Nitish Mittal
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Nitish Mittal

Nitish Mittal is a member of the IT Services team and assists clients on topics related to Healthcare and Life Sciences (HLS) IT. Nitish’s responsibilities include leading Everest Group’s HLS IT PEAK Matrix evaluations as well as custom engagements on emerging technology themes, sourcing constructs, demand-supply dynamics, and thought leadership initiatives.

Enterprise Technology 2016: What Will and Won’t Happen| Sherpas in Blue Shirts

By | Blog

Now that the dust has settled from the New Year frenzy, it is a good time to channel our inner psychic and do some crystal ball gazing about enterprise technology trends. Following are the technology trends that we see playing out in 2016 and into early 2017.

  1. Customer centricity and UX are king

The fundamental disruption being caused by consumerization of the enterprise IT has profound implications on how organizations approach the user experience (UX). As consumers’ expectations and benchmarks for next-generation channels evolve, UX is key in enabling the digital mandate. This translates into an enhanced focus on superior design, collecting data (user behavior, regional preferences, A/B testing, and demographic information), and personalizing content. Design coupled with the appropriate tracking/monitoring will be crucial in driving meaningful engagement through a personalized UX. While global technology providers have generally lagged in bringing UX and design thinking into solutions, this is changing. Whether it is Accenture (per its 2013 acquisition of Fjord), Infosys (with AiKiDo, its next generation services in Design Thinking), or Wipro (via its 2015 acquisition of Designit,) service providers have started looking outside their organizational set ups to develop these capabilities through M&As, acqui-hiring and setting up separate business units, often outside their P&L play.

  1. Open APIs to catalyze innovation

 Numerous examples of unlocking barriers to provide open access to APIs to catalyze innovation, gain developer trust, and accelerate the pace of use-case creation emerged in 2015. For instance, in September IBM acquired StrongLoop, a provider of popular application development software (enterprise Node.js) that enables software developers to build applications using APIs. In November, IBM launched API Harmony with cloud-based API matchmaking technology for developers. It also opened up access to IBM Watson’s cloud-based API. In an attempt to woo developers, Salesforce announced App Cloud, which integrates its existing Force, Heroku Enterprise, and Lightning services to create an interactive learning environment for “citizen developers” creating Salesforce apps. Apigee, a company that helps organizations build and manage API connectors, went public in April 2015, and its revenues and margins are performing well. It has also witnessed traction with large enterprises such as AT&T, Bechtel, Sears, and Walgreens, to name a few. Given how crucial APIs are to advancing innovation and enhancing the digital experience, we’ll see many more technology companies jump on the open API bandwagon.

  1. DevOps, ITOps, NoOps, and ShadowOps, will continue to slug it out

The emergence of new operating paradigms continues to transform IT operations. DevOps, the latest, promises quick and reliable unified development and operations to meet business needs. Then there’s conventional ITOps, and NoOps, an extension of DevOps wherein developers take over all responsibility for processes such as architecture design, capacity planning, performance optimization, etc. In the absence of a clear winner in 2016, there will continue to be various shades of these methodologies in place across various industries/organizations, depending on maturity of IT set up, specific needs, business constraints, regulatory requirement, etc. DevOps adoption will continue to struggle to move beyond lip service as organizations grapple with challenges related to change management, restructuring, talent, and governance to manage complex IT environments.

Read our previous take on DevOps

  1. IoT – Let’s cut to the chase, shall we?

The conversation about the Internet of Things (IoT) will move beyond just sensors and connected devices. We have already begun to see the emergence of new business models such as Printing-as-a-Service, Home Automation-as-a-Service, Blood Tests-as-a-Service, Transport-as-a-Service, etc. IoT and the connected world have made these individual products into continuously evolving prototypes that can be enhanced through over the air updates, thereby introducing new features. Connecting various disparate products will lead to improved analytics and, therefore, better forecasting and customer experience, highlighting new possibilities for IoT-based value creation.

  1. Security: CISOs step up to the plate

It is time for Chief Information Security Officers (CISOs) to take their place in the sun. After years of CIOs treating security as a hygiene checklist item, recent high-profile data breaches and global cyber warfare have placed the spotlight firmly on cybersecurity. Our digital services research indicates that 70 percent of enterprises believe cybersecurity is a major concern in their digital journey. Cybersecurity initiatives also rank as the second most important among digital enablement priorities. In the single biggest affirmation of this change, the White House announced on 9 February, 2016, that it is seeking to hire its first Federal Chief Information Security Officer as a part of a new Cybersecurity National Action Plan. As security takes a seat on the board, enterprises will start treating cyber risk at par with financial risks. CISOs should see budget approvals getting easier as they look to revamp cybersecurity preparedness, enhance audit and governance controls, and shift the focus from prevention to mitigation. Security will gain a more prominent place in public discourse in the context of 2016 U.S. presidential elections (you may recall that attackers targeted both presidential candidates’ websites and emails during the 2008 and 2012 elections.)

