Nearly US$5 billion in payer ITO contracts are due for renewal from 2015 through 2020, and rising anti-incumbency, coupled with intensifying competitive landscapes, have heightened the risk profile for incumbent service providers
Today, Cognizant announced the acquisition of TriZetto® (a leading provider of healthcare IT software and solutions) for US$2.7 billion. The deal ties in favourably with Cognizant’s dominant position in the healthcare IT marketplace, with the combined entity having US$3 billion in healthcare revenue. TriZetto has around 3,800 employees across the U.S. and India, who will join Cognizant’s existing healthcare business, which currently serves more than 200 clients.
The acquisition is a landmark deal within the Indian IT service provider community, given the size, scale, intent, and implications to the status quo, but what makes it unique is its focus on industry solutions vs. other services-centric acquisitions.
TriZetto primarily develops and licenses IT platforms and service for healthcare providers and payers, competing with the likes of Allscripts, DST Systems, and McKesson. Cognizant aims to leverage its dominant position in the market–a healthcare IT portfolio in excess of US$2 billion–to provide an integrated portfolio across services and platforms. Investing in products and solutions has been a key area of focus for Indian IT service providers as they look to embed their solutions within enterprises buyers, use technology adjacencies, and leverage the technology-platform model instead of flexing just the labor arbitrage card. This acquisition could be one of the steps allowing Cognizant to cross-pollinate and build an integrated (applications/infrastructure/business process services) services play in an industry in which it has primarily relied on its application services strengths.
Cognizant will get access to multiple software platforms and aims to realize nearly US$1.5 billion of potential revenue synergies over the next five years. TriZetto currently operates at 18.5% margins on a revenue base of US$711 million. The numbers are right in the zone for Cognizant, as it wants to continue to drive its growth-plus-margin story in the high revenue base in which it currently operates. The products, platforms, and solutions play has very unique challenges, opportunities, and operating dynamics. Whether Cognizant can navigate this fundamental transition and still maintain its growth story, will be an interesting study.
The ongoing transformation in the U.S. healthcare system is shaping service provider’s strategies as they look to capture the incremental opportunity that is up for grabs. The focus on driving down healthcare costs, wide-sweeping reforms (driven by Obamacare and ICD-10), and blurring lines between payers and providers, are principally reshaping the healthcare delivery model. Cognizant will aim to drive increased stickiness with healthcare buyers to drive retention in an increasingly complex vendor landscape. It is aimed at garnering a large share of the growth pie, when it comes to the payer and the provider ITO market. This acquisition is an unmatched clear indication that service providers must evolve from a services-only play to a platform-based solutions play, to stay relevant in a market that has an immense potential to grow.
The deal will also have myriad implications for the overall healthcare IT services competitive landscape. Most competitors of Cognizant already have a steady revenue stream (large or small) implementing TriZetto solutions, most importantly Facets™, which is used by most payers in the U.S. How this impacts its engagements and partnerships will be tricky. Whether Cognizant will want to (and if so, how) assume a dichotomous role of a partner and competitor will be another interesting area to watch. Additionally, whether Cognizant plans to ultimately absorb TriZetto (thereby dissolving the brand) or leverage its unique positioning is also unclear.
Cognizant is ideally placed in healthcare with few like-sized competitors, allowing it to consolidate. Two things that are definitely salient here–one, Cognizant is going all out to bet big on healthcare; and two, this acquisition has the potential of taking it to a different league altogether! There are already murmurs in the healthcare IT industry equating Cognizant to a new “IBM,” when it comes to its negotiating power at the table. This is another step in ensuring it stays ahead of peers as the competitive intensity in the market increases. The deal definitely has characteristics of a long-term strategic bet than a tactical manoeuvre.
Download the complimentary breaking viewpoint: Cognizant Acquires TriZetto for US$2.7 Billion.
Singer/songwriter Lyle Lovett wrote a song with the line “If I were the man you wanted, I would not be the man that I am.” With apologies to Lyle Lovett, I think this is a very appropriate line when applied to IT infrastructure services today. Clients’ changing expectations of their incumbent IT infrastructure service providers leave the providers lamenting like the forlorn cowboy in Lovett’s song.
It’s only natural for companies to want their incumbent service providers to bring them cloud offerings. Their expectations are set by what they read and see from Amazon, Microsoft and Google. They want the infrastructure services price dropped, the benefits of elasticity and flexibility of the cloud model and usage with no commitment. Companies are trying to persuade or force their infrastructure providers to bring cloud offerings.
But IT infrastructure providers are unable to provide what they want.
