SHARE:
Palmer's Progress
Indeed, Palmer doesn't have much time to dwell on the past. As chief executive officer of Wellspring Resources, a comfortably capitalized but unproved provider of employee benefits administration outsourcing, he's focused on carrying out an ambitious business plan. He's convinced it will save large corporations buckets of money and transform the way American workers deal with their pensions and other employee benefits.
--
Two big investors
Wellspring is a 50-50 joint venture of State Street Global Advisors, one of the country's biggest investment advisors with $271 billion under management, and Watson Wyatt Worldwide, a leading designer of pension plans and human resource consultant, based in Washington, D.C. The pair hopes to tap into a growing trend among corporations to outsource more and more of the administrative chores of their employee benefit plans.
Increasingly, U.S. companies are focusing more of their resources and capital on their core, revenue-producing businesses, while they farm out support functions to contractors like Wellspring.
"We've seen a significant trend toward benefits outsourcing," says James Phelan, a senior vice president at Boston-based State Street who helped create the Wellspring venture. "We view this as a potentially large market." As pension and health care plans have become more complex, employers are eager to outsource their benefits management to specialist firms, which can spread the high cost of the necessary computer systems over thousands of workers at numerous companies.
A recent survey of large companies by Cerulli Associates, a management consulting and research firm in Boston, found that employers are looking for employee benefits packages that offer better service and more information.
Total benefits outsourcing has just recently begun to attract interest from large money managers such as State Street. Fidelity Investment Retirement Service, a unit of the mutual fund mammoth Fidelity Investments, turned heads in 1994 when it began administering the employee benefits for the papermaker Mead Corp. "It was the first significant client brought in by a non-employee benefit company," says Glen Casey, a consultant at Cerulli Associates.
For big investment firms, getting into benefits management is as much a defensive play as a way of generating new revenue. The self-directed 401(k) pension plan market is now about $650 billion. It's expected to top $1 trillion by the end of the decade. Fidelity, Vanguard and State Street presently control about one-third of the market. No one's market share is guaranteed, of course; big employers can drop one money manager for another. But, asserts Casey, if a money manager can establish additional ties to large corporate 401(k) clients through plan administration, those clients "might be less likely to unwind" the relationship. Consequently, competition among large investment firms is expected to intensify. Merrill Lynch and American Express are said to be eyeing possible entry into the employee benefits outsourcing business. Executives from these two firms will no doubt be following Palmer's progress at Wellspring.
State Street and Watson Wyatt are betting $25 million each that Palmer will make a success of Wellspring. Most of that start-up capital will be used to develop technology, Palmer says, to track and administer benefit plans under Wellspring's management and to give employees of client firms instant access to their accounts. Prior to Palmer's arrival at Barnett in 1990, the banking company was a technology straggler. It had a primitive central customer information system, and it couldn't readily determine if a checking-account customer also had a home mortgage. Bank officers at one Barnett branch couldn't tell if a loan applicant had been turned down at another branch.
"It was scary," recalls Palmer.
--
Smooth veneer
Improving Barnett's technological capabilities was an important part of the bank's growth strategy. Like most commercial banks, Barnett had seen income from its interest rate margin - the difference between what it charged borrowers and what it paid depositors - erode as Wall Street firms joined the competition to manage people's money. Technology would enable Barnett bankers to cross-sell more fee-income services to existing customers. "Barnett made significant strides in developing technology," Palmer says.
Palmer manages to avoid being pegged a technocrat by disguising his technological talents behind the smooth veneer of a marketing executive. True, he started his career as a computer programmer in 1966 at First Fidelity Bank in Philadelphia. But by the time he left in 1989 for Washington, D.C., to work as a consultant, he was vice chairman in charge of technology as well as marketing.
The consulting stint at Furash & Co. was short-lived, interrupted by a call in late 1989 from Shearson Lehman Bros. Like other Wall Street firms, Shearson was reeling from the Oct. 19, 1987, stock market crash. Among other problems, Shearson's technology costs were way out of line with revenue, the result of a system developed to handle a much heavier number of trades. Palmer's solution: whack costs, including reducing the computer systems staff from 800 to 430, while improving efficiency.
Hired by Barnett to oversee technology, Palmer eventually added responsibility for retail banking, where, among other things, he directed the bank's recent entry into supermarket banking by teaming up with Publix. "Jon Palmer comes with a wealth of experience in technology and service," says State Street's Phelan. "We thought it was a perfect match for what we were looking for." At Wellspring, Palmer is expected to build, in Phelan's words, the "new service delivery platform for the year 2000."
--
Deals with Rockwell, NYNEX
Wellspring's information technology system development group is in Washington while Jacksonville will serve as the new company's headquarters and customer service center. The company has 250 workers in Jacksonville now, and Palmer expects the number to grow to 1,000 over the next four years.
Wellspring's target market is quite focused: U.S. Fortune 100 companies with 20,000 employees or more spending $3 billion to $5 billion a year on their employee benefits plans. "It's a small market in terms of the number of companies but we can dominate it," predicts Palmer, who feels confident that Wellspring can reduce its customers' employee benefits administration costs by 50% within three years. In the meantime, Wellspring has signed on five big name customers. Major clients include Rockwell International, NYNEX and Westinghouse Electric. Smaller deals are in the works with AT&T, Federal Express and IBM.
Snagging even a portion of IBM's benefits business would give Wellspring a big boost. Not only is the name magical, but IBM has long boasted a generous benefits plan that until now has been internally managed. Should IBM shift administration to Wellspring, it would carry "a fairly significant implication" for the fledgling industry, says Casey, the consultant.
Wellspring's annual revenue now runs between $25 million and $30 million, which Palmer confidently predicts will double every year for the next three. If so, Palmer's progress will be closely tracked not just by his chums across the street at Barnett Banks but also by the increasing number of competitors in this new and growing industry.