Enterprises need to take a hard-nosed look at their technology spend and realize that the walls between business and IT need to break down. All aspects of IT – application development, maintenance, testing/QA, infrastructure – are getting aligned to specific business outcomes for greater visibility, predictable demand, enhanced governance, risk mitigation, and audit control.

These themes are already sweeping the global technology landscape, and will only gather steam as the year progresses. We would love to hear what you have to say about enterprise technology in 2016, and beyond.

Will Corporate Venture Funding Lead to the Death of VCs as We Know Them? | Sherpas in Blue Shirts

By | Blog

For some time now, large companies have shied away from corporate venturing, unsure of returns and/or efficiency of capital usage. Enterprises have seen their venture initiatives fail, and many give up hope quickly after initial enthusiasm. Even corporates that have managed to run successful funds have struggled to monetize their leveraged investments as they scale up. Given these challenges, it’s not surprising that enterprises with large, under-utilized cash piles chose to maintain the status quo, rather than invest in an emerging startup economy.

However, we’re starting to see a significant change in the funding landscape. This week, Google announced plans for a new operating structure that effectively makes the eponymous search engine giant a subsidiary of a new holding company, Alphabet. One of the main driving rationales for this decision was to delink Google from other ventures in which the parent organization is involved, and give it more room to experiment with new ideas. After all, Google has diversified into areas including life sciences, drone delivery, space research, and home automation.

Last month, Workday, the enterprise SaaS poster boy, announced Workday Ventures, the company’s first strategic fund focused on identifying, investing, and partnering with early to growth stage companies that place data science and machine learning at the core of their approach to enterprise technology. In June 2015, Intel Capital led a US$40 million Series D investment in Onefinestay, best described as a luxury Airbnb competitor. And other corporate venture funding efforts have figured prominently in the recent hyper-competitive boom in the deals landscape.

Corporate VCs don a new avatar

Corporate venture funding has taken a new lease on life, and aroused widespread interest, notably in The Economist and Harvard Business Review. This is not without reason. AMD, Dell, and Google are technology giants with early venture funds, and firms such as Microsoft and Salesforce made similar moves later. A CB Insights study on corporate venture investment trend found that corporate venture capital activity witnessed a significant uptick in 2014, with deals by corporate venture arms jumping 25 percent YoY and funding rising 76 percent. The most active corporate venture investors in 2014 among technology companies were Cisco, Comcast, Google, Intel, Salesforce, Qualcomm, and Samsung, underscoring the attention being paid to this route.

In terms of exits by corporate venture investors, technology players again emerged on top, led by Google Ventures (OnDeck Capital, Hubspot, and Nest Labs), Intel Capital (Yodlee, [x+1], and Prolexic Technologies), and Samsung Ventures (Fixmo, Cloudant, and Engrade), and Qualcomm (Divide, MoboTap, and Location Labs). The marquee corporate venture deals in 2014 were Cloudera (US$900 million, led by Intel Capital), Tango (US$280 million, led Alibaba), and Uber (US$1.2 billion, led by Google Ventures). The chief areas of investment include Internet of Things, analytics, security, and platform technologies.

Differences between corporate venture funding and conventional VCs
  • While VCs tend to focus on growing portfolio companies and time their exit from a ROI standpoint, corporate venture funds take a strategic view of investments, and look to use their expertise to guide start-ups
  • Acquisition of portfolio companies is not uncommon for corporate venture funds (e.g., Google Ventures – Nest Labs). Funding a startup and acquiring it later, rather than building one organically, makes for a stronger business case. Traditional VCs frequently work with the intention of taking investments public
  • Corporate venture funds are less risk-averse than conventional VCs, given their deep pockets and long-term position. This is also reflected in their higher involvement in seed funding rounds
  • Typical VCs tend to lag corporate venture funds in terms of average deal size or term, also due to corporates’ deep pockets and long-term holdings
  • Corporate venture funded start-ups tend to go public more often than their VC portfolio peers

 

Strategic technology investment or desperate spend?

Given improved macroeconomic confidence, there is a lot of “easy money” floating around the technology continuum. And this is beginning to result in a “perpetual investment bubble.” While this isn’t to say that doomsday is just round the corner, with everything and anything getting funded (does anyone remember Yo?), utility, monetization models, and future relevance seem to be the last things on investors’ agenda. More often than not, there is a fine line between a blunder and a brilliant bet. Everyone and anyone in this easy dollar-fueled utopia tend to be under the messianic illusion that the next multi-billion dollar bet is around the corner and will change the world. Most players tend to add incremental value over existing processes, systems, and interfaces, rather than changing them as we know it, which is the reality of investing.

