Chathurya Pandurangan, Author at Everest Group

The Digital Health Unicorns Are Proving Their Value | Sherpas in Blue Shirts

By | Blog, Healthcare & Life Sciences, Mergers & Acquisitions

In August 2016, Everest Group published an analysis of hot digital health startups that were disrupting the status quo of the industry landscape. It ended becoming a unicorn-spotting analysis…cut to February 2018, and by healthcare and life sciences organizations have acquired three — Flatiron Health, NantHealth, Practice Fusion — and among the top 25 players. While we speak, there are multiple conversations around the others as investor interest peaks.

HC startups Blog

What are the key business reasons behind these three acquisitions?

  • Flatiron Health by Roche: Flatiron Health has an end-to-end cloud-based EHR platform (OncoEMR) exclusive for oncology that curates the evidence-based drug development process. As oncology is one of Roche’s major focus areas, this is extremely valuable for the company while devising cancer drugs. No wonder Roche agreed to a US$1.9 billion acquisition price, in addition to its existing stake in the company. Flatiron Health also has a OncoAnalytics module that leverages big data analytics for better diagnosis and treatment.
  • NantHealth by Allscripts: NantHealth is a cloud-based healthcare firm that aims to improve patient outcomes and personalized treatment. Its proprietary learning system, CLINICS, utilizes machine learning and cognitive computing to provide information for better care delivery, tools and insights for efficient care financing, and wellness management programs for enhanced patient engagement. NantHealth fits well within Allscripts’ ambitious plan to build a healthcare company that drives innovation in patient care and improves evidence-based research in R&D processes.
  • Practice Fusion by Allscripts: Practice Fusion is a web-based cloud EHR platform that also provides patient engagement and practice management assistance. Unlike traditional EHR platforms, Practice Fusion provides a simple and intuitive user interface. Beyond these capabilities, this acquisition also adds ~30,000 ambulatory sites to Allscripts’ client base in the hard-to-crack independent physician practices segment.

What’s working with these healthcare startup acquisitions

Here’s what is common among these recent acquisitions:

  1. Data is the new oil: The real asset is access to critical healthcare data. Companies that convert the data into actionable insights, resulting in better patient care, emerge as clear winners.
  2. Uberization of everything: Healthcare enterprises have struggled with huge fixed investments in EHR platforms, on-premise infrastructure, etc. This has created a deep dent in their profitability numbers. Because Flatiron Health, NantHealth, and PracticeFusion and are cloud-based companies, there are no more fixed costs, everything is demand-based. Clearly, the as-a-service model has become the choice for healthcare firms.
  3. Care – of, by, and for the people: Accelerated R&D cycles, augmented physician capabilities, and improved precision in diagnosis and treatment all ultimately result in improved patient care, enhanced clinical outcomes, and boosted patient engagement. All three of these acquired companies focus on improving at least one of those factors. And they all allow the acquiring companies’ patients to take center stage.

Digital moves from pilot to program

At a broader industry level, these acquisitions mirror the change in sentiment around digital initiatives. Our research shows signs that enterprises are moving beyond proof of concept to proof of value. While digital, as a market, lends itself to smaller deals with focuses on design thinking, first principles problem solving, and business model redesign, we see these initiatives now scaling up.

Digital HC blog
As the digital marketplace matures, investment activity is only going to intensify. While early adopters are reaping rich rewards, valuations and competition for viable targets are likely to skyrocket. It’s clear that healthcare enterprises see significant business value, and are willing to put their money where their mouth is. Stay tuned to this space for more analysis of what’s happening in the healthcare and digital spaces.

Outcome-Based Contracts in Life Sciences – An Age-old Idea Taking a New Avatar | Sherpas in Blue Shirts

By | Blog, Healthcare & Life Sciences, Pricing

Outcome-based contracts in the life sciences industry are essentially a risk sharing agreement between a drug manufacturer and its consumers, which include healthcare payers, healthcare providers, and physician groups. The agreement guarantees that if defined care outcomes are not achieved, the drug manufacturer is liable to pay compensation.

