Back in July 2008, when we began our fiscal 2009, no one could have predicted what was about to unfold.
But we ended the fiscal year by posting our second-best results ever — just slightly below our record fiscal 2008. Given the economic times, this was a significant achievement.
Let me put our numbers in perspective. Our revenues in fiscal 2009 were $1.68 billion, compared with $1.76 billion for fiscal 2008. Although this is a reduction in dollar terms, much of our revenue is derived in other currencies and has been affected by the strength of the dollar.
Removing the impact of the change in exchange rates, our revenues actually increased by 3 percent. In terms of profits, we earned $3.42 per share this year, only slightly below the record $3.50 per share we earned in fiscal 2008.
More than anything, these results reflect our continued focus on our clients. In a turbulent period, our clients turned to us for help in getting through the downturn. They needed new thinking for a new world and advice they could trust.
And our people delivered. As a result, our client relationships have grown even stronger. In fact, as I write this, we are preparing to host the largest-ever gathering in the 12-year history of our Client Conference. I think this speaks to the power of getting together with friends and colleagues and sharing ideas, especially in difficult times. It’s also a testament to the community we’ve built together through the years.
Of course, our future holds the promise of our planned merger with Towers Perrin. This move will broaden our global reach and enable us to offer an enhanced range of services. It will change the landscape of our industry and allow us to serve our clients around the world with an even deeper pool of talent.
Our clients face far more complexity and risk today than ever before, and their margins for error have shrunk dramatically. That’s the new normal for business. In this new world, organizations need to see all sides of a business issue. For example, in the executive pay area, this means more careful balancing of rewards and risks. It’s similar for insurance companies and pension schemes. We need to help our clients better define their tolerance for risk and then ensure they’re getting a good return for the risks they take.
In this new world, our clients will need advisors with a unique combination of skills and expertise. In areas such as risk and financial services, benefits, investment and human capital consulting, we’ll have formidable depth. We are well positioned for the future.
Now, some details about our consulting segment results.
Revenue in our Benefits Group declined 3 percent (but increased 4 percent constant currency). Our large, solid base of recurring retirement services — which clients need in all economic climates — kept declines to a minimum. The economic turmoil raised complex financial, risk and demographic issues for pension plan sponsors, who came to us for advice on funding goals and plan design. In Europe, European Pensions Magazine recognized our service to pension funds by naming Watson Wyatt the Consultancy of the Year, for the second year in a row. And in the United States, our core retirement services continued to do well, as employers wrestled with decisions critical to the viability of the country’s voluntary retirement system. This work in the larger markets helped offset modest declines in smaller ones and softness in our health care consulting business.
Investment Consulting Group revenue decreased 5 percent (but increased 10 percent in constant currency). Overall, we’re pleased with how the group managed through a very difficult environment. At first, illiquidity in some markets prevented us from executing certain client projects. As the year progressed and the economy worsened, we advised clients to defer making some investment changes. This advice was right for our clients’ long-term success but had a negative impact on our revenues. Later in the year, demand for strategy projects increased, and we have helped clients examine their risk tolerance and manage their risk through portfolio diversification and other means.
Revenue in our Human Capital Group decreased 12 percent (8 percent constant currency). The group got a good start to the year, due to exceptionally strong demand for advice on executive compensation. As the economy turned, however, we saw the demand weaken, and other discretionary work dropped off through the third quarter. But by year’s end, we saw an increase in proposal activity as the business landscape continued to shift. With smaller workforces now, many companies need to focus on aligning their structure, strategy, systems and culture for the best results.
Our Technology and Administration Solutions Group revenue grew 3 percent (11 percent on a constant currency basis). Much of the increase was due to clients we won in the United Kingdom the previous year that began generating revenue in fiscal 2009. In the United States, some clients deferred projects due to the economic downturn, but at the same time some existing clients brought us additional work. Globally, this group has excellent client retention, creating a stable platform of revenues. And our administration solutions remain very compelling. They’re helping clients control costs and increase productivity — both of which have become more crucial to companies’survival over the past year.
