Principal Financial Group Targets 15 Million Customers

This tech innovator offers workers Web tools for managing their assets and uses database marketing to effectively package products.

Aaron Ricadela, Contributor

September 9, 2006

5 Min Read

Marketing so-called "lifetime funds" to baby boomers is the focus of a deal Principal struck in July with Washington Mutual, which will combine Principal's $28 billion mutual funds business with WM Advisors' $26.4 billion in assets under management. The acquisition is expected to close in the fourth quarter.

Principal also is combining its health insurance, mutual fund, and online banking businesses to offer new health savings accounts, which went on sale this summer. The accounts let employees set aside money on a pretax basis for medical care, without the use-it-or-lose-it restrictions of conventional flexible spending accounts. They're partly enabled by integrating Principal's database with employers' payroll systems and letting customers access the accounts over the Web. As the assets build up, Principal will be able to market bonds, mutual funds, and other products to customers who have purchased health savings accounts, providing higher-return alternatives for their money, says Todd Sutphen, a client executive at IBM who's in charge of sales to Principal. IBM helped Principal design the process that underpins the health savings accounts. "They're at the front edge of this," Sutphen says. IBM supplies mainframe and RISC-based Unix systems to Principal, whose main database of customer information runs on IBM's DB2 software.

Automation Edge

Another IT strength is Principal's ability to automate database transactions to lower selling costs and improve service. Selling to and servicing 100,000 small and midsize companies means IT needs to program for fast response times and high transaction volumes. Scholten estimates the company performs 1 million online transactions each day, and 98% of cash contributions--direct from workers' paychecks--are handled over the Internet.

Fick helps sales reps make their point with Web toolsPhoto Courtesy of Principal Financial Group Inc.

Scholten, 48, started at the company as a Cobol and assembly language programmer out of the University of Northern Iowa. Even then, the company had a reputation for being technically advanced--it used terminals instead of punch cards. "I would guess there are still a few programs with my name on them" on the company's mainframes, he says. During his career at Principal, Scholten has headed technology for nearly every business unit, becoming CIO of the company in 2002. A distance runner who still laces up almost daily, he competed regularly until about two years ago. Now, he runs a few 5K races a year in addition to his workouts.

Despite being a native Hawkeye, Scholten has little taste for Midwest delicacies such as corn dogs and pork-chops-on-a-stick. These days, it's more like curry and samosa: Scholten has been traveling every few months to India, where Principal is expanding; he plans to make his seventh trip this fall.

Principal's international business grew nearly 17% last year, to $604.5 million in revenue, including mutual fund and insurance businesses in India, a longtime presence in Hong Kong, a recent Chinese mutual fund joint venture with China Construction Bank, and operations in Brazil, Chile, and Mexico. Principal managed $6.7 billion in assets outside the United States at the end of last year. In India, it recently opened an office in Pune to complement its Mumbai office. Principal outsources some IT development to Tata Consultancy Services and has hired 50 of its own workers in India. Scholten predicts a large market for retirement benefits in India once regulations ease.

Still, Principal can't take anything for granted. Competitors such as Fidelity Investments, the No. 1 401(k) provider, are moving down into Principal's small- and midsize-business market, just as Principal is moving up to serve larger customers, including the National Geographic Society, Igloo Products, and Montefiore Medical Center in New York.

Principal is a step ahead as one of just a handful of companies that have automated collection of reams of data about employees' age, marital and family status, salary, and benefits. Small companies often store that data in Excel spreadsheets, Intuit QuickBooks files, or on paper, says Todd Eyler, an insurance industry analyst at Gartner. Connecting to customers' payroll and HR systems instead of swapping e-mailed files, faxes, and snail mail provides Principal a big cost advantage, as more insurers reach into the midmarket. "As companies try to grow where the economy's growing, they're looking for a much more transactional approach," Eyler says. "That's a huge technology challenge."

It's one that Principal thinks it has mastered. "Lots of companies are seeing the potential in small and midsize business," Scholten says. "It's an underserved market. We think we have the right technology to serve it."

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