This type of contract is not a new concept in life sciences. For instance, money-back guarantees from snake oil liniment companies and for products such as Emerson’s Bromo-Seltzer have been advertised since the 1800’s. However, the idea is getting a makeover, thanks to value-based healthcare, Medicare Access and CHIP Reauthorization Act (MACRA), falling R&D productivity, and the slow death of the blockbuster drug discovery business model.

outcome-based contracts

Comparing volume versus value

Given the push for value-based healthcare, outcome-based contracts in life sciences are gaining momentum. Leading life sciences companies are making a transition from volume-based contracts to outcome-based contracts to drive higher accountability and ownership, better quality of care, optimized R&D costs, and competitive differentiation.

Outcome-based contracts

Indeed, many pharma companies, such as Amgen, Merck, and Novartis, are already experimenting with outcome-based contracts for areas such as cardiovascular treatments, diabetes medication, and cholesterol cures.

Operationalizing outcome-based contracts

To operationalize outcome-based contracts, drug companies, consumers, and technology-providers must work in tandem.

  • Life sciences firms must have a risk appetite to share the financial burden with their consumers
  • Consumers must be willing to appreciate and reward innovation provided by drug companies
  • Technology is the key catalyst in accelerating an outcome-based contracts model. In fact, it becomes the key pillar in risk analysis, value analysis, and reward analysis. Technology providers must co-innovate with pharma firms in identifying and measuring care outcomes. For example, they can provide cloud-powered IT infrastructure to enable clinical trials orchestration across multiple trial sites, and implement predictive modeling techniques to help drug companies understand consumers’ unmet needs.

Outcome-based contracts challenges

Although outcome-based contracts open new vistas for drug companies, significant challenges hamper adoption. A study conducted by the “American Journal of Managed Care” indicated that incremental investments – in both money and time—is the biggest hindrance, and pharmaceutical firms mention they are not yet witnessing evident RoI from these investments.

Stakeholders’ reluctance and regulatory restrictions are also deterring outcome-based contracts adoption.

outcome-based contracts implications for stakeholders

Implications for stakeholders

Life sciences firms
With outcome-based contracts gaining momentum, life sciences companies should be more accountable for their products. They should interact with healthcare entities and consumers to understand the efficacy of their products, and work towards improving care outcomes.

Payers
As life sciences firms embrace outcome-based contracts and providers embrace value-based care tenets, payers will have a direct financial impact. They can derive breakthrough value from their operating costs as any medication or procedure charges are directly linked to the drug quality and/or quality of care. This, in turn, optimizes claims costs and reduces fraud and abuse incidents.

Technology partners
Technology vendors and IT service providers that are struggling to open new business arenas with life sciences companies must see this as a lucrative opportunity to propose high-value technology services. Example opportunities include infrastructure modernization, cloud orchestration, a data analytics suite, interoperable API creation, customer experience management solutions, pricing analytics, etc. Overall, developing outcome-based contracts can not only create market success with life sciences clients but also help technology and IT service providers cross-leverage these capabilities in other industry verticals.

Has your company ventured into or fully-embraced outcome-based contracts? What successes and challenges have you experienced? Feel free to contact the authors (either Nitish Mittal or Chathurya Pandurangan) and let us know.

Life Sciences Startups: Catalyzing the Innovation Ecosystem | Sherpas in Blue Shirts

By | Blog, Healthcare & Life Sciences

Did you know that global funding for startups dipped more than 20 percent in 2015-16? But that life sciences startups were a rare breed that continued to find favor with those who hold the purse strings? Do you want to know who these startups are? Read on.

First, the context: while life sciences firms make extremely fat margins and sit on huge piles of investment dollars that focus on research, increasing regulatory interventions, slowing growth rates, and growing consumerism have become their new normal. To chart out a new growth path in the face of these challenges, life sciences firms are increasingly looking at tapping the innovation ecosystem that exists outside their legacy environments.

Startups are playing an important role in this transformation journey. By introducing technology solutions that address CXOs’ key imperatives, startups are bringing innovation right to life sciences firms’ doorsteps.