Given their tremendous business acumen, corporate funds have talent, skill set, pedigree, and, ultimately, deep pockets to exist and thrive in a volatile knowledge economy as they look to identify and nurture a truly revolutionary idea beyond just incremental technology value. That said, there is likely to be significant churn once the rose-tinted glasses come off. Still and all, with the strategic depth and domain guidance large enterprises can provide, their portfolio companies are likely to be better positioned to ride the wave.

IBM’s Watson Ups the Ante in Healthcare | Sherpas in Blue Shirts

By | Blog

The recently announced acquisition of Merge is one in a string of initiatives by IBM to increase both its market presence and depth of offerings to the healthcare sector. With birth rates increasing in many parts of the world and the aging population growing in developed countries, the race is on for data driven and highly efficient healthcare.

IBM is clearly targeting this market. Its recent activities have included:

  • Entering into new partnerships with companies such as Apple, Johnson & Johnson, and Medtronic for health-related data collection, analysis, and feedback
  • A partnership with CVS Health to develop care management applications for chronic diseases
  • Acquiring Explorys, a healthcare data provider, and Phytel, a hospital care coordination information provider
  • Buying AlchemyAPI to include text analysis and computer vision capabilities into Watson’s computing platform
  • Establishing a dedicated business unit called IBM Watson Health, headquartered in the Boston, MA, with the specific remit of growing its healthcare business
  • Collaborating with leading hospitals and research institutes including Memorial Sloan Kettering Cancer Center, University of Texas MD Anderson Cancer Center, the Cleveland Clinic, and the Mayo Clinic to leverage Watson’s healthcare capabilities at the cutting edge of medical research
  • Setting up IBM Watson Health cloud to bring together data for healthcare and research

The US$1 billion acquisition of Merge brings IBM a medical imaging platform to combine with Watson’s image data and analytics capabilities and an extended client base. Excellent and Elementary, Dr. Watson.

With these initiatives, IBM is building specialist competences, to capture, analyze, and recommend treatments or actions that would help healthcare providers, payers, pharmaceuticals, as well as individuals achieve positive health outcomes.

Gaining a wide range of capabilities in specific areas has helped IBM generate specific segment revenue in good and bad times. For example, its large number of information management and WebSphere portfolio acquisitions (e.g., Cognos, Netezza, and SPSS, to name but a few) has seen segment-specific revenues maintain steady growth over the years.

If IBM was to successfully combine its deep specialization in healthcare with Watson’s cognitive computing to enhance its services, it could gain a big edge over competitors at a time when demand is set to grow. At the moment we are seeing more of IBM in healthcare IT infrastructure modernization contracts than data-driven care provisioning and support services. Recent examples include:

  • A contract to update the UK NHS’ electronic staff record (ESR) system, adding mobile access and self-service capabilities for 1.4 million employees
  • A contract to provide mainframe and data center server and storage infrastructure services for Anthem Inc, a U.S.-based health benefits company, for the next five years at TCV of US$500 million

These types of contracts give IBM opportunities to tap into new solution and services openings at existing clients.

Other challenges for IBM’s intelligent and data driven healthcare offerings include:

  • Collecting enough data for its solutions to be relevant to, as well as accessible in, different parts of the world
  • Data protection barriers in Europe
  • Poor cloud infrastructure in emerging economies.

IBM is going all out when it comes to showcasing Watson as a competitive differentiator. In an uncharacteristic move (and a sign of the times), it has launched Watson Developer Cloud, an open platform for developers to build apps on top of Watson for industry-specific solutions (through a set of APIs and SDKs). It is also working with app developers such as Decibel, Epic, Fluid, Go Moment, MD Buyline, TalkSpace, and Welltok to build apps embedded on Watson technology, thereby, rounding up a robust ecosystem. It is abundantly clear that IBM views healthcare as the principal vertical where Watson’s computing prowess can make its mark. In the meantime other service providers are likely to build or acquire their own cognitive capabilities to challenge IBM on pricing and specialist offerings.


Photo credit: Flickr

Teva Buys Allergan’s Generics Business to Consolidate Pole Position | Sherpas in Blue Shirts

By | Blog, Healthcare & Life Sciences

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.

Many More PEAKs to Conquer in Healthcare and Life Sciences! | Sherpas in Blue Shirts

By | Blog

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, [email protected]

Nitish Mittal, Senior Analyst, [email protected]

Mayank Maria, Analyst, [email protected]

Health Net – Centene Merger Leaves a (Slightly) Bitter Pill for Cognizant | Sherpas in Blue Shirts

