Experts in the global services terrain

On July 27, Israel-based Teva Pharmaceutical announced the acquisition of Allergan’s generics business unit for US$40.5 billion in cash and stock, consolidating its position as the leader in off-brand drugs. The deal which becomes the latest in a wave of high-profile consolidation in the pharmaceutical industry, combines Teva, the world’s largest generics drug company with its third largest competitor. The acquisition gives Teva enhanced scale in the intensely competitive generics market (over 20% market share) with cost savings potential due to product overlaps and economies of scale (through operating synergies of nearly US$1.4 billion) as it looks to cope with end of patent expirations. The deals comes at a time when the entire healthcare and life sciences continuum is witnessing rapid consolidation moves including large payers teaming up.

Core Competence – the New Life Sciences M&A Mantra

The deal is another indication in a long line of recent transactions as life sciences firms undergo a realignment of strategic focus and choose to concentrate on business of core competence. Following the big bang “acquire all” days of Big Pharma, pharmaceutical firms have realized that they need to reorient strategic goals and narrow down their focus to specific service lines and markets. This was the principal driving factor in the seminal Novartis-GSK asset swap announced in April 2014, which typified the new normal.

For Teva, this wraps up an increasingly messy four-month long pursuit of another generics rival, Mylan. The company withdrew its latest US$40.1 billion hostile offer to acquire Mylan as the deal prospects became bleak. Mylan itself is busy chasing rival OTC drugs company, Perrigo, which has so far snubbed Mylan’s attempts. The deal also has interesting implications for Allergan. The company has been at the center of major M&A activity in the last two years. This sale allows it to pay off debt from the US$70.5 billion integration with Actavis in 2014. That deal also signaled the end of one of the intense takeover struggles as Actavis beat Valeant Pharmaceuticals for Allergan. The sale to Teva allows Allergan to focus on building its branded drugs business. It could also mount an effort to purchase large peers such as Amgen or AbbVie.

Implications for Service Providers

As with any major consolidation exercise, the primary beneficiaries will be service providers with exposure to both merging entities and account-level relationships as they help with the integration initiatives. A natural consequence of such an exercise is the tendency to go for vendor rationalization as enterprises look to trim the sourcing pie. Demonstrating value across the life sciences value chain will emerge as a crucial differentiator in retaining presence across accounts. Given the diversified operational footprint of pharma firms, global presence becomes an important qualifying criteria for large scale deals, especially when it comes to areas such as infrastructure management. As the spotlight shifts on pockets of core competence, mapping enterprise-specific business outcomes and challenges to technology/process solutions will be key in getting management buy-in for forthcoming sourcing initiatives. The following image illustrates the current exposure of key service providers across major life sciences firms. As you can see, these mergers will lead to overlapping accounts for several services providers.

Account exposure across life sciences firms

The Road Ahead

Life sciences buyers stand at interesting crossroads right now. They seek technological preparedness to tackle multi-faceted challenges arising out of stifling R&D efficiency, dwindling margins, increasing M&A/restructuring, and evolving customer profile. Blockbuster-drugs-led growth has paved way for more pragmatic business models in this new reality. While the digital Kool-Aid continues to sweep the landscape, life sciences firms tend to struggle with digital enablement due to factors such as fragmented service provider landscape and non-standardized internal structures. How they navigate this challenge while digitizing operations will be crucial. Our recent report on IT Outsourcing in the Life Sciences Industry focuses on how global life sciences organizations need to enable their systems for digital enablement through a well-thought out services integration strategy. Pharma is in a continually evolving state of flux and these changes are only going to intensify. Service providers need to up their game to ride this wave.

Analytics has been a bright spot in the services world, particularly for the Indian service providers as their analytics practices have grown faster than the rest of their organizations. They often are able to command premium pricing in this space, and it holds the tantalizing promise of transforming other service lines such as ITO, apps dev, and BPO. However, I’m making a bold prediction: The analytics practices are going to quickly hit maturity and the rate of growth will quickly slow.

We at Everest Group observe three maturity characteristics now happening in this space, so the “recipe ingredients” are in place for this market to start maturing.

  1. Gold rush stage. As companies come to understand and believe in the power of analytics, they are eager to do proofs of concept, which they then scale into a Center of Excellence (CoE). For the most part, the leading providers that offer analytics services establish a CoE or complement an existing CoE with data scientists. But data scientists are scarce, so they often use partners to augment their CoE. 