Life Sciences Startups Innovation 1

To understand the dynamics of this trend, Everest Group analyzed over 150 start-ups in the life sciences industry. The results of our analysis are encapsulated in our recently published report, “Hot Life Sciences Startups: Friends, Foes, and Frenemies in the Innovation Ecosystem.”

This life sciences startup research helped us answer the following questions:

 

What is the big deal?

While funds are drying up globally for start-ups, life sciences start-ups continue to find favor with venture capitalists. Niche therapeutics within life sciences such as cancer therapies and medical devices are attracting investments like never before.

Life Sciences Startups Innovation 2

Where are these dollars headed?

The majority of the focus is on biopharmaceutical start-ups that are aligned to three value chain functions: drug discovery/product development, clinical and pre-clinical trials, and sales and marketing. The start-ups leverage analytics, cloud computing, social media, mobility, and automation to create significant impact in the three life sciences segments.

Life Sciences Innovation Startups 3

Who are these investment magnets and innovation leaders?

Everest Group assessed the startups against three key criteria – level of business disruption, level of technology disruption, and market buzz. Our scoring methodology led us to select the following as the top 20 “Hot Life Sciences Startups” for 2017.

Life Sciences Startups Innovation 5

What are the implications for the global services industry?

These start-ups provide enterprises with enhanced access to bleeding edge innovation. This is evident with various life sciences firms investing actively in start-ups through corporate venture arms. For service providers, the startups provide an attractive channel to catalyze their innovation journey with a view towards partnership or acquisition. They also help providers move away from their cost-sensitive business model to focus on growth and capability development.

What’s your take on the life sciences innovation ecosystem and seminal role of start-ups? Do you have direct experience with any of them? We’d love to hear your story!

The Widening Gap between Customer Satisfaction Perception and Reality | Sherpas in Blue Shirts

By | Blog, Customer Experience

Not surprisingly, every service provider claims to have exceptionally high customer satisfaction ratings from their enterprise clients. Yet, we see anti-incumbency rising and deal size dwindling.

To assess enterprises’ satisfaction levels in IT services engagements, we conducted a deep dive study of 30 service providers and 130+ of their clients. We largely focused our analysis lens on six vital parameters of service delivery – technical expertise, domain expertise, talent management, commercial models, client management, and strategic partnership.

Enterprise customers are dissatisfied with service providers

The results, presented in our recently published report entitled, “Customer (Dis)Satisfaction: Why Are Enterprises Unhappy with Their Service Providers?” were quite disturbing. They indicated that nearly 50 percent of IT service buyers are not satisfied with their providers, feeling that they fall short in many areas of service delivery.

enterprises not satisfied with service provders 1

We investigated the reasons behind the huge gap between buyer expectations and current service delivery and arrived at the following insights:

  1. Early-stage differentiating factors have become table stakes: The value propositions of labor arbitrage and low-cost delivery are no longer compelling. Instead, enterprises want service providers that can create a positive impact on their core business functions.
  2. Inability to meet the unspoken demands of customers: Enterprises expect their service providers to have evolved from “order takers” to “collaborators” capable of effectively partnering with them in strategic decision making. They want their providers to go beyond the project ask and demonstrate transformative skills, even though such expectations are largely unspoken.
  3. Limited understanding of clients’ businesses narrows down business opportunities: Visibility into enterprises’ business dynamics and priorities are critical for service providers to align their offerings and strategy to client needs. Yet their margin obsession and hesitation to make new technology investments have precluded them from taking a futuristic approach to IT engagements.enterprises not satisfied with service providers 2

How service providers can turn the tide

So how can service providers turn the tide to have a more positive impact on existing and future engagements? Here are Everest Group’s top three recommendations.