By | Blog

On July 2, managed healthcare companies Centene and Health Net announced a merger in a cash-and-stock deal valued at US$6.8 billion, becoming the latest deal in an intensifying wave of consolidation in healthcare. The agreement has been approved by both companies’ Board of Directors and is expected to close in early 2016. The deal combines the two companies, with the joint entity having more than 10 million members and an estimated US$37 billion in revenue this year. The large-scale reform of US healthcare (instigated by the Affordable Care Act) was never expected to be a smooth and genteel affair. One of the immediate impacts was provider consolidation as health systems (which had endemic cost and profitability issues) looked for scale, efficiency, and lean cost structures. A similar trend was also expected in the payer space, but the rollout of the Health Insurance Exchanges (HIX), which operationalized last year, delayed the eventual M&A frenzy. Last month, America’s numero uno insurer, UnitedHealth Group (UHG), approached the number three, Aetna. The latter responded by buying number four, Humana, for $37 billion on July 3, capping a seminal week for mega mergers in health insurance. Humana was earlier reported to be close to a similar deal with Cigna. The second largest, Anthem, is in the midst of a messy takeover attempt as it relentlessly pursues the number five, Cigna (which rejected an initial US$47.5 billion bid). We covered the potential impact of the potential UHG-Aetna and Anthem-Cigna deals on IT services in a blog soon after the first rumors started floating.

Collateral damage – the Cognizant story

The announcement comes at an extremely inopportune time for Cognizant. The company had announced (with much fanfare) a marquee seven-year US$2.7 billion deal with Health Net last August. The engagement was unique in multiple ways. Along with Accenture’s Rio Tinto deal, it is the flag bearer of a bold new deal construct, which epitomizes the fundamental tenets of the As-a-Service economy and widely expected to herald the era of a consumption-based IT services model. Under the terms of the seven-year master services agreement (MSA), Cognizant was to provide a wide gamut of services to Health Net across consulting, technology, and administrative areas spanning claims management, membership and benefits configuration, customer contact center services, information technology, QA, appeals & grievances, and medical management support. Cognizant was to be held responsible for meeting specific SLA targets for improving the quality, effectiveness, and efficiency of multiple operating metrics. These included claims processing and routing times, customer contact center response times, and contact center customer satisfaction targets. In effect, a fairly wide ranging set of services with ambitious KPIs for accountability and governance.

The planned implementation was scheduled to begin in mid-2015. Given the Centene-Health Net deal, the implementation is being deferred, while the deal is completed pending the merger review and approval process. As a result, Cognizant does not expect any contribution (previously pegged at about US$100 million in H2 CY2015) from the deal, which the company can easily absorb without tempering its ambitious revenue guidance for the current financial year. Additionally, it also foresees that if the merger is completed, the existing MSA is not likely to be implemented, which (if it materializes) will be a major setback. Cognizant will still remain a strategic technology/operations partner to Health Net (under a prior contract) through 2020 with a total contract value (TCV) of about US$520 million. Cognizant has also negotiated the right to license certain Health Net IP for use in its solutions and “As-a-Service”platforms, which is not expected to be impacted by the proposed merger.

Looking ahead, despite the short-term loss of US$100 million incremental revenue, Cognizant’s CFO Karen McLoughlin has reaffirmed 2015 guidance as strength in other areas of the business are expected to offset the lost revenue. 2015 revenue is expected to be at least US$12.24 billion with non-GAAP EPS at least US$2.93. Overall, the contract was expected to be margin dilutive in the early years and in generally only “margin neutral over the long run.

Lessons for the services world 

As overall macroeconomic confidence is on the upswing and various industry drivers come into play, the M&A activity is only bound to intensify. This has a profound implication for service providers who are deeply entrenched in such large enterprises and need to be prepared to come out on top of any eventuality. One potential impact of such M&A is the tendency for the combined entity to rationalize its vendor portfolio – choosing to stick to a short list of key strategic vendors by trimming the sourcing pie. The selection criteria for vendors then boils down to specific value-differentiators, maturity of service portfolio, senior management relationships, competitive positioning, and account-level exposure. Technology/operations budgets also tend to shrink as enterprises leverage economy of scale and target operational efficiency.

The following image illustrates the current exposure of key service providers across UHG, Aetna, Anthem, and Cigna. As is evident, these mergers tend to benefit larger service providers that are typically well entrenched across the combining firms. However, a few, may find their portfolios at-risk given competitive underpinnings, sourcing maturity, and enterprise penetration.

Account-level exposure of key service providers

Net-net, we don’t expect Cognizant to be unduly impacted by the proposed merger given the current state of affairs and its leading position in the healthcare and life sciences landscape (poised to reach US$4 billion in annual revenue in the next 18 months). The opportunity at hand is not under threat but there will be significant shifts and redistribution between vendors. The healthcare market is poised to witness increased turbulence (we believe this is just a teaser of things to come) and service providers need to realign and reposition themselves to utilize this opportunity. Let the games begin!

