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.

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

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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.

HIMSS16 was all about getting real when it comes to healthcare IT | Sherpas in Blue Shirts

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Before heading out to HIMSS16, I wrote about five themes I expected to dominate conversations at healthcare’s seminal event. It was interesting how a mix of those themes (and sometimes all five of them) figured into almost all of my meetings in Las Vegas. As I look at where the healthcare and life sciences market is headed in 2016-2017, there are a few secular changes dictating the technology mandate.

Please proceed with caution, as any attempt at synthesizing the narrative at an event of such scale can be ominous (and foolhardy in equal measure), but here goes:

Population health and patient engagement are finally coming into their own

Finally, care providers and vendors are talking about what an effective pop health or patient engagement actually represents, beyond ad-hoc individual investments. The need for having a coherent and thought-out strategy couldn’t be more pressing. CMS’ value-based goals have provided an increasing impetus to advancing the state of pop health programs to encompass a range of channels (mobile/social/self-service), enablers (big data & analytics, CRM, and EHR), and care dimensions. CMS has set a goal to have 50 percent in categories 3 and 4 (value-based care models including alternate care and population-based payments) by the end of 2018. I was a part of an insightful and interesting roundtable event hosted by Xerox (recapped here by Dr. Tamara StClaire, Xerox’s Chief Innovation Officer of Commercial Healthcare) on value-based care, which highlighted the principal issues regarding the definition and actual adoption of population health.

The 2016 elections has everybody on their toes

Merill Goozner, Editor of Modern Healthcare, had an interesting tidbit amidst all the election frenzy in the States. After Super Tuesday last week, the #1 Google search term in the U.S. was “moving to Canada.” The absurdity of the election season aside, it highlights an important realization of Trump’s ascendancy as a serious challenger. What either of the political choices mean for the ACA or universal health coverage is up for debate (no pun intended,) but we are in for some uncertain times. Payers are putting off some spending on health insurance exchanges looking for more visibility into future policies, providers are taking a wait-and-see approach on some discretionary spending, and pharma companies are taking a measured approach to see how the drug pricing debate plays out.

Interoperability becomes real … well almost

HHS secretary Sylvia Mathews Burwell announced the interoperability pledge during her HIMSS16 keynote address. “We need to do better to unlock data,” she told attendees. She kicked off proceedings with a pledge from 17 major health IT developers, 16 large healthcare provider organizations, and 17 healthcare associations and medical societies to promote patients’ access to their own EHR, avoid information-blocking, and use federal standards to promote interoperability. The need to speak the same language when it comes to EHR and patient data is now a part of the discourse. I had interesting conversations when it comes to the openEHR Foundation as well. Everest Group covered the EHR space and the problem with the oligopoly in an earlier blog.

The cool stuff is good, but let’s talk about the nuts and bolts please

We live in an era where it is easy to end up drinking your own Kool-Aid and buying into the infinite buzzwords being peddled in the market. In recent years, we have had a slew of buzzwords circling all conversations about healthcare – analytics, big data, personalized medicine, population health, interoperability, and consumerization of healthcare. The single most significant change in my opinion has been the shift from discussing these themes to what they actually mean for a healthcare market in an existential transition. Peeling the onion, if you will.

So instead of focusing on just a social media campaign, healthcare buyers are increasingly coming with problems that involve resolving multiple instances of a CRM/EHR system residing in the organization, cleaning and unification of patient data across multiple sources to obtain a 360 degree view, getting disparate information silos to talk to each, and rationalizing infrastructure – real housekeeping issues. This, in a way, symbolizes the demand profile at the peak of the IT outsourcing boom. IT is crucial to getting this enabling layer together to be able to meaningfully run a pop health initiative.

What’s your viewpoint on these issues?

Five Themes I Expect to Dominate at HIMSS16 | Sherpas in Blue Shirts

By | Blog

It’s hard to believe that the 2016 HIMSS Annual Conference & Exhibition is upon us! Being held in Las Vegas on February 29 – March 4, it is the largest healthcare IT conference in the world bringing together 40,000+ health IT professionals, clinicians, executives, and vendors. And with more than 1,300 healthcare IT vendors occupying over 1.3 million square feet of space (the equivalent of 22 NFL-sized football fields) in the Sands Expo, it will be easy to get lost physically and in the multitude of discourse and chatter that will be going on.