Insurance and Financial Services Group revenue decreased 1 percent (but increased 13 percent constant currency). Clients in this segment have been hit hard by the economic crisis. Some sought our help on M&A projects. And other consulting opportunities arose due to the turmoil, particularly around the management and reporting of solvency. But some clients found it necessary to defer discretionary projects or take them in-house. The overall level of revenue growth reflected our flexibility in meeting changing client needs.
As employers continue to make adjustments, there’s sure to be a lot of attention given to two important topics that affected our clients during the past year: executive pay and the adequacy of retirement programs in light of the economic meltdown.
Executive pay has been in the news for two reasons. One is the role some feel it played in exacerbating the economic crisis. We agree that executive pay programs need to adequately factor risk taking into the equation. But they also must deliver appropriate pay for performance.
To that end, we developed the PayRiskScore, a research-based tool companies can use to identify the pay components most likely to correlate with risk-taking behavior. Our findings questioned the conventional wisdom and will help our clients find the right balance.
The other part of the debate centered on what some critics say is a perceived conflict of interest in executive pay consulting engagements. The argument is that multiservice consulting firms have conflict built in, and that they might recommend higher pay than they should to secure additional engagements.
There are two things wrong with this argument. First, three separate academic studies have found pay levels are the same or even lower at companies using multiservice firms for executive compensation consulting than at those using single-line firms. Second, we think the concerns about multiservice firms are ill-founded. Multiservice consulting firms make recommendations based on research and data, and are unlikely to risk their reputations by recommending pay levels out of line with the market.
Also, a multiservice firm that provides a particular client with executive pay consulting and other services might have revenue from that client that is less than 1 percent of the firm’s total revenue. At a boutique firm, however, executive pay consulting could represent 5 percent or more of the firm’s total revenue. We think the multiservice-line argument is a red herring. If the controversy about conflicts continues, we would like to see the government restrict the overall size of the relationship — for example, prohibiting any one relationship from representing more than 2 percent of the firm’s revenue — rather than focusing on the mere fact that multiple service lines are involved.
The economic crisis has also brought needed attention to the adequacy of retirement programs. It exposed latent employer risks with defined contribution plans — in which the amount of the employer’s annual contribution is specified — and made it clear that DC-only approaches aren’t a perfect answer. For example, such plans make it harder for companies to predict who will retire and when. Also, employees who rely mostly on DC plans are more likely to worry about their financial security — and this creates an additional drain on morale and productivity.
There’s no doubt defined benefit pensions aren’t as prevalent as they once were — in some markets more than others. But we believe they offer several distinct positives. They provide employees a guaranteed stream of retirement income, which reduces risk and uncertainty. They also can deliver benefits more cost-effectively than DC plans, and they can give employers more influence over who retires and when. On the negative side, they can generate unfortunate levels of volatility. Investment strategies such as liability-driven investment — many of which Watson Wyatt pioneered — can reduce the asset/liability mismatch considerably. But we believe regulators, especially in the United States, can do more to increase plan sponsors’funding flexibility during tough times.
As I said earlier, I think we can take real pride in the results we achieved in fiscal 2009. I’m grateful to our 7,700 associates around the world for their extraordinary focus and discipline this year and for their unwavering commitment to our clients.
That has been — and will continue to be — the cornerstone of our business. As always, it will guide us as we adapt to the new world of business, along with our clients.
In many ways, the Towers Watson combination is the logical next step in our long-term strategy. The merger markedly accelerates our progress, bringing together two great names with long, proud histories.
It’s a strategic move that exemplifies our new way of looking at things. I’m very optimistic about the potential for innovative ideas from our combined talent — new thinking for what has become an entirely new business world. The type of thinking that will raise the standards in our industry higher than they’ve ever been and will serve our clients in new and countless ways.
I look forward to our continued collaboration as we enter this exciting new phase.
Sincerely,
John J. Haley