The CSC Split: More than What Meets the Eye | Sherpas in Blue Shirts

By | Blog

Yesterday, Computer Sciences Corporation (CSC) announced that it was splitting the company into two independent, publicly-traded entities – U.S. Public Sector and Global Commercial. The split, expected to be completed by October 2015, will be accompanied by a special cash dividend of US$10.5 per share. After the bifurcation, the U.S. Public Sector business will focus on federal, state, and defense customers within the country, and employ 14,000 people. The remaining 51,000 employees will be a part of its Global Commercial business that will focus on commercial customers, and public sector organizations outside the United States. The two businesses generated US$4.1 billion and US$8.1 billion, respectively, in annual revenue during FY2015. Everest Group’s CEO Peter Bendor-Samuel shared his top-level insights shortly after the announcement. Following is our evaluation of the different potential scenarios arising out of the split.

Last attempt to avoid a buyout?

The announcement comes after the latest set of rumors about CSC’s potential sale. In February 2015, Carlyle Group and Capgemini were reported to be in talks to jointly acquire the company. Around the same time, CSC was said to be working with Royal Bank of Canada to review buyout options. Similar reports emerged in September last year with CSC exploring leveraged buyout via multiple private equity firms, including Bain Capital and Blackstone Group. CSC’s buyout (if it had materialized) would have been the largest leveraged buyout since Dell went private for US$16 billion in 2013. However, the talks over the year fizzled out as buyers baulked at CSC’s expected valuation.

If this move is a precursor to a possible sale, the question comes around to the identity of the suitor. Rumors have floated about interest from HCL and Accenture, but things don’t add up with those two suggestions for a number of reasons. HCL already has what it needed from CSC through its alliance, and Accenture already enjoys pole positon in the consulting markets, so they would have to radically depart from their infrastructure strategy to take on the CSC asset base. Given that Accenture is integrating infrastructure with operations as part of its GTM (go-to-market) strategy, we do not see the change in strategic direction that would indicate acquisition of an asset like CSC. A more plausible candidate would be someone looking for scale in the North American enterprise market with allied economic models creating scale and IP synergies.

Driving rationale 

The decision to split can be viewed as the culmination of CEO Mike Lawrie’s efforts to revitalize this ailing company. Since his inception in 2012, CSC has witnessed firm-wide cost takeout measures as a part of the “Get Fit” phase of its turnaround efforts. Attributable to these efforts, the company managed slight melioration in its operating margins during FY2014 and FY2015. Recognizing the fact that the cost takeout measures have already liquidated as enhanced bottom-line, and in the absence of a successful buyout, the management has settled on forming two separate business entities catering to different customer segments. Increasing profitability and value for shareholders could also shore up CSC’s valuation.

Apart from catering to different customer segments, the two entities have inherently exhibited great divergence in terms of their growth profiles and cash flow dynamics. The Global Commercial business has faced strong tailwinds, with revenue in FY2015 declining due to contract completions and lack of new opportunities. On the other hand, the Public Sector business managed to maintain the figures, backed by demand for next-gen IT solutions such as cloud. As it gears up for a potential sale, the government business is potentially value dilutive, and may not find many takers. There’s also an aspect around risk compartmentalization – troubled contracts in the federal marketplace can get service providers stuck in long-drawn out lawsuits and punitive damages.

The future

Keeping this context in mind, splitting the overall businesses can play out in a number of different ways for CSC. It can help offload the new entities of assets not core to their business, enabling them to be more strategic in serving clients and pursuing new opportunities. The new entities will be in a better situation to position themselves as specialists in their respective markets. While this may not be a pivotal factor for the Global Commercial business, it could be a turning point for the Public Sector business, wherein, organizations increasingly seek to engage with specialized technology partners. Despite the split, both entities stay as multi-billion dollar businesses, thus, ensuring that none of the two entities face any scalability issues in the market.

With its decision to split, CSC joins the league of technology companies that have lagged in adapting to the changing market dynamics (shift to mobile, cloud computing, and the As-a-Service economy), and are splitting up in response to market pressure. Last year, HP, another service provider plagued by similar challenges, announced a similar split. Two years ago Science Applications International Corp. (SAIC) went down the same path and spun off its government technology services business as SAIC and rebranded itself as national security and engineering company Leidos Holdings Inc.

While the ultimate success or failure of such a strategic move is murky at best, it is beyond doubt that a rapidly disruptive and evolving services landscape will lead providers to ponder hard choices. In the last year we have seen multiple instances of this realization translating into different maneuvers – movement towards an integrated value proposition (Cognizant-TriZetto), geographic/vertical expansion (Atos-Xerox and Capgemini-IGATE), and focus on next-generation tenets (Apple-IBM). As this continues to happen, expect more industry churn, realignment, and consolidation.