As I look at the healthcare and life sciences IT space heading into 2016, I expect the following five themes to rule the roost at HIMSS 16:

  1. Mega mergers, middling impact for providers

Big healthcare client mergers are underway, and they will cause fluctuations in IT services demand. Major IT services clients in the healthcare vertical are pursuing mergers – e.g., Aetna acquiring Humana; Anthem acquiring Cigna; and Centene acquiring Health Net. While awaiting regulatory approvals (which could take until the second half of 2016 or longer) and consummation, these mergers will affect IT services demand growth in this market segment – entailing pull back on awards of new IT services deals, and stalls on previously-planned scope – in turn potentially detracting from revenues previously expected by IT services firms. We have already seen market leaders such as Cognizant raise concerns over possible downward demand pressures arising out of this temporary pause in spending. After merger consummation, a ramp in merger-integration work could enhance consulting demand. Yet longer-term, existing outsourcing revenues from the combined organizations are prone to be truncated. That said, well-positioned IT services firms could capitalize by achieving client merger-induced share gains.

  1. Will the real patient engagement please stand up?

Patient engagement, population health management, and customized/targeted care have all been doing the rounds in the last couple of years. However, our assessment of the state of patient engagement maturity mandates suggests that most providers lack a coherent strategy. More often than not, care providers conflate ad-hoc and siloed patient-facing initiatives, such as a patient portal or solitary mobile app, as true patient engagement. This couldn’t be farther from the truth. These attempts don’t meaningfully move the needle on patient engagement, and give care providers a false sense of hope and progress. In 2016, health systems and payers will – hopefully – realize that to actualize the patient engagement mandate, they need to constitute a coherent, thought-out strategy that encompasses organizational maturity, culture, multi-pronged initiatives (spanning care management, operational support, internal IT, and omni-channel access), and effective governance mechanisms to keep these disparate moving parts together.

  1. Data security: keeping healthcare CIOs on their toes

Healthcare industry tailwinds such as big data, BYOD, EHR/EMR, networked devices, mHealth apps, cloud-based technologies, and IoT are adding to the healthcare information security conundrum. There has been a manifold increase in the complexity of managing information assets, specifically Electronic Protected Health Information (ePHI) and IP. The data sharing requirements for the Meaningful Use program and the Affordable Care Act will only compound the security challenges for healthcare organizations. The frequency, severity, and velocity of cyber-attacks have increased, leaving stakeholders shaken in the absence of adequate response and protection systems. Although CIOs often list security as a priority, historically it has not translated into actual meaningful spending on security initiatives. However, we believe now is time for Chief Information Security Officers (CISOs) to take their place in the sun. Per a 2015 survey conducted by Everest Group spanning over 200 senior healthcare IT stakeholders, more than 90 percent view data security as the key IT challenge, higher than any other pressing concern about their IT portfolio.

  1. Drug pricing – the Goldilocks syndrome to the rescue?

Thanks to Martin Shkreli, concerns over drug prices dominated the public discourse last year. For the uninitiated, Turing Pharmaceuticals, headed by Martin Shkreli, was widely condemned for raising the price of Daraprim, a drug used to treat HIV patients, by 5,000 percent from $13.50 to $750 per pill. Price increases for branded drugs have outpaced inflation every year since 2006. Even generics prices increased by an average of 9 percent in 2014. The federal government is investigating Turing Pharmaceuticals’ and Valeant Pharmaceuticals’ drug pricing strategies. In a U.S. election year, Big Pharma will be under tremendous pressure to lower drug prices, which could potentially affect new innovation funding. Presidential candidates, Democrats and Republicans alike, have drug price proposals, further intensifying the spotlight on the issue.

  1. 2016 Presidential elections and the fight for universal healthcare

Both parties in the U.S. presidential race have a number of healthcare proposals on the table. With the high-profile tax inversion mergers by pharmaceutical companies, rising medical costs, and high drug prices, healthcare will remain a key issue throughout the political campaign. This battle will stretch to the Congress as well, given the Senate’s recent passage of a bill that would dismantle core elements of the Affordable Care Act. While a full repeal looks unlikely, parts of the act are still under attack, and the mudslinging is likely to continue through 2016.

I look forward to interesting discussions on these and other topics with clients and the broader vendor community during #HIMSS16. If you’re there in person, feel free to contact me!

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

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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.