  1. Shift from an operational to a strategic mindset: Service providers need to go the extra mile to proactively identify enterprises’ business drivers and must develop capabilities to offer innovative solutions. Just delivering on the agreed upon SLAs does not elevate service providers to the level of service partners.
  2. Innovative engagement: With rising competition, it is imperative that service providers walk the talk. While they cannot avoid investing in new technologies, they can share the adoption risk with their enterprise clients. Newer engagement models like outcome-based, risk-reward sharing, and output-based give enterprises the necessary confidence to take the leap and engage service providers for a next generation technology adoption initiative.
  3. Invest. Automate. Improve: Two-thirds of the enterprises are gearing up for large scale process digitalization, and they expect their service providers to be able to technologically support their objectives. Service providers must strategically invest in automation to improve efficiency, reduce costs, enable faster time-to-market, and deliver process improvements in order to offer a compelling solution.enterprises not satisfied with service providers 3

With anti-incumbency risks, anti-offshoring rhetoric, and clients’ propensity to adopt a digital arbitrage model looming large, service providers cannot afford to lose customer confidence. They must, today, start looking through a clearer lens to evaluate where their relationships with their enterprise clients stand.

For details on the areas in which service providers must smooth their rough edges, polish their existing skills, and develop new skill sets, please read our report, “Customer (Dis)Satisfaction: Why Are Enterprises Unhappy with Their Service Providers?

From Labor Arbitrage to Digital Arbitrage: Shareholder Value in the New IT World | Sherpas in Blue Shirts

By | Blog, Onshoring, Outsourcing

Recently, corporate developments, such as management changes, corporate governance, and investor activism across Indian IT service providers, have bombarded the investor community. Many investors perceive the initiatives taken by these companies to be a watershed moment in their histories.

Furthermore, with next generation automation, digital services, artificial intelligence (AI), and other disruptors creating massive, requisite, and unavoidable change in the IT services industry, investors and service providers are in increasingly opposing schools of thought. However, many of the investment firms we work with struggle to correlate these developments with their investments and returns.

Given the scale of the IT industry and the pace of disruption happening in the entire ecosystem, it’s valuable to take a few minutes to dissect and analyze the situation.

Growth vs. profitability equation – digital arbitrage vs. labor arbitrage

For the past two decades, Indian IT service providers have reported a stellar net profit margin in the range of 18-25 percent. The business grew on the investments made in human resources. The players achieved impressive returns primarily due to their grip on labor arbitrage. The investor community embraced the stocks, and experienced significant returns. For instance, an investment of US$350 in one of the top Indian IT service providers in 1992 would have yielded US$377,643 in 2015!

The emerging IT services model – driven by digital disruptors – gives little emphasis to labor arbitrage or the providers’ earlier factory model, and instead focuses on innovation and value creation for enterprises that extends far beyond greater efficiency. Not many IT service providers have demonstrated a mindset aligned to these new requirements. They are still hesitant to loosen their noose on profitability, as they set investor expectations very high with their earlier business model.

What is bothering investors?

Investment firms we work with believe that most disruptive technologies will drive lower profitability for Indian IT service providers likely in the 8-15 percent net profit range. They also believe that technology disruption will not allow the same level of offshoring as before, and will further erode profitability.

As most of the Indian IT service providers have zero debt and own huge piles of cash, investors think they should receive distributions in the form of dividends. Their demand is stronger when they learn the providers are going to invest in low-margin digital businesses, as they believe they will not receive the optimal reward they are due.

A twist

Believing that the market is undervaluing their stocks, IT service providers are planning share buybacks, spinning them as a way to reward shareholders. However, they actually plan to reduce tax leakages caused by dividend distribution, as Indian tax law stipulates they pay a 15 percent Dividend Distribution Tax (DDT) on dividends paid. Additionally, the share buybacks help them increase their control over the company.

What is the reality?

Both these opposing schools of thought fail to think in the long term.

Investors looking for dividends aren’t acknowledging Berkshire Hathaway’s theory of dividends. If a business can deliver promising returns in the long-run, dividends act as a negative catalyst for growth. In an attempt to pacify their investors, most of whom are technology novices, most Indian IT service companies are relabeling their old offerings as “digital.” Instead of dividends, investors need to ask IT service providers’ leadership tough questions on how they plan to use their large cash piles relative to their IP, platforms, acquisition, talent development, and client relationship strategies. How do they plan to differentiate in this crowded market? When large-scale offshore development centers fail to provide the needed competitive advantage, what does their armory contain to create shareholder value?