Capgemini Acquires IGATE to Power North American Ambitions | Sherpas in Blue Shirts

By | Blog

Today, Capgemini announced the merger agreement to acquire IGATE for $4.04 billion. IGATE is a US-listed technology and services company headquartered in New Jersey with US$1.27 billion in revenue in 2014. The sale of IGATE has been in the offing for a while after private equity company, Apax Partners, which financed most of IGATE’s US$1.2 billion acquisition of Patni Computer Systems in 2011, converted its debt into equity in November 2014 (becoming its largest shareholder) and also filed with the U.S. Securities and Exchange Commission to have the option to sell its stake. The combined group will have nearly US$13 billion in annual revenue and 177,000 people globally. Capgemini aims to realize revenue synergies of US$100-150 million (through cross-selling and account farming) and cost savings of US$75-105 million over the next three years. The deal’s size and cross-ranging implications make it one of the most significant transactions in the IT-BPO industry. Capgemini is paying a premium for its North American ambitions, over 3x revenue multiple. It outstrips other such deals in the marketplace, notable CGI-Logica (2012) and IGATE-Patni (2011), indicative of the scale and urgent imperative driving deal rationale.

Major acquisitions in the IT-BPO market (US$ million)

Major acquisitions in the IT-BPO market

What works?

Prima facie it gives Capgemini a sizable foothold in the North American market, the biggest IT outsourcing market in the world. North America becomes a significant market for the combined entity, comprising nearly one-third of 2015 projected revenue, up from 20% for Capgemini earlier. Europe will still account for over half of the combined revenue. The North American region contributed nearly 80% to IGATE’s revenue in 2014, with marque clients such as GE and Royal Bank of Canada. This had increasingly become important for the company since its French-rival Atos bought Xerox’s North American ITO business late last year. That deal also made Atos the primary IT services provider to Xerox (~US$240 million annual revenue) and also have the right to first refusal on collaborative opportunities with Xerox.

It enhances Capgemini’s delivery presence in offshore/low-cost regions specifically India, where most of IGATE’s 33,000-strong workforce is based. Capgemini had earlier acquired Kanbay in 2006 with a focus on increasing India operations. It also bought Unilever’s India GIC – Unilever India Shared Services Ltd (UISSL) – in parts over 2006-2010. Around two-fifths of Capgemini’s global workforce of 144,000 employees is based in India, with the combined group having an offshore leverage of nearly 55% by the end of 2015, comprising over 90,000 people.

The move adds greater definition to the verticalization maneuvers Capgemini had been driving of late. IGATE’s strong BFSI client roster (CNA, Royal Bank of Canada, MetLife, UBS, Morgan Stanley), comprised over two-fifths of its revenue last year. Similar synergies are expected in manufacturing, healthcare, and retail sectors.

Capgemini’s functional spread stands to gain on account of IGATE’s mixture of IT and BPO services. Specifically, Capgemini has been looking to grow its ADM and BPO business, as enterprise clients exhibit a preference for integrated services stacks led by an expanding As-A-Service economy, combine infrastructure, application, and business process service needs. This is the driving force behind IGATE’s business model – ITOPS or Integrated Technology and Operations, which will help Capgemini position itself as a fully integrated service provider. The deal also holds Capgemini in good stead, bolstering its industrialization play. As the value proposition in the global services space moves beyond labor arbitrage, service providers are looking at non-linear IP-driven revenue sources through products, platforms, and solutions. IGATE has monetized the ITOPS value proposition through productized applications and platforms – IDMS (for BFS), IBAS (for TPA clients), and SIB (for retail customers) – which are distinct P&L-plays for the company. Capgemini is also likely to receive additional tax benefits from the deal, as it is carrying a large deferred tax asset in the U.S.

The uncertain

The adage “culture eats strategy for breakfast” couldn’t be truer for this merger. There is a stark cultural tension with a Europe-heritage firm struggling with offshoring trying to integrate an Indian IT service provider with a strong North American client roster. Plus all is not rosy with IGATE. One of its largest clients, Royal Bank of Canada, has been facing problems for its use of IGATE services while GE’s contribution to revenue has been falling. CEO Ashok Vemuri’s hire-for-growth plan witnessed a bump when Q4 2014 headcount actually fell by about 900 employees. IGATE registered an annual revenue growth of just 10% to $1.27 billion in 2014, lagging other IT peers. On the executive front, the merger means uncertainty for Ashok Vemuri, who left Infosys specifically to take over as CEO after Phaneesh Murthy left. His dream of staying a CEO might be curtailed, and he will be tempted to move on, as he wouldn’t want to occupy a role similar to what he held at Infosys, with even less leverage with the leadership. This potential void in leadership could pose a major hurdle for the integration process.

The road ahead

The move is indeed a bold one by Capgemini to catalyze growth, plug delivery/regional/vertical gaps, and streamline operations. IGATE is the right size for Capgemini to absorb – not too small so it does not have a tangible impact but not so big that to create an integration struggle. The sizable deal size could spur U.S. giants to action. Given Capgemini’s European legacy, other regional service providers could mull their options in a bid to expand their operational footprint. We have already seen recent activity in Europe with the Steria-Sopra merger last year. MNCs struggling for growth and looking at globalizing delivery could start thinking of mid-sized players as possible targets. Some of these players have growth issues, significant PE investments, scaling problems – all of which make a good rationale for a merger with a bigger player. On the other hand, the deal lacks some specific attributes when it comes to next-generation technology tenets such as cognitive computing, automation, digital, and analytics. Moreover, Capgemini will need to bridge the inherent disconnect between two different cultures, systems, processes, and people, to make this integration successful. The deal is certain to spark further consolidation and conversations, as service providers witness pricing pressures, evolving engagement models, and increasing anti-incumbency, in a bid to adapt to the As-A-Service construct.