The clients helped created the underlying problem. The incumbents’ services are bespoke, unique, and have been dictated through client contracts in a different kind of delivery model. In this model, costs rise every year through COLA rather than plummeting like the price of public cloud. The cost of public cloud services had been dropping around 20 percent per year but is now accelerating with the latest adjustment between 60-80 percent in a single downward-pricing adjustment by Google, quickly followed by all the major cloud players.
The pricing components are not apples to apples, and companies understand that. But plummeting prices play into client expectations. Expectations of business users that they ought to be able to have deflating costs with elasticity and flexibility and limited or no long-term commitments just cannot be met in the traditional outsourcing base.
The incumbent providers’ delivery model is a recipe of the client’s own making. Clients dictated where the provider can provide services from, what kind of service the provider must deliver and demanded customization to address their needs. As a result, providers have huge stranded investments tied up in providing what the clients demanded.
There is no “they lived happily ever after” end to this situation. Among infrastructure clients, the situation causes increasing unhappiness as their unmet expectations further diverge from the reality of the services their incumbent providers deliver. But because of contractual obligations and because of their orientation, the incumbent service providers simply cannot change.
So, like the forlorn cowboy in Lyle Lovett’s song, the lyrics resonate with great poignancy among today’s service providers … “If I were the man you wanted, I would not be the man that I am.”
Photo credit: Cristian Viarisio
Software-defined infrastructure:a revolution for the infrastructure landscape
In a landmark move with far-reaching implications, Infosys appointed ex-SAP CTO Dr. Vishal Sikka as its new CEO and managing director, making him the first non-founder at the helm in the firm’s 33-year history. Accompanying this change, the founders are getting out of the new chief’s way. Current CEO and co-founder SD Shibulal will leave by end of July, while NR Narayana Murthy will vacate his role as executive chairman on 14 June, continuing in a non-executive board role until 10 October to ensure a smooth transition.
The fact that Infosys engaged an executive recruiter to look for a successor reflects a dramatic shift in ethos for the firm. It represents the strategic decision to bust up a certain inward-looking culture that has come to represent Infosys. That Infosys reacted to market and customer expectations by bringing in an external technology visionary bodes well for the critical imperative to change to a customer-centric culture, rather than firm-centric.
What Works
The Gujarat-born Dr. Sikka holds a Ph.D. in artificial intelligence. He spearheaded the development and marketing of HANA, SAP’s flagship analytics product. His experience in these areas could give Infosys a sizable edge as service providers look to establish credentials in next-generation technology avenues such as big data, analytics, cloud, robotics, and artificial intelligence.
He seems to have been given a wide mandate, per the large-scale changes in senior management that are accompanying his appointment. This will allow him to exercise a free hand as he attempts to reshape the beleaguered company. Infosys’ long-standing strategic imperative to let the founders control the firm has been widely criticized.
He joins a long list of industry outsiders taking charge of IT majors. Louis Gerstner was unanimously credited with turning around IBM’s fortunes when he took over in 1993, after previously leading RJR Nabisco and American Express. Closer to the Indian IT services landscape, Vivek Paul, a GE-alumnus transformed Wipro, fast tracking growth from a US$150 million company in 1999 to over US$1 billion in sales in five years. Last year, Apple announced UK fashion chain Burberry’s CEO as the head of its retail and online business.
Appointing an outsider tends to bring fresh perspective to inherent legacy issues plaguing companies. Free from the baggage and expectations associated with firm veterans, Dr. Sikka can look to usher new life into Infosys.
What May Not
Since he comes from primarily a products-driven business, it will be interesting to see how he adapts to the IT services industry, which has inherently different business dynamics and challenges. The focus will be on streamlining project management, client delivery, and sales efforts. Dr. Sikka’s experience in driving sales and marketing at SAP will be a crucial asset in this regard. Being a CTO of a products-based company is an entirely different ball game than leading a global services behemoth, as product-driven businesses rely primarily on the strength of intellectual assets, while services businesses are an amalgamation of resource management, delivery, and expectations handling.
In spite of the large-scale management changes, Dr. Sikka has his work cut out as he navigates disgruntled senior management. How he soothes frayed nerves and reassures them will be essential for stability. A cultural shift he will seek to implement will revolve around Infosys’ limited risk appetite for investments. Infosys needs to invest significantly in boosting its expertise in next-generation solutions through alliances and possibly acquisitions. Although it has made some notable acquisitions such as Lodestone, the firm has generally been fairly risk-averse in exercising its significant cash pile.
The role that NRN Murthy assumes will also determine the efficacy of Dr. Sikka’s roadmap for revival. If Murthy remains strictly in a mentorship role overseeing the transition, without overriding Dr. Sikka’s strategic decisions, the sailing should be smooth. However, if those lines blur, it could create a vicious cycle of conflict, decisions embargo, and execution paralysis.
