Fidelity,outsourcing,revenues,big,and,growing

Fidelity says outsourcing revenues big and growing

12 Feb 2004 | (Case Study)

Fidelity Investments, which made its reputation by picking stocks, is now getting a third of its revenue with less glamorous things like sending payroll stubs, and expects that business will keep adding to its bottom line.

Boston-based Fidelity, the world's biggest mutual fund company, said it added 1,175 new clients and 2.6 million new employees to its human resources and benefits outsourcing services last year.

As a sluggish economy prompted many employers to try to save money by giving up the tedious task of keeping track of workers' payroll and benefits records, Fidelity and other financial service groups like Mellon Financial Corp. jumped into the business.

"This is very much a core business for us today," Peter Smail, president of Fidelity Employer Services Co. said about the outsourcing business. He added the business now accounts for roughly one third of privately held Fidelity's annual revenue, up from about one quarter a few years ago.

Looking ahead, Smail said the business is expected to keep growing as employers realize they can't compete with the billions of dollars that Fidelity spends on technology every year to offer clients the fastest and best systems to process things like paychecks or health insurance claims .

"Our value proposition is that you outsource to us and we'll take care of the technology over time," Smail told reporters on a conference call.

Analysts said the outsourcing business, which is far steadier than the asset management business because it does not depend on the stock market's movements, could make up as much as half of Fidelity's revenue in five years.

"There is something to be said for a company like Fidelity where there are several legs to the stool," said John Bonnanzio, editor at independent newsletter Fidelity Insight. "There is definitely a benefit to being an investor with a fund company where they are not relying exclusively on money management," Bonnanzio added.

Last year, Fidelity said it added automaker General Motors Corp. and pharmaceutical company Novartis to the client roster after signing up computer major International Business Machines Corp. in 2002.

In the coming years, Fidelity and rivals hope to attract even more employers trying to cut costs. Some analysts have said companies can save as much as 10 or 20 percent by outsourcing such services.

But for the companies that take on the task, there are potential risks to keeping on top of all the numbers.

For example, Mellon in 2002 paid the federal government $18.1 million over the loss of 70,000 tax returns that were either hidden or destroyed by employees at a Pittsburgh processing center operated by Mellon. The scandal hurt Mellon's reputation for processing payments.

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