Watson Wyatt and the ABCs of Going Public

Watson Wyatt's performance since it went public on Oct. 11, 2000, supports Haley's conviction. The company expects to match its 10 percent to 12 percent growth rate of recent years, which resulted in revenue of $624.6 million in fiscal year 2000. The firm's fiscal second-quarter profits, released in February, rose 20 percent, and Watson Wyatt's shares traded in the $21 range — more than 65 percent higher than their IPO price.
"But we're not going to worry about what the stock price is day-to-day or even week-to-week," Haley adds. "At the same time, we feel that the market, taken over a longer period of time from a broader perspective, gives you useful feedback about whether your strategy is fundamentally right or fundamentally wrong."

There are several reasons to which the company attributes its success as a public organization so far, including its financial performance, its focus on a few key businesses, its broad private ownership, and the fact that it had been publicly reporting its financials for the past decade. Chief among the reasons, though, is what Watson Wyatt does: "human capital consulting." The company's consulting practice focuses on the links between employee practices and shareholder value. In fact, its Human Capital Index™  research tool has found its way beyond human resources executives into the CEO's and CFO's office because of how well it connects HR issues to the bottom line.

Large Clients

Founded in 1946 as an actuarial and benefits consulting firm, the company took its current global form in 1995 following a merger with R. Watson & Sons, an actuarial, benefits, and human resources consulting partnership based in the United Kingdom. Today, Watson Wyatt Worldwide consists of Watson Wyatt Partners, a private company that operates a dozen offices in Europe and Africa, and Watson Wyatt & Company Holdings, the publicly traded company based in Bethesda, MD, with 5,800 employees in North America, Latin America, and Asia.

In 1997, Watson Wyatt & Company conducted a comprehensive strategic review of its practices and business lines. In doing so, the firm determined that it was better to focus on offering a few best-of-breed services rather than spread itself too thin among its Fortune 500 clients such as General Electric Company, General Motors, Lockheed Martin Corporation, Cisco Systems, and Microsoft Corporation.
In the past three fiscal years, none of the company's clients accounted for more than four percent of Watson Wyatt's consolidated revenues. (Clients are billed at an hourly rate about 60 percent of the time, and on a fixed-fee basis for the other 40 percent.) "There are a lot of consulting firms that built their strategy around one-stop shopping," Haley says. "But our view is that these are sophisticated buyers of service. Just because you may have access from providing one service to them, you don't get to sell them other services unless those services are also world-class."
As a result of the strategic review, Watson Wyatt in 1998 extricated itself from the benefits administration outsourcing business, ending its participation in Wellspring Resources LLC, a joint venture with State Street Bank and Trust Company that had been formed in 1996. It was a costly but necessary move — the company absorbed an after-tax charge of roughly $60 million as a result — and, Haley says, further reason to go public.
"It was rather a traumatic experience for the company," he admits. "If we had been a publicly traded company rather than a private one, we would have been forced to deal with the Wellspring issue several years before we actually did. If we had done that, we would have been better off."
Watson Wyatt then decided to concentrate its consulting offerings on its three strengths, which now are the firm's three business lines: the benefits group, the human capital group, and the e-HR (formerly HR Technologies) group.

Within those three lines, Watson Wyatt consultants provide strategic planning, research, software implementation, and actuarial (surrounding retirement plans within the benefits area) services. The largest practice, benefits, is responsible for about 60 percent of the company's revenues. The remaining two lines are responsible for about 20 percent each, although e-HR is the fastest-growing line of business.
Through its benefits area, Watson Wyatt focuses on its clients' retirement and health care plans. In tackling the actuarial issues surrounding retirement plans, consultants conduct valuations, determine how much money clients need to contribute to their plans, and help identify optimal tax deductions and accounting costs. "With health care, we help employers with the design of their plans, with provider negotiation and selection, and with actuarial work in terms of helping them cost the plans," Haley notes. Watson Wyatt also helps large companies select investment managers to manage the assets associated with health care plans, and offers some broad asset allocation direction as well.
The company's human capital practice is "all about attraction, retention, and motivation of employees," Haley says. That translates to designing employee and executive compensation plans and strategic reward programs such as profit-sharing. This group also provides consulting services that help client companies effectively communicate their benefits and rewards programs to employees.
The e-HR practice concentrates on helping clients use technology to administer their human resources programs. Watson Wyatt e-HR consultants advise clients on the administration of HR programs, assists with outsourcing decisions, and helps select and implement HR-related software packages. "A lot of the work in this area involves moving the delivery of HR services to the Web," says David Marini, 44, global director of Watson Wyatt's e-HR group. "So, consultants can get involved on several different levels, including consulting on high-level strategy, project management, process reengineering, or programming."

