Tag: government

Cerner, Accenture, and Leidos Won the DoD’s US$9 Billion EHR Deal: Do You Know Who Lost It? | Sherpas in Blue Shirts

While the healthcare industry is reeling over the massive size of the Department of Defense’s (DoD) US$9 billion EHR contract just awarded to Cerner, Leidos, and Accenture, less attention is being paid to the fact that this team won the deal over the hot favourite joint bid of Epic Systems and IBM. Those who know the EHR landscape know there is scant anything that Epic loses (of course, the same used to be said about IBM, and that is where irony can probably find solace). Hence, the focus of this blog is on the fact that the invincible Epic Systems lost the mother of all deals in the EHR space.

Why are we hung up on Epic Systems? For the uninitiated, here is some context:

  • Predominant market leader: With over 40 percent market share, Epic has precipitated a large ecosystem of providers that are on its EHR platform. Epic has intelligently used its dominant market position to work with its customers in defining the roadmap for the evolution of EMR systems, and to make its competitors react to the steps it is taking to innovate across various care practices. Epic has focused primarily on large hospital systems, with minimal attention on the mid- to low-sized segment of the market. With its hold on the market, one is led to believe that Epic chooses its clients, rather than the other way around

  • Highly relationship-driven: Clients have traditionally loved Epic for being proactive in evolving its products, responding to suggestions, and quickly fixing issues. This is what set it apart from the biggies, such as Allscripts and Cerner, in its initial days. Epic has strong consultative sales teams that work closely with administrators, CMOs, and physicians. For large pursuits, it deploys dedicated product customization teams that can deliver POCs, manage change, and implement Epic in record time with partners. And most of Epic’s key product people, who can actually understand and address issues, are just a phone call away.

What could be going wrong with Epic Systems?

  • The “Epic” standard EMR? In an era where healthcare is actively pursuing consumer-focused and highly flexible technological innovation, Epic is facing flak – outside of its existing customer base – because of its highly standardized and rigid architecture. Key areas of question include lack of interoperability, lack of efficient APIs for consumer/end-user application development, and foreseen inability to innovate in a digital world due to its MUMPS-based legacy platform. This is what came out starkly when you read between the lines of Frank Kendall, Under Secretary, Department of Defense’s statement: “Market share was not a consideration, we wanted minimum modifications.”

  • High upfront capital investment: The upfront cost of Epic adoption is increasingly being mentioned as one of the hindrances. Cost is a major factor, and EMR implementations are hospitals’ biggest IT spend and budget areas. More importantly, some of the highly cited large EHR implementations (such as the US$700 million Duke University and Boston Partners deal) create an impression of a highly rigid commercials image for Epic. The case on cost versus benefit of having EHR has not been settled yet. Epic’s high premium positioning put it in a tight corner, despite the US$35 billion subsidies riding the EMR industry, and the general customer preference for Epic. The irony here is that the US$9 billion size of the deal is the reason Epic was such a natural choice for this DoD deal, but it probably lost it because the government needed a more flexible arrangement

  • Declining quality of services: Epic is facing the classical quality versus quantity challenge when it comes to managing its growing list of clients. The increasing shortfall in expert support staff is impacting its ability to maintain and support its products across many new and old clients. In the last 18-24 months, an increasing number of client executives have raised flags about outstanding and unresolved issues

  • Training has become a major area of concern, as more and more hospital systems are complaining of lost revenues due to their staffs’ below par or behind the curve Epic readiness. Epic’s inability to provide efficient training modules, and its tendency to keep things close to its chest, is driving wariness among new clients

  • Vendor-neutral storage: Given dependency concerns, customers are increasingly demanding vendors be aligned to some sort of vendor-neutral storage or archiving architecture. This is likely to lead to more thought leadership on vendor-neutral technologies, which will be directed at Epic’s predominant control regime.

There may be other commercial reasons for this massive DoD EHR deal not going Epic’s way. However, organizations already had a strong sense of circumspection while evaluating Epic’s EHR in terms of interoperability, next generation technology, digital enablement, and control. While before these reasons were less salient because of Epic’s trailblazing success, this lost deal will spur prospects to question them with a far more discerning eye.

UK Outsourcing Giants Take Diverging Paths | Sherpas in Blue Shirts

Last week both Serco and Capita announced their interim results. Not only did the two companies show a widening gap in terms of financial performance, but they also highlighted diverging business strategies.

Firstly, their financial performance in H2 2014 to date was very different:

Operating margin:

  • Capita has managed to stay on track to achieving at least 8% organic growth, net of attrition, for the full year 2014 (2013: 8%). It also stated that it expects to maintain its operating margin in the range of 12.5% to 13.5% for the foreseeable future
  • In contrast, Serco announced that the 2% organic growth in H1 2014 has turned into a mid-single digit decline in H2. This has been primarily due to reductions in volume of work in the Australian immigration contract but also due to contract losses and reduced volumes elsewhere. Serco expects to shrink significantly by 2016, with revenue reaching a nadir of £3 billion to £3.5 billion from a forecasted adjusted revenue of £4.8 billion in 2014. It expects to return to growth in 2017
  • Serco also announced a proposed equity rights issue of up to £550 million in the first quarter of 2015 to strengthen its capital structure
  • Capita announced that it has secured £1.63 billion of major new deals to date in 2014 (nine months). This is down by £1.27 billion year-on-year (largely accounted for by the signing of the £1.2 billion O2 mega deal in 2013). At £4.1 billion the bid pipeline is also lower on a sequential basis compared with £5.7 billion announced in July 2014. However Capita reports a strong win rate of one in two
  • Serco reported £900 million of contract awards since the half year to date. It also said that its current pipeline and win rate are considerably weaker than before

Secondly, the strategic directions of the two companies are diverging:

  • With its strategic review still ongoing, Serco announced that it is going to focus entirely on business to government (B2G) in the areas of justice and immigration, defense, transport, citizen services, and healthcare
  • In contrast, Capita aims to grow its private sector business and in particular in the customer management services (CMS) arena. Like Serco, it made a number of CMS acquisitions in the past few years including Ventura and parts of Vertex. Another growth target is its burgeoning legal business with the acquisition of Eclipse Legal Systems. It is also expanding its presence beyond its UK stronghold to countries such as Ireland and Germany
  • Serco will be divesting a number of businesses that are now non-core to its strategy. These include the Environmental and Leisure businesses in the UK, Great Southern Rail business in Australia, and the majority of its private sector BPO business which are mostly CMS businesses delivered by two companies that it acquired in recent years: Intelenet and The Listening Company
  • Capita has made 13 acquisitions to date in 2014 for £285 million, with more likely as it continues to expand or enhance its capabilities

Interestingly, both companies have also announced changes to their boards:

  • Alastair Lyons, Serco’s chairman has resigned
  • Capita’s CFO Gordon Hurst is stepping down following a 27-year stint at the company

Serco’s tale of woe began in 2013 when the British government discovered that it had been overcharged by Serco for offender tagging services to the Ministry of Justice (MoJ). The company is still recovering from the fallout more than a year after the issue first came to light, and having repaid more than £68 million of fees and gone through several reviews and management changes. It is ironic that Serco’s new board has chosen to focus on B2G services only, given that the troubles began in a government contract. That said, front line government services is and has always been at the core of the company’s business.

Serco has suffered from failures of governance and risk management. As it rebuilds itself, it will seek to enhance these significantly. In terms of business strategy, it will target growing opportunities in the government sector, as the pressures from aging populations and rising demand for services pushes governments to outsource more. Serco will seek to differentiate itself with its international approach, as part of which it will give its businesses a portfolio of services to go to market within specific regions of the world, to share experience and expertise.

Capita boasts of robust financial and governance structures and highly selective approach to opportunities that it pursues. Robust governance is highly needed given Capita’s aggressive acquisition strategy that has seen it take over more than a dozen companies a year for many years. Even with robust governance problems can still occur. For example, in its eagerness to win more government clients, in 2012 Capita acquired Applied Language Solutions (ALS), which had been awarded responsibility for courts interpreter services in England and Wales. For a while service delivery was less than smooth leading to the MoJ withholding fees in some instances and bad publicity in the press. Overall though Capita has benefited from many niche and strategic acquisitions that it has fully internalized, and which have largely created value and revenue.

Serco and Capita

There are lessons to be learnt from the performance of the giants of UK outsourcing. Today, one thing that is common to both is the belief that bid and governance structures have to be robust and maintained at all times.

They’re Changing Guard at Cabinet Office | Sherpas in Blue Shirts

Stephen Kelly, the UK government Chief Operating Officer (COO) is to step down from his role in November to become CEO of Sage, the UK software company. Kelly was appointed Government COO back in 2012. He has played a key role in the Cabinet Office’s efficiency agenda since 2011, when as Crown Commercial Representative, he managed the government’s relationship with IT suppliers such as Oracle, SAP and Microsoft.

Kelly has been the driving force behind a team that has implemented government policy to overhaul the way the UK government does business with the private sector as well as generate internal efficiencies. This has led to £14.3 billion of efficiency savings in 2013-14 against a 2009-10 baseline:

  • The biggest saving by far, £5.4 billion, has come from improving the government’s commercial contracts, including the new Crown Commercial Service which is overhauling central government procurement. Other efficiency measures have included:
  • £4.7 billion from reducing the size of the civil service by 16% since 2010, and reforming civil service pensions
  • £3.3 billion by tackling inefficiency through large scale projects
  • Over £200 million by going digital—moving more services online, improving the citizens’ online experience and also overhauling technology spend, e.g. £62 million was saved by merging government websites into GOV.UK.

Measures for efficiency and reform have included centralization, shared services, creating public sector mutuals and joint ventures with the private sector to make more of government assets and capabilities.

Centralization and shared services: In the past few years, the Cabinet Office focus on centralization and shared services has seen the creation of the G-Cloud, the consolidation of government back office shared service centers into ISSC 1 and SSCL, and the creation of the new Crown Commercial Service that is to provide centralized procurement and managed services.

Joint ventures: These have included:

  • Axelos: a JV with Capita to increase the sale of the government’s best practice methodologies such as ITIL and PRINCE2
  • SSCL: with Steria, to initially consolidate a number of government back-office shared services but to offer other shared services in the future to public and private bodies

Mutuals: The move towards mutual organizations partly owned by their employees — At the time of his appointment in 2012, Kelly had successfully spun out the government pension body, MyCSP into an independent mutual company. He has since overseen the setting up of over 100 public services mutuals.

UK Government Mutuals

SMEs: Increasing small medium sized (SMEs) organization’s share of government contracts by mandating that large suppliers subcontract part of their work to SMEs.

The government efficiency measures will continue after Kelly’s departure but the style of implementation is likely to change with a new appointment. Many large suppliers will be hoping for a softening of approach towards them.

The general election due in 2015, is also unlikely to lead to major change. The entities might morph into something new, as we have seen with the change of Government Procurement Service (and its predecessors) to the Crown Commercial Service, but the thrust of activity is expected to stay the same whether or not a different party gets into power.

We will not know how successful some of these measures will be for a while, e.g., will the mutual model lead to improved productivity as the Cabinet Office hoped it would, or will the government generate some revenue from its JVs as well as see improvements in services. The involvement of large service providers with experience in this type of work is with the end in mind. For example, Steria, the government’s SSCL JV partner, has been running NHS SBS shared services for many years.

Kelly leaves just as the government is recruiting for a new post, a chief executive officer (CEO) for the Civil Service, most likely to whom, Kelly would have reported. The CEO post is the evolution of the role that originally started as something of a government CIO/head of e-government back in the mid-noughties. Several reincarnations later, it shows the government’s approach to reform increasing in maturity, to have a central driver to reduce expenditure, make more of assets and improve management of suppliers. The results of the general election is unlikely to affect this, even if some aspects of policies change along with titles and personnel.


Photo credit: Nieske Vergunst

Soames of Serco and the Plummeting Profits | Sherpas in Blue Shirts

Today is a big day for Serco as Rupert Soames OBE takes the helm as the new CEO of the British outsourcing giant. Soames is coming on-board following a turbulent year for Serco. Found to have overcharged the Ministry of Justice for its offender electronic monitoring services, Serco was barred from new UK government contracts, until the matter was investigated and settled. The settlement cost Serco a charge of £111m. The UK government also demanded a major change of organization and senior management to allow Serco to compete for its tenders again. To add to its woes, a change of government and policy in Australia saw Serco’s revenue from one of its largest customers, the Australian Department of Immigration and Border Protection, decline too.

On Monday, April 28, just days before the new CEO was to take up his post, Serco gave an unexpected profit warning. Unsurprisingly, the next day, shares in the company plummeted by 19%, and there is press speculation about a rights issue. Serco had already set expectations for lower organic revenue growth and profitability in 2014 when the latest profit warning came on April 28. At the end of 2013 the company reported a margin of 5.6%, which was a 68 basis point decrease compared with the prior year. The company is already restructuring, having reported related costs of circa £15m in 2013. Workforce reduction is also on-going. It reduced its workforce by 400 in 2013.

Serco has also disposed of a number of businesses, some at a loss:

  • UK transport maintenance business – net profit of £23.2m
  • Occupational health business – net loss of £3.9m
  • Ascot College – net loss of £0.1m.

It is against this backdrop of strained relationships and declining profits that Soames takes the helm. Another challenge that he faces is to close the gap that has opened up between Serco and its competitors. For example, Capita, its biggest rival, has been winning major contracts as well as making new investments in technology through acquisitions. Neither company has been quick to embrace the latest technology but Capita appears to have changed tack recently to bolster its IT services capabilities. Since March 2014 Capita has acquired:

  • AMT-SYBEX which provides mobile technology and data management capabilities
  • Updata for its network connectivity services
  • Network Technology Solutions, an IT security reseller and managed services provider.

Another competitor, Agilisys, has invested in front-office process automation tools.

The new CEO faces a number of challenges from day one, but it is not all bad news. In 2013 Serco had a revenue of £5.1bn up 7.8% at constant currency. This represented a healthy organic growth of 5.9%. Furthermore, in 2013 it achieved contracts wins to a value of £3.7bn despite the on-going issues with its relationship with UK central government.

After the Ministry of Justice contract debacle, Serco had to go for a CEO who brought more than just good business acumen. As well as a successful track record as CEO of Aggreko, Soames brings with him good connections with the establishment, being the grandson of Winston Churchill, and brother to Nicholas Soames, Conservative MP. While Soames is positioned well to rebuild the company’s relationship with the UK central government, the painful task of restructuring the company will have to continue. We expect more divestments which may include some of its many joint ventures. We also expect Soames to continue Serco’s strategy of diversification by pushing into other sectors such as retail, and other geographies such as the Middle East, where it has won a number of contracts recently.


Photo credit: zeitfaenger.at

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