IBM dives into admin pool

The superannuation administration environment just became a little more competitive in Australia with the entry of IBM.

Thanks to the outsourcing deal with Russell Consulting Group announced in the closing weeks of January, IBM has established a toe-hold in the Australian superannuation administration market.

On a scale of one to 10, Russell’s presence in the superannuation administration market probably only rates as a 3.5 to 4, but that does not mean that the entry of IBM on such a relatively modest scale has not caused some ripples in the superannuation administration industry. Far from it.

The speculation rife in the industry over the past two weeks is that IBM’s deal with Russell simply represents a strategic entry point ahead of a larger acquisition down the track.

So who might IBM be looking to acquire? Well a simple break-down of the superannuation administration market in Australia tells you that four companies dominate the arena — Telstra subsidiary, Australian Administration Services (AAS), SuperPartners, Citistreet and Pillar.

Perhaps not surprisingly, most speculation on potential IBM targets has centred on AAS. Why? Because not withstanding its profitability, there are those who believe AAS sits uncomfortably within Telstra and that it is likely to be one of the assets the big telco will look to unload in the run-up to full privatisation.

Commenting on the transaction last month, IBM Australia chief executive Glen Boreham said the deal represented an important step towards IBM’s goal of expanding its consulting and technology presence in the fast-growing financial services sectors around the globe.

“We are delighted to begin our strategic Business Transformation Outsourcing relationship with Russell and welcome Russell employees into IBM,” he said. “We are committed to becoming a leading provider of member administration services to Australian super funds, by leveraging our scale and expertise in Australia and around the world.”

But the speed with which IBM seeks to grow its presence in the Australian superannuation marketplace might also be dependent upon how quickly it beds down its arrangements with Russell Consulting Group, particularly in circumstances where Russell acknowledged in late January that not all of its administration clients had been entirely comfortable about the deal.

Interviewed by Super Review just hours after the deal with IBM had been announced, the managing director of Russell in Australia, Alan Schoenheimer, said that the company had been informing its clients of the move and that “with one or two exceptions” those clients had understood the benefits likely to flow from the transaction.

Schoenheimer then sought to portray the deal as being a “win-win-win” for Russell, Russell’s administration clients and IBM.

However, both Schoenheimer and IBM will well understand that similar commercial transactions in the past have led to the leakage of at least some clients and they can be assured that their competitors will be knocking on the doors of Russell clients asking whether they are happy with the new arrangements.

The stark reality is that IBM is a global information technology giant with precious little experience in pension administration generally and Australian superannuation administration in particular. That is why the nature of the deal with Russell is so important.

Under that deal, IBM is expending $140 million to purchase Russell’s Member Administration Service Centre and that includes its 199 specialist staff. Perhaps more importantly, Russell said that it will be maintaining all client relationship functions.

That seems to mean that IBM will effectively be delivering an administration back-office while Russell seeks to maintain the client interface.

According to Schoenheimer, the decision to outsource to IBM was driven by the reality that superannuation administration did not represent a core business to Russell and, on that basis, it was loathe to undertake the investment required to continue competing in that sector.

“Superannuation administration requires scale and constant technological innovation to stay at the leading edge of member services,” he said. “This deal with IBM gives us the ability to scale as well as access world-leading technological innovation to meet the changing needs of our super fund clients and their members.”

Schoenheimer said that the continued strong growth in the Russell SuperSolution Master Trust had also been a major factor in circumstances where, over the past two years, Russell SuperSolution had transitioned more than 30,000 members into the master trust and was expected to grow to 300,000 members by 2010.

“With the rapid growth in our master trust and other funds, we want to ensure the processing part of our business is able to accommodate growth without compromising the quality of member services,” he said.