Photo credit: Capgemini

Oscar and the Emergence of Consumer-Centric Healthcare | Sherpas in Blue Shirts

By | Blog

As I’ve blogged before, the healthcare space is at the cusp of a transformative change. Consumers are assuming greater ownership, control, and responsibility of health outcomes. Consequently, the decision making is shifting to the individual. Consumption patterns have undergone a significant change owing to disruptive mobile computing, rapid adoption of social media, next-generation sales/engagement channels, and ‘‘anytime-anywhere’’ information access. As individual consumers (patients and physicians) become more empowered, healthcare is transitioning to a principally patient-centric operating paradigm, with focus on cost, efficacy, and equity.

Analogous to what Uber has done to transportation, in progressive (and controversial) ways, there is a fundamental transformation in healthcare, placing patients at the center of all the action. These changes are reflected in the way reimbursements are distributed (moving from volume-based to outcome-based) and the onset of personalized medicine therapies based on real-world evidence. These gamut of changes are also aided by various cultural and socio-economic forces. The disruptive shift – from a healthcare provider-centric to a more customer-centric model – is driving significant healthcare investments in digital enablers of consumerization – social media, mobility, analytics, and cloud.

Healthcare consumerization levers

The New Kid on the Block

These winds of change have given rise to an immense opportunity to cater to this new patient-centric paradigm leveraging next-generation technology channels and enablers. Which brings us to Oscar, a New York-based health insurance start-up. Health insurance in the United States has conventionally been complex and non-transparent. With the advent of PPACA and health insurance exchanges (HIX), there has been a greater sense of accountability. Oscar aims to bring big data/analytics, design thinking, and transparency to the often-puzzling world of health insurance, making it smart, intuitive, and simple for consumers.

The idea for Oscar was born when one of its co-founders received his health insurance bill and realized that none of it made sense to him. The complexity and high entry barriers to health insurance can be gauged from the fact that Oscar was the first new health insurance provider to launch in the state of New York in more than a decade. The start-up sells coverage to individuals through insurance marketplaces in New York and New Jersey. The insurance plans offer free basic care including doctor visits, phone calls with doctors, preventative care, and generic drugs.

The company is backed by seasoned venture investors Peter Thiel and Vinod Khosla as it attempts to bring Silicon Valley mojo to health insurance. It was co-founded by venture capitalist Josh Kushner (an early stage investor in Warby Parker and Instagram), Kevin Nazemi (a Microsoft veteran), and Mario Schlosser (MIT Media Lab and hedge fund experience). The company’s strong digital health ethos is reflected in the senior leadership team – CTO Fredrik Nylander is a former Tumblr executive, Dave Henderson (ex-Cigna and EmblemHealth) is Oscar’s president of insurance, board member Charlie Baker is former CEO of Harvard Pilgrim Health Care, and senior medical executive hires from EmblemHealth, a leading health plan in New York state.

Oscar

What’s different?

Oscar’s value proposition is on being a more personalized health insurance provider, with a strong sense of convenience and personal attention, aided by marketing, design, and consumer service practices that are aligned to the needs of the millennial generation. It has a sizable emphasis on telemedicine (offering it free of charge), and lets customers speak to doctors 24×7 with a goal of 10 minute wait time or less. To help answer medical questions, the company has doctors on call to chat online or over the telephone with customers. Oscar also lets customers check prices for procedures ahead of time and offers three free in-person doctor visits and free generic drugs.

The company faced minor bumps in the beginning with poor reviews and complaints (an average Yelp rating of 2 stars), but has instituted a feedback input mechanism based on customer interactions. The company aims to productize every customer interaction by implementing feedback as soon as it receives it. It has a slew of partners and tie-ups in line with its strategic focus.

In December 2014, Oscar announced a partnership with Misfit (a wearable tech company), by offering members free fitness trackers, along with Amazon gift cards, as part of an attempt to incentivize healthy behavior and bring down employee healthcare costs. Oscar also offers services at many hospitals and retail locations such as New York CVS CareMark. It is a health insurance company that resembles a technology start-up rather than a faceless insurance behemoth, sort of a health insurance start-up for “born digital” natives.