The way in which IT service providers are surrendering to investor pressures gives the impression that they are not willing to utilize their cash for digital technology investments. This in turn reinforces the popular opinion that Indian IT service providers are not confident enough to tide over the current transition. That some of the providers are distributing cash instead of putting the money in beneficial investments is making some market observers uncomfortable.

Furthermore, if the providers are not planning to distribute cash, they must ensure that they use the money for useful investments rather than just share buybacks. This is a win-win situation, as the providers get a boost to their topline and ability to endure the current business transition, and shareholders get maximized wealth in the long term. Net-net, firms that invest wisely are going to withstand the changeover, while those that use their cash piles to temporarily shut out investors are likely to witness a tough time.

Are these companies capable of implementing the business model?

As the adage goes, easier said than done. Although service providers are vocal about re-skilling employees opening onshore centers focused on digital services, the viability of these initiatives are questionable. The majority of these companies have amateur design thinking capabilities, and their DNA is around supplying people, not innovation and strategic partnerships. Indeed, in our recently published report “Customer (Dis) Satisfaction: Why Are Enterprises Unhappy with the Service Providers,” enterprises only gave providers a score of five out of 10 on their strategic partnering abilities.

Only time will tell whether service providers made the right move in distributing cash or investing in low-margin businesses.

Hot Healthcare Start-ups: Dawn of a New World Order | Sherpas in Blue Shirts

By | Blog, Healthcare & Life Sciences

The United States healthcare system suffers from systemic issues of cost, access, and quality, providing significant whitespaces for innovation. The key factor driving disruption is the pressure to contain costs and improve care quality amidst rising healthcare expenditures. (In 2014, The United States’ spending on healthcare was 17.1 percent of its GDP, and in 2022 it is expected to touch 20 percent.)

The transition from defined benefits to defined contribution, employer-based purchasing to the individuals market, and fee-for-care to fee-for-outcome are some of the structural changes that are driving cost optimization and better patient outcomes.

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Technology: the harbinger of change
However, with the rising adoption of digital services by healthcare buyers, technology is proving to be the biggest catalyst in transforming the entire healthcare ecosystem. Technology enables both cost reduction and consumerization. Most of the modern healthcare doctrines such as remote healthcare, 24×7 vitals monitoring, seamless claims management, and integrated health records are powered by technology tenets such as Internet of Things (IoT), robotics, Artificial Intelligence (AI), mobility, analytics, and cloud computing.

Incumbent players have started providing digital services to meet the demands of customers. However, they are a little hesitant to make huge technology investments as they must balance already thinning bottom-lines, shrinking in-patient volumes, and tightening regulatory controls. Additionally, in-house investments have longer go-to-market cycles, higher risk of failure, and stretched pay-off duration.

Start-ups: catalyzing innovation
Stakeholders have been trying to tackle endemic industry issues through technology use. At the same time, consumer expectations are fundamentally changing from their healthcare experiences. Stakeholders are trying to evolve healthcare’s operating model in the new normal. Start-ups have a fertile ground to reap benefits through innovative solutions that address these challenges.

This is reflected in the differential investment interest in healthcare. While the overall funding climate has begun to show signs of correction, healthcare is witnessing a resurgence in investment activity. Global funding for start-ups went down by more than 20 percent in Q3 2015, whereas funding for digital health companies shot up by nearly 10 percent in 2015.

Healthcare start ups

Uncovering the healthcare start-ups landscape
In order to understand the extent of disruption that start-ups bring to the healthcare market, Everest Group Research conducted an in-depth analysis of start-ups in the healthcare landscape (see Hot-healthcare Start-ups: Dawn of a new world order).

We took a discovery-based approach, and analyzed more than 200 start-ups on three major levers:

  • Technology disruption
    • To what extent has the start-up addressed existing challenges through technology?
    • To what extent has the start-up created new channels via technology?
  • Business disruption
    • To what extent has the start-up transformed existing business functionality?
    • To what extent has the start-up created a new market?
  • Market buzz
    • How much trust have investors shown in the start-up?
    • What kind of market recognition has the start-up received?

