Tag: public sector

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.

Capita’s German Gambit | Sherpas in Blue Shirts

Over the years we have seen Capita successfully expand from one market sector to another in the UK and Ireland. Since 1984 when it only served the UK local government sector, it has expanded into seven major verticals and over 15 segments of those. The latest expansion plans take it beyond the UK and Ireland borders into DACH, with Germany being a primary target market.

Acquisitions

Capita’s new geographic growth strategy has seen it make three acquisitions in the DACH region (Germany, Switzerland and Austria) in the past year:

  • tricontes – the £6.2m acquisition of this Munich-based company in June 2014 brought Capita specialist contact centre services across the retail, telecommunications, utilities and insurance sectors in Germany
  • SCHOLAND & BEILING – a customer care consulting company also based in Munich, Germany
  • avocis – announced in February 2015 and if successfully completed, at £157m, avocis would be one of the bigger Capita acquisitions. It would bring Capita 6,500 employees and a portfolio of customer contact management services contracts in DACH. Although headquartered in Switzerland, Germany is avocis’ biggest market, accounting for 53 percent of revenue. The rest comes from Switzerland.

Capita has a formulaic approach to acquisitions with a budget of £200m to £250m per annum. It considers many potential acquisitions each year, selecting a dozen or more that fit its formula to:

  1. Increase scale
  2. Add new expertise to enhance its propositions
  3. Take it into new markets.

In addition, the acquisitions have to make a Return on Capital Employed (ROCE) of 15 percent post tax return after 12-months integration into the group.

Capita recently also acquired 700 skilled, multi-lingual FTEs in Krakow and Lodz, thanks to its acquisition of SouthWestern in Ireland. It can tap into these centres to further boost its presence in DACH for outsourcing services, including insurance, finance and legal administration, and customer management.

The Drivers for DACH expansion

The key drivers for Capita’s German gambit include:

  • Small growth in the UK market – we estimate that contact centre outsourcing (CCO) to be growing at circa 5 percent. Capita posted decent growth in this business, but given the overall market conditions, Capita must be looking for an alternative growth trajectory outside its comfort zone
  • Continental Europe is growing – Everest Group research shows a rise in CCO adoption within Continental Europe. Germany has the largest economy in Europe with an under-penetrated and fragmented market, and only in certain verticals such as utilities, retail and telco. Germany, therefore, presents ample room for sustainable CCO growth for Capita
  • The DACH region represents a large CCO market with 110m German speakers. Yet there is only small levels of outsourcing. Capita sees good opportunity for a transformational CCO partner in the region
  • Ability to engage existing UK clients – this also provides Capita with opportunities to extend its existing contracts within UK with firms that have European parents and subsidiaries and vice versa
  • Access to the in-house contact centre market through SCHOLAND & BEILING’s existing portfolio of enterprise clients, enhancing the breadth of Capita’s footprint in the broader contact centre market.

The three acquisitions add scale to Capita’s existing customer management services in the service-line’s key sectors of retail, telecom and utilities. We expect to see some sharing of resources and skills across country units, driven by multi-country client requirements.

The combination of both customer care outsourcing and consulting services represented by these acquisitions also bodes well for CCO clients, who increasingly look to their service partners for guidance in strategic areas, such