    But the analytics gold rush is starting to ebb. Many providers have already seen the light and are already on the journey to establish or scale up a CoE. Therefore, the market will mature.

  2. Analytics becomes core. At Everest Group, we see a trend in which the benefits of analytics are so strong that analytics customers over time tend to want to build their own CoE and use their own capabilities, leveraging third parties only as an overflow or extension of what they are doing.

    With the return on investment in analytics being so high and customers viewing analytics as core or necessary to their business and competitive advantage, they view the expense of building an internal analytics CoE as a justifiable cost and wise decision. Therefore, service providers’ labor arbitrage offerings are less compelling.

  3. Benefit doesn’t pull through to a process. For the service providers that have built a capability around analytics, it should lead to complementing other BPO or IT practices; but we have not seen this as a common occurrence. We believe the reason is that the customers’ stakeholders block providers’ access and seal them off translating the analytics work to a broader business process or IT application. The providers’ hope of pulling through work has not manifested consistently in a large degree.

As we analyze this issue, we believe there are three areas where analytics providers can build distinctiveness:

  • Provide access to proprietary data
  • Build proprietary tools
  • Provide capability

As already explained, we expect the market for providers whose practices are built on capability will slow rapidly. But we see substantial opportunity where a provider combines proprietary data and proprietary tools with capability that focuses on a specific business problem.

An example of a scaled analytics program that has achieved billions of dollars in this way is OptumRx. This solution includes a proprietary data source, proprietary tools and capability focused on a business problem that serves the healthcare industry at scale. And it generates billions – not millions – in revenue.

We believe that providers that transition to a model of creating proprietary data and customized tools combined with capability to solve a business problem will enjoy ongoing and potentially explosive growth.

But those that stay focused on providing capability and data scientists are doomed as they face a quickly maturing marketplace. It’s not that this space will go away; it’s just that it won’t grow fast and pricing pressure will start to take hold.

Although we believe the analytics market maturity will happen in the next two years, we think a lot of room and potential remains for providers that combine the three analytics components (data, tools and capability focused on a specific business problem).

The Healthcare and Life Sciences (HLS) ITO market has been buzzing with activity in 2015. At just seven months into the year, Everest Group’s projected market size for the HLS ITO market size is US$39 billion.

Here are some of the standout messages from our 2015 research to date that address some of the contributors to this enormous market size.

  • Life Sciences ITO market: Services integration (applications, infrastructure, and BPO) and IT-as-a-Service (ITaaS) to drive a growing chunk of next-generation IT opportunities (see our upcoming Life Sciences ITO Annual Report – “Integrated Services Strategy in the age of digital”)
  • Payer-provider market: Growing convergence in the market will drive significant vendor consolidation and rationalization initiatives
  • Life Sciences ITO PEAK Matrix – This report in part discusses the intensifying neck to neck competition between the India-heritage service providers (such as Cognizant, TCS, and HCL) and the global majors (such as Accenture and IBM) – Download a preview

Life Sciences ITO PEAK Matrix 2015

  • Europe Life Sciences ITO PEAK Matrix – This research brings out how Europe-based life sciences enterprises are opening up to outsourcing as a strategic component of their sourcing strategy and cost containment efforts – Download a preview

European Life Sciences ITO PEAK Matrix 2015

While robust in their coverage, these already published 2015 research reports paint only a portion of the picture enterprises need to view to address cost-cutting imperatives and deliver metrics-driven business outcomes through alignment of their technology strategy with their lines of business.

For example, an increasing number of life sciences clients, especially large pharmaceutical firms, have been reaching out to Everest Group for assistance in evaluating technology partners not only to drive digitization of their critical operational components, but also higher R&D productivity through next-generation analytics and high-tech systems. Similarly, while payer and provider organizations are starting to view technology from an entirely new prism, they are uncertain how to leverage technological solutions and platform to address concerns and initiatives including growing consumerization (patient engagement), population health initiatives, and care-risk convergence.