Pick Your Path

Diversity is a staple of the Watson Wyatt consulting experience. "Each individual can really develop the career path he or she wants," Marini notes. "Consultants can cross lines of business within one of our three groups, and they can move from practice to practice. We're not a hierarchical organization." Marini says that managers often return to consulting because they want to work directly with clients again. "In some environments, that might be considered a demotion. In our environment, it's considered a normal part of the course."
That sense of self-determination has been a valued component of Watson Wyatt's culture for many years. "If you look at our history, you'll see that we're not the most centrally managed company," notes Haley. "We emphasize respect for the individual consultant. We make sure we equip them with the right tools and quality processes, but we make sure we don't overburden them with those tools and processes. That notion has survived since the beginning of the company." And the cultural preservation continues through large-scale events, like the annual retired board of directors dinner (at which past and present board members swap anecdotes, tap each other's insight, and share visions), and more personal activities, like Haley's "Communication Days."

In August 1998, Watson Wyatt announced that Haley would succeed his predecessor, A.W. "Pete" Smith, Jr., on January 1, 1999. "I thought, 'This is nice, because it gives me time to go to our offices, talk to our people and gather input,'" Haley recalls. "But I realized that if I only made the rounds during those four months, I could wind up basing what I did for the next several years on the information I collected during a few months in 1998. So, I started Communication Days."
Haley dedicates one to two days a month to traveling to different Watson Wyatt offices and meeting with the consulting teams. He values the opportunity to share his message during those sessions, but says that the question-and-answer sessions with consultants are what make his travels worthwhile. "I think it's fascinating," he says. "There is great power in telling people why you did what you did."
The open communication also helped smooth the organization's recent transition to a public company. Prior to the IPO, Watson Wyatt had been reporting its financials as a public company. While other private-turned-public organizations must work through delicate issues, like making available their executives' salaries, Watson Wyatt had been releasing executive compensation figures for 10 years (in 2000, the total compensation of the firm's top five executives ranged from just under $1 million to Haley's $1.9 million). Watson Wyatt also had been owned by a diffuse group of several thousand private shareholders, who, Haley notes, voted to approve the IPO plans virtually unanimously.

The Great HR Debates

Now that the company is public, Haley stresses that its mission remains the same. Haley and his senior management teams still want their new hires, whether they hail from four-year programs, business schools, or other consulting firms, to be smart, nice, and team players. Smart, he says, translates to a strong record of achievement in school and, equally important, the ability to learn quickly.
"The entire human resources consulting area is changing very rapidly," Haley notes. "We want people who can take a position in some of the great debates going on around the world in the area of human resources planning."
Haley wants nice consultants because those are the ones who establish the "right kind of relationships" with clients. "And we want people who are team players," he adds. "We've learned that you don't deliver very effective service to clients when you build it all around a star system. You need to have people who have a lot of talent, but who can function effectively as part of a team. Team consulting really adds the kind of value we're looking to deliver to our clients."

Sidebar: FirmFacts

Watson Wyatt & Company
Headquarters: Bethesda, MD
Year founded: 1946
Number of offices: 60 (in North America, Latin America, and Asia-Pacific)
Number of consultants: 4,200 
Revenue: $687 million (projected, fiscal year 2001)
Growth rate: 10–12 percent

Building a Career at Watson Wyatt

Consultant: David Marini, global director of e-HR group

Practice area: Formerly known as the HR Technologies group, Watson Wyatt's e-HR group is the company's fastest-growing business line. The group's second-quarter revenues for fiscal year 2001 posted a 19 percent gain over revenues for the second quarter of fiscal year 2000. The practice focuses on using technology to administer human resources programs, although Marini says that the discipline is "moving into areas that have to do with delivering information and knowledge to employees within an company."

On what he does: "Today, companies are pursuing different initiatives under the heading of knowledge management. In order to continue to increase productivity, companies are relying on automation to bring more information and knowledge to employees. And that process is influenced by the HR organization because that's how you service your employees.
"If you take a look at demographic statistics, you'll see that there is going to be a shortage of labor for the next 15 to 20 years. We're in the decade of the employee. And that creates retention issues where companies may want their employees to have longer careers than they may have today. We look at those trends and issues, try to figure out what's next, and help our clients anticipate those changes."

Why he likes Watson Wyatt: "I don't think the technical competence of the people I work with on a day-to-day basis can be topped. Second, we have a culture that is built around people and the roles they perform rather than around hierarchical issues. Third, I like the ability we have to look at the next strategic issues that are going to hit workforces across the world. Instead of reacting to trends, we're the one that sets the pace for the future."