The future

Since commencing operations in July 2013, Oscar has had a reasonable start. It had about 15,000 members and estimated revenues of U$72 million in 2014. It doubled that member base to 30,000 in January 2015, with one month of enrollment left to go. Oscar is seeking approval to enter California’s individuals exchange by 2016. The primary litmus test for Oscar is going to be the same as for any health plan – managing risk, keeping premiums reasonable, maintaining margins, handling payer-provider convergence, and improving health outcomes. Oscar is a prime example among modern companies looking to shape consumer-driven healthcare in the United States leveraging next-generation technology. As it looks at a reported valuation of significantly more than US$1 billion (implying a handsome 14x sales multiple!), the bet might just pay off.


Photo credit: Oscar

Enterprise Technology 2015: Heavier Apps, More PaaS, Troubled Security… and more | Sherpas in Blue Shirts

By | Blog

As enterprises freshen their technology mandate for 2015, they stand at the cusp of a multi-dimensional interplay of agility, flexibility, and rising security considerations. Beyond the usual SMAC stack, enterprises are also grappling with challenges to the status quo in terms of faster application development, automated IT operations, the Internet of Things, and process fragmentation.

Following are five technology trends that rose to the top of our list for the important role they will play in enterprise technology in 2015.

    1. Mobile Apps – Will Need a RethinkThe IBM-Apple partnership to tackle enterprise mobility is a significant development that validates our earlier hypothesis. However, the enterprise apps now require a rethink. These apps were conceived to be “light weight” and easy to use, focused on a specific range of capabilities. But, due to increased adoption and constant demand for additional functionality, enterprises are going against this fundamental tenet by coding in multiple features that are making mobile apps heavy and difficult to use. Yet, this same “overhead bulk” has become compulsory to provide features such as analytics across apps usage, offline access, and cloud collaboration that help enterprises perform meaningful tasks. In 2015, enterprises will need to walk a fine line between honoring the basic principles of mobile apps and the persistent demand for increased functionality.
    2. PaaS – The Needle Will Move FurtherWhile Platform-as-a-Service (PaaS) has been touted as the “next wave” since its inception, it never fulfilled its purported potential of adding meaningful value. However, enterprise technology may see that change in 2015 given the push from leading vendors such as Microsoft (Azure), IBM (Bluemix), Red Hat (OpenShift), Salesforce (Salesforce1), and AWS (Elastic Beanstalk). The PaaS business case will be enhanced by IaaS providers offering “PaaS-like” features (which is already happening), as well as PaaS platforms getting integrated with IaaS (e.g., the recent partnership between Apprenda and Piston Cloud). Although we do not believe PaaS will become the face of the cloud, we indeed expect 2015 to push its adoption within enterprises.
    3. Cyber Security and Open Source – Conundrum Won’t be SolvedThe Sony hacking scandal reiterated the importance of enterprise security – which is often taken lightly as compared to most cool next-gen initiatives – and has turned cyber security into a top priority for 2015. However, with the proliferation of Open Source Software (OSS) in enterprises, this “insecure” perception will surge. Enterprises are aggressively looking toward OSS with a host of next-generation technology areas such as cloud (OpenStack), Big Data (Hadoop), mobility, IT operations automation (Chef, Puppet), and content management (Drupal, Joomla!). With marquee B2C corporations such as Netflix, Samsung, and Facebook already having undertaken major, well-publicized OSS initiatives, other traditional enterprises will be pushed hard, despite a concern for security. Google teaming up with Samsung to include Knox (additional enterprise security features) to make Android more appealing for the enterprise is a step in answering this conundrum. However, it won’t be solved in 2015.
    4. Battle for Container Supremacy – Docker Will be ChallengedApplication development is getting a relook within enterprises with increased interest in container technology. Docker, the poster child for containers, whose open platform helps developers to build, ship, and run distributed applications, was rocketed in 2014 with competition from CoreOS. While Docker container technology is now supported by most platforms such as Amazon, Google, IBM, Microsoft, and VMware, its shortcomings are becoming visible. Developers believe Docker “replaces” virtualization but provides limited platform-type support, and its containers are becoming resource intensive. Moreover, given Docker’s early foray into container management, it will be pitted against the might of Google Kubernet and AWS, as well as nimble players such as Giant Swarm. This may dilute Docker’s focus on developing next-generation container technology, leaving an ample field for competitors to exploit.
    5. Analytics – Focus Will be on Bread and ButterWith millions of dollars invested in data analytics initiatives, 2015 will make enterprises reassess the opportunity cost and value of data. While tools such as Hadoop and NoSQL have greatly reduced the entry barriers to analytics, they have witnessed middling adoption. Enterprises still have a long way to go to embed analytics in their existing processes. Therefore, despite the Internet of Things and wearable devices taking off and generating more machine data for organizations to tap into, these new initiatives will not be an immediate priority for 2015. In 2015, enterprises will get their analytics act together to focus on existing processes, consolidation, rationalization, and targeted spending, with data management, governance, and security taking priority.

Danish physicist and Nobel Prize winner Niels Bohr once commented that, “prediction is very difficult, especially if it’s about the future.” So, please join us out on the limb. What are your predictions for 2015 enterprise technology?