To inform the marketplace on issues and exciting opportunities in ITO for the HLS industry, Everest Group is significantly expanding its portfolio of published PEAK Matrix evaluations in 2015. New reports we’ll be publishing through the end of the year are:

  • Life sciences industry PEAK Matrix
    • Digital services
    • Big data and analytics
    • Clinical and R&D IT services
  • Healthcare (payer and provider) PEAK Matrix
    • IT services (payer)
    • Digital services (payer)
    • Big data and analytics (payer)
    • Care management and patient engagement (payer)
    • IT services (provider)

Everest Group’s goal is to help ensure enterprises and service providers achieve maximum success from their sourcing initiatives. Thus, we encourage you to reach out to us directly with your queries.

Abhishek Singh, Practice Director, Abhishek.Singh@everestgrp.com

Nitish Mittal, Senior Analyst, Nitish.Mittal@everestgrp.com

Mayank Maria, Analyst, Mayank.Maria@everestgrp.com

There is a secular shift occurring within IT services. Many businesses are shifting from functional orientation – where cost and reliability are the key objectives – to a new focus where business value and cycle time are the new objective functions. This shift has big and very serious implications for organizations that encompass the technologies they use and the third-party services ecosystem they use to meet these needs. Accommodating these needs requires a significant rethink of traditional IT delivery, whether it’s through internal centralized IT services or third-party IT services.

Cost and reliability are still important; but these are now secondary issues and no longer dominant issues. C-level executives now drive IT spend. They increasingly focus on aligning IT and business value with the voice of the end user/customer as well as the speed at which IT can make changes and respond to the business needs.

I’ve blogged many times over the last few years, observing this shift of influence out of centralized IT into the rest of the organization (business units, CFO, CMO, etc.) These powerful stakeholders now believe technology more than ever is central to their moves to change the game. They want better value – technology that meets their needs and also responds far more quickly to their needs.

Functional IT structures has disciplines that frustrate these stakeholders because:

  • Projects or initiatives take too long (often a year to 18 months) for them to get the functionalities/capabilities
  • IT often focuses on how to do those functionalities cost-effectively instead of focusing on the customer or user experience and the value derived from that.

Therefore, their requirements can’t be met through a traditional structure of IT where technology orientation is based on functions (data centers, applications maintenance, application development, etc.).

To accommodate the change in demands – the new core objectives – enterprise IT must realign by service lines and have persistent teams that align from end to end on the service lines that focus on achieving business value instead of aligning on performing excellence in a functional way.

Therefore, organizations are rethinking their IT services and a new Enterprise IT-as-a-Service model is taking off. I’ll discuss this new model in upcoming blog posts. The implications are profound for internal services as well as third-party IT services.


Photo credit: Flickr

We have been taking a deep look at the newer types of Service Delivery Automation (SDA) technologies for business process services (BPS). These include robotic, cognitive and plug-in architecture tools. Our interim findings show a lot of similarities and many differences.

BPS automations can be successfully achieved by all the tools, albeit, in different ways and for different types of processes. Some offer richer and more rounded features that make the software more user and enterprise friendly. The features include but are not limited to visual tools, automation control and management features, and process analytics.

Some are more advanced in their utility pricing and cloud deployment options than others that, for now at least, are sticking to older styles of licensing.

Some have other advantages such as being well supported by partners and resellers while others are behind on this.

We have been surprised by some of the findings too – for example, a technology vendor seemed to underestimate the potential of its software, which we thought could tap into new opportunities if wrapped in a control and management layer. Another surprise was a vendor that turned out to be more technology-focused than we had expected. Its well-practiced demo was impressive but showed a high focus on technology versus other considerations, such as a methodology, to get clients started.

This is a dynamic and changing landscape. And the technology providers are working to enhance their offerings, for example, the software itself or the partnership relationships.

The future outlook is a mix of product and eco-sphere developments:

  • Some vendors are starting to combine robotic and cognitive or AI capabilities while others are focusing on other aspects of intelligent automations
  • On the eco-sphere front we expect to see automation communities springing up supported by the technology vendors. These will share automation know how, best practice and, in time, portable and reusable automations
  • We will also see increased emphasis on resellers and implementation partners.

Another development is large system integrators building automation centres of excellence. The technology vendors will be competing to get into these centres.

Many service providers are also developing their own automation technologies. These will have to offer a more compelling outsourcing proposition to clients than in-sourced processes that are automated in-house, using the independent technology vendors’ automation software and supported by system integrators.

Keep an eye out for Everest Group’s in-depth report on SDA technologies and their assessment, which will be released soon. Our currently available SDA reports include:

Reports:

Free SDA content:

Page 1 of 12112345...Last »