Our analysis resulted in five leading investment categories, and five top players in each.

Hot healthcare start ups

Key findings from the study included:

  • Given the valuations and impact they create, start-ups have the potential to unseat some of the incumbent companies. Therefore, it is imperative for payers and providers to partner with them or acquire them to remain relevant in the healthcare value chain.
  • Associations with start-ups will significantly reduce time-to-market as they provide ready-made plug-and-play solutions. This can also convert capital expenditures to operating expenditures and maintain a leaner cost structure.
  • Start-ups have built the agility required to withstand changing industry dynamics, as they have tried and tested multiple use-cases. Hence, association with them will be helpful to mitigating competitive rivalry and adapting to regulatory changes.

Access the full report entitled “Hot-healthcare Start-ups: Dawn of a new world order”.

Social Media-based Disruption is Even Hitting the General Insurance Industry | Sherpas in Blue Shirts

By | Blog, Uncategorized

The general insurance (GI) industry has largely remained silent in a world where conversations either begin or end with the word “digital.” Products and services from the traditional GI providers have failed to keep tempo with the rapid technological developments happening everywhere else. One reason for this is that GI offerings are low-touch products about which customers interact with the provider just once or twice a year. Another is that GI providers have traditionally not focused on customer experience or value generation for their clients. They lag the Ubers and Amazons of the world by many miles.

However, the landscape has started to change recently due to the entry of disruptive start-ups trying to bridge the gap between service delivery and customer expectations. Areas gaining traction include price comparison services and mobile-based services. The real standout is peer-to-peer (P2P) insurance. It has gained more market buzz because the business model is not as opaque as the traditional model and provides clear benefits for the customers.

The P2P insurance business model
P2P insurance is a novel model facilitated by social media. Customers form their own online networks, and each pools in money to build a corpus. They allocate some portion of the fund to the mutual pool and pay the balance to a traditional insurer. When a claim must be made, members pull money from the mutual pool. If a claim exceeds the mutual pool corpus, they approach the reinsurer. If the claim is less than in the mutual pool, the remaining amount is distributed back to the members.

What are the benefits?

  • Risk reduction
    • There is less likelihood of fraudulent claims, as the small group of members who know each other share the risk
    • The members can select the risk level of their group, unlike in the traditional model
  • Non-operating cost optimization
    • Marketing and administration costs account for nearly 10-15 percent of policy premiums in the traditional model. These costs are nominal in the P2P model, as marketing is done by members personally. Hence, members pay less than usual premiums
  • Savings generation
    • Unclaimed insurance premiums are profits for traditional insurers. However, P2P insurance gives unclaimed money back to the members.

How does this disrupt the status-quo?
In the medium to long term, as this model gains maturity and acceptance, customers may switch to the P2P model. This will shrink the market share held by traditional players. Reduced demand for traditional insurance plans, coupled with increased supply, will drive down prices. Thus, customers are likely to benefit in the end.

Who are the current prominent P2P start-ups?
P2P Start Ups

These companies are the hot start-ups in this space for a number of reasons. First, they are the early movers that have leveraged cutting-edge technology tenets such as social media and mobility. Second, they are trying to tackle a real business problem and, in the process, are improving efficiency in the market. Finally, they are managing to raise substantial funding from prominent investors such as Sequoia Capital and Horizons Ventures.

An urge for innovation in the industry, coupled with high potential demand from the customers, will drive further disruptions in the GI market. Start-ups are likely to be the vanguard in this evolution, by introducing value generating products and services. Sooner than later, the traditional players will wake up to the new normal, and will try to catch up by either acquiring these start-ups or partnering with them. Ultimately, the end-customers will be the beneficiaries, as competition forces the prices down and innovation drives the quality of services up.

