 percent of revenues in 2002, to grow another 6 to 7 percent in fiscal 2003, which ends June 30.
2. Imminent Labor Shortage. "If you thought the labor markets were bad in the late '90s, what we're going to face in the end of the decade is going to make the '90s look like the good old days," says Caldarella.
By 2010, Watson Wyatt expects a surplus of as many as 100,000 jobs over workers to fill them. As labor becomes a greater concern in a company's business plan, human resources executives will need to have tools for devising sound workforce planning models. In response, Watson Wyatt is refining its workforce planning practice and will be rolling it out to larger audiences. Caldarella expects to redeploy consultants to this area as business grows, rather than hire new consultants.
3. Corporate Scandals. High-profile cases, such as disclosures of GE Chairman Jack Welch's generous compensation plan brought to light during divorce proceedings, have companies clamoring for executive compensation consulting. Now, proposed regulations by the International Accounting Standards Board concerning stock option accounting has companies scrambling "to deal with the real or potential changes" in that area, according to Don Lowman, a managing director at human resources consulting firm Towers Perrin in Stamford, CT. The firm expects demand for executive compensation consulting to increase by double digits in 2003.
Meanwhile, the Enron scandal brought to light the need for accountability by senior and middle managers.
At the HayGroup in Boston, more than half of the consultants assigned to merger & acquisition projects and helping organizations upsize or manage growth have been shifted to a new program that the firm calls Creating an Accountable Organization.
"We're seeing a trend toward getting a lot more clarity about accountability at top levels," explains Sylvia DeVoge, vice president for integrated consulting and head of HayGroup's strategic development group. "Driving that is the Enron debacle — making sure there's real clarity of accountability at top levels. The other thing is value. If you look at senior executives and middle managers at organizations today, they want to be much clearer about the size of jobs, the accountabilities, and whether that represents value-add for the organization."
Executive coaching plays an increasingly valuable role with accountability, DeVoge explains, so the firm is adding executive and team coaching to many of its projects. "Leaders are faced with a really rocky, uncertain economy; biz issues and problems; downturns in their businesses; ethical concerns. The fact is that they really do need to lead in different ways."
The idea has caught on at some traditional consulting firms, as well. "The pressure of structurally reducing costs, finding ways to enhance revenues, and having incredibly high integrity and transparency in providing support as a leader is unbelievable. When I think about Wall Street executives and the pressure they're under, I think consultants have got a very strong role to play," says Bridget Van Kralingen, partner in the wholesale banking practice of Deloitte Consulting in New York, referring to Deloitte's new campaign to become "advisor" to executives as well as technology consultant.
The HayGroup calls the trend "wisdom consulting," part of a fundamental shift in the consulting industry away from large-scale projects staffed by junior and midlevel consultants, and toward smaller projects driven by a few senior consultants who truly are trusted advisors.
"We've all acknowledged that it's a new game. The whole way consulting is contracted has changed — the value proposition, more coaching, more working directly with senior leaders — all of that," DeVoge says.
4. Retaining Top Talent. Though it's easy to keep top talent in a down market, companies are becoming more aware that those top performers might hit the road when jobs become more plentiful.
In an "Employee Trust Survey" given last fall to employees at 300 corporations in the United States and Canada by Towers Perrin, Lowman and his colleagues were surprised to find that employees didn't have a crisis in confidence in top management — even with all the news of scandals, layoffs, and economic uncertainties. Rather, they are more pessimistic about volume of work, work/life balance, and their career paths. "People are being asked to do more, and fewer people are doing it. But feedback also shows that people don't see a lot of future in their careers, and management is not paying much attention to them," Lowman explains. "They're feeling increasingly disengaged with their work and from the company they work with. This is going to be an increasing problem that many companies have if they don't pay greater attention to employees when the economy picks up and there are more choices."
The Outsourcing Caveat
For many human resources firms, impressive year-end results are due largely to benefits outsourcing revenue, which can make up as much as two-thirds of a firm's overall total.
Towers Perrin expects 15 to 20 percent revenue growth in its nonretirement benefits outsourcing practice, after landing several big outsourcing clients in late 2002.
At Hewitt Associates Inc. in Lincolnshire, IL, net revenues jumped 16 percent to $1.72 billion in fiscal year 2002, which ended September 30. Two-thirds of that revenue came from its outsourcing practice, which grew 17 percent for the year, thanks in part to Hewitt's acquisition of the actuarial and benefits consulting business of U.K.-based Bacon & Woodward.
Organically, the net revenue grew just 4 to 5 percent, which was "good and as expected," according to Mathis, who expects Hewitt's organic growth rate to remain the same in 2003.
Hewitt's impressive numbers were also bolstered by its initial public offering in June that raised $212 million — no small feat considering that Hewitt began trading on the same day that WorldCom imploded. "I think it's got to be one of best-performing initial public offerings of the year," Mathis says.
Mathis believes that firms which offer consulting as well as solutions, including outsourcing, will have the edge in 2003.
With human resources services and outsourcing projected to grow more than 20 percent in the next five to 10 years, "the bigger strategy question for human resources consulting is how they are positioned in terms of offering solutions," Mathis says.
A large company pays about $1,500 per employee per year for human resources administration services, he explains. Payroll processors represent about $300, even including add-on services. Benefits outsourcers, like Hewitt, Fidelity, and others, represent another $300. The balance of services needed, such as recruiting, training, and employee relocation, is fragmented through many smaller firms. Firms that can offer services in these underpenetrated or underutilized human resources offerings stand to see double-digit growth, says Mathis.
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