Another important but often ignored challenge of such senior-level changes is the risk of culture mismatches outweighing the business positives. Echoing Peter Drucker’s “Culture eats strategy for breakfast,” bringing in a rank outsider can have controversial implications. For example, John Sculley joined Apple from PepsiCo, and during his time had long-standing disagreements with Steve Jobs due to divergent management styles and priorities, ultimately resulting in Jobs’ exit in 1985. The entry of a new top-level entrant is not easily accepted by the old guard, leaving open the possibility of wilful sabotage. Dr. Sikka will need to build bridges with senior stakeholders to avoid stepping on toes.
Swimming in Choppy Waters Ahead
Essentially, whether or not Dr. Sikka manages to snap the once industry bellwether out of its funk will depend on his ability to make the transition from a technology visionary to an empathetic business leader combining technical expertise, client management, and people development, while maintaining the focus on innovation and thought leadership. He will try to take Infosys out its comfort zone, bridge service gaps with more nimble rivals, and ultimately reassure clients that their business is in sound hands. He needs to show that a brilliant pilot can be a swimming coach as well.
About 2/5 IO incumbent providers were replaced with new providers in 2012 and 2013 as buyers sought change and control
Wage inflation in India for engineering and IT talent has been going up consistently because the demand exceeded supply, particularly for experienced talent. But Everest Group is making a bold prediction that we we will see a lowering of the inflation rate in India, Europe and, to some degree, in the Philippines over the next few years.
Why? Because demand and supply have come into balance, thanks to the impressive work that the Indian government, Indian providers and GICs have done in building the recruitment and education mechanisms that feed the services industry. We can now clearly see those feeding mechanisms are more than adequate to satisfy demand.
We now have enough experienced resources in the country, so there is no longer a shortage. Supply is coming into balance with demand for both new and experienced talent, which inevitably will act to significantly moderate the past wage inflations.
Implications
The implications are fairly significant. First, with moderating wage inflation, we think both providers and enterprises can adjust their COLA requirements.
In addition, the moderating wage inflation also could aggravate enterprises to ask for a bigger piece of the rupee depreciation windfall to providers’ profits. To date, the full effects have not been passed along because the wage inflation somewhat modified the depreciation windfall. We believe that the lowering of the wage inflation rate — which is likely to stay moderate in the foreseeable future — may change people’s negotiating positions over the rupee.
When Accenture completes its acquisition of Procurian, (announced October 3, 2013, and expected to close by end of 2013), the firm will hold a formidable one-third of the procurement outsourcing (PO) outsourcing marketplace.
For non-regular followers of the PO space, Procurian was incepted in 2000 per its own acquisition of Accenture’s ePValue e-procurement venture. The somewhat latent PO market finally found its footing, with a US$1.7 billion and a five-year CAGR of 13 percent in 2013.
While the PO marketplace has become increasingly competitive in the past several years, as evidenced by numerous acquisitions by Xchanging, IBM, Infosys, and GEP, Accenture’s acquisition of Procurian represents a game changer in the PO space, and has far-reaching implications for providers and buyers alike.
The new dynamics in PO?
Bottom line, given the combined capabilities of Accenture and its come-back-home compatriot Procurian, this new PO powerhouse should make other global service providers step back and think about their PO service capabilities.
For more details on the Accenture/Procurian acquisition, and Everest Group’s insights on it, please go to: Accenture + Procurian = One-Third of the Procurement Outsourcing Market viewpoint.
“At times, Indian IT service providers fall behind expectations in new and exciting technology areas that extend beyond the traditional outsourcing paradigm.” – A large MNC buyer of IT outsourcing services
With traditional models of IT outsourcing facing increasing competitive pressures, Indian service providers are looking at a multitude of solutions to drive success and retain competitive advantage. Chief among these are emerging technology solutions from start-up firms. Service providers have realized that to compete and stay relevant in the changing paradigm they have to focus on developing niche and specialized products, boost efficiency, and develop IP. Primary traction themes include data analytics, big data, cloud computing, and enterprise mobility. Niche start-ups with innovative technology solutions help providers augment their existing service offerings.
Increasing Traction
This echoes the strategy often adopted by multinational technology firms including Cisco, Microsoft, Yahoo!, Intel, and SAP, which back a plethora of emerging firms. Indian providers are now looking to invest and form alliances with ventures in niche domain areas. This is a dramatic shift in the status quo, as Indian IT providers have historically paid minimal attention to start-ups due to their own lack of a proper ecosystem to facilitate such transactions and a fairly low-risk appetite. Yet, of late, they have increasingly set up funds and accelerators dedicated to tech start-up initiatives.
|
Company |
Mandate |
Notable Involvement in Start-ups |
|
Infosys |
Has set up a US$100 million fund to invest in start-ups, besides spotting and funding internal innovation |
OnMobile, Yantra Corp |
|
Tech Mahindra |
Has established a US$50 million fund exclusively for investments in global technology start-ups |
Launched an initiative – i5 Startnet – to scout for firms in cloud, mobility, networking, and vertical-specific technologies |
|
MindTree |
Created a team led by the Chief Strategy Officer to look for start-ups and next generation solutions |
7Srata |
|
Wipro |
Actively picking up stakes in cloud and big data firms |
Opera Solutions, Axeda |
|
TCS |
Formed its Innovation Labs and Co-Innovation Network (COIN) to bring together academic institutions, start-ups, venture funds, strategic alliance partners, multilateral organizations, and clients |
iKen Solutions, Perfecto Mobile, Computational Research Laboratories |
|
Cognizant |
Set up an emerging business accelerator |
Incubated 20 ideas over the past 18 months |
Changing Ecosystem
Slowly, but steadily, the ecosystem is developing to encourage such start-ups. For instance, in June 2013, NASSCOM announced a program to fund and incubate 25 start-ups to be established by young Indian entrepreneurs. Additionally, it held an event that brought together promising technology start-ups and IT service providers including Infosys, TCS, Cognizant, Wipro, and MindTree. The gathering was an effort to provide young start-ups a platform to showcase their capabilities, connect with leading service providers, and generate investor interest.
Quid Pro Quo
Increasing competitive pressures and changing market dynamics have made Indian service providers truly value innovation, viewing it not just as a buzzword but rather a core operating lever to drive growth. Partnering with start-ups is an effective method of achieving innovative solutions without the allocation of time and resources they can ill-afford. And the mutually beneficial relationship between the two segments can lead to sustainable ecosystem in the long haul.
As a result of the consumerization of IT within today’s businesses, many technology service providers struggle to find a sales approach that drives greater growth. With CIOs now playing a far less prominent role as an intermediary determining the best solutions and, instead, business stakeholders making buying decisions, traditional solution selling is not a very effective approach today. But something akin to solution selling is meeting with success in the business stakeholders market.
At Everest Group, we have come to think about this issue as the difference between a “push” or pull” approach. Here’s what they look like:
CIOs and IT organizations tolerate the traditional push approach, but it doesn’t get traction with the business stakeholders market. In fact, they find the push approach offensive. If you use this approach, you run the risk of coming across as arrogant, effectively telling them that you know how to run their business better than they do.
The surest way to get to a positive sales outcome in the business stakeholders market is to get them to solicit you for a solution. But how can you create a pull and get them to invite you to help solve their business problem?
Two steps are foundational to a pull approach.
1. Establish your credentials as an expert through marketing
First of all, you need a reason to be in the room having a discussion with the prospective client’s business stakeholders. Thus they must perceive you as relevant. In other words, they perceive you as an industry expert and/or an expert in their functional area.
That perception must occur without you going in and positioning yourself, telling them you’re an expert. They need to already think of you that way and pull you in for a discussion. Hence, the role of marketing is crucial.
2. Demonstrate interest in the client’s issues — without selling
You need to express interest in the client’s issues. How do you do that? One highly effective way is to motivate the sales prospect to commission your company to do research in an industry or functional area. First you must show that you recognize they (not you) are the expert in that area.
For example, you could say, “We are looking to make new investments in your industry (or functional area) to serve you and others like you. We recognize that you are a leading firm in this area, and we would appreciate your telling us your thoughts on specific aspects.”
The key to making this succeed is not having a salesperson make that approach. If you move to a sales pitch at this point, you will alienate your prospect.
In the course of doing the commissioned research, you will begin to understand the issues the prospect faces and how they view the world. If you can then further explore (again, not using a salesperson to pitch this) what it takes to resolve the problems you identified, prospects then often ask the question: “Can you help us do this?”
As we pointed out in our blog post about recent earning reports, Cognizant and TCS are leading the services provider pack in growth. We believe that, to at least a small extent, this is because they are being better listeners to their sales prospects in industries where they have expertise and are thus more often able to pull the question: “Can you help us?”
Eliminating your competitors
By the time prospects ask you for help with their business problem, you have already credentialed yourself in their minds. They believe you are interested in them and you have relevance to their problem. At this point, they’re not looking at your competitors; they’re looking to you for help.
At this point, and only at this point, will a sales approach find acceleration in today’s services market.
The traditional sales process with a push approach is quick to reach the RFP and proposal point but then takes a long time going through due diligence and the rest of the RFP process before getting to closure. That process inverts with a pull approach: it’s a long time to proposal, but getting to closure is quick once the prospect asks for your help in solving their problem.
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