Lessons from the Dark Side of the Healthcare Industry: Spotlight on Theranos | Sherpas in Blue Shirts

By | Blog

The ongoing saga of Theranos reached a nadir last week when Walgreens decided to terminate its relationship with the once-hot healthcare start-up looking to transform healthcare diagnostics one blood test at a time. For the uninitiated, Theranos claims to have developed a highly disruptive means of conducting blood tests, wherein it could quickly process more than 240 lab tests, ranging from cholesterol to cancer, with just a finger prick of blood. However, these claims have come under immense public and regulatory scrutiny, following an investigative article in the Wall Street Journal last year.

In this day and age, when start-ups are the new conglomerates, revered and reviled in equal measure, this suspicion would typically not lead to such outrage, But Theranos is not an ordinary start-up. Its story was written in start-up heaven. It touted a path breaking innovation that could have revolutionized the field of healthcare diagnostics. In 2014, it raised over US$400 million, and was valued at $9 billion, with 50 percent owned by its enigmatic founder CEO – Elizabeth Holmes – a dynamic entrepreneur who has modeled her persona on Steve Jobs. Her own star rose with the fortunes of Silicon Valley’s latest unicorn. She was ranked 110 on the Forbes 400 in 2014, and topped Forbes magazine’s list of “America’s Richest Self-Made Women” in 2015 with a net worth of US$4.5 billion. On June 1, 2016, Forbes revised its estimate of Holmes’s net worth… to zero. Theranos is now being investigated for fraud, facing possible federal sanctions, a criminal probe, and imminent class action lawsuits. Regulators have proposed banning Holmes from her company for two years.

There are lessons aplenty from this topsy-turvy tale. Given the scale and pace of innovation required to transform the U.S. healthcare ecosystem, it’s valuable to take a look at key learnings from the Theranos saga.

When just a Minimum Viable Product (MVP) won’t do

Theranos used finger prick blood samples to conduct tests. Medical experts are of the opinion that this blood may not be as pure as the traditional vein sample, as the blood mixes with fluids from tissues and cells. This fact was completed ignored by Theranos.

Theranos developed a blood testing device called Edison. While undergoing tests to prove Edison’s accuracy to the Centers for Medicare and Medicaid Services (CMS,) Theranos fraudulently performed most of the tests using a traditional Siemens machine rather than its own device. Theranos also diluted the samples to match the specification of this machine, which resulted in inaccurate test reports. The underlying technology was at best in the development stage. Every start-up in the healthcare space needs to ensure that its business model and technology behind it are robust before full-scale deployment.

Customer loyalty – hard to get, harder to retain

Customers are typically much more invested in a healthcare purchase than, say, a retail purchase, mainly because of the grave ramifications. Hence, it is particularly important for healthcare providers to earn the customers’ trust. There have been instances of lab reports from Theranos being completely off the charts, or totally inconsistent with patients’ history/health. The company’s response to such reports was characterized by hubris rather than empathy – it did not take any step to rectify the errors. Ultimately, customers lost trust in the company.

Even its own employees felt something is amiss. When a Theranos employee wrote to senior management pointing to inaccuracy in test results, she was fired immediately. Instead of investigating and making things right, the company took an autocratic approach. A few employees blew the whistle, and reported wrong doings to regulatory authorities. This opened the proverbial can of worms for Theranos.

Governance, risk, and compliance – transparency is key

The belief in innovation was so ingrained that investors and partners remained oblivious to warning signs. The company made bold claims, but kept its technology secret. When Walgreens executives visited, they were not permitted into a lab to examine data. Yet the drugstore chain, in a rush to strike a deal, went ahead investing US$50 million with the plan to dispense Theranos blood tests at thousands of its locations. All the while, favorable media coverage failed to acknowledge the stark absence of scientific studies reaffirming the device’s credibility.

The Theranos tale is a revelation on multiple counts – a hype-fueled venture investment climate, fundamental loopholes in business/technology models, lack of transparency, adulatory technology reporting/spin – all of which are symptomatic of Silicon Valley today.

Today’s pace of disruptive innovation needs to be counterbalanced with robust fundamentals. The healthcare industry is in dire need of breakthrough innovation to tackle the three Cs – consumerization, cost, and compliance. Against this backdrop, Theranos should be treated as a reality check to rectify endemic inadequacies, but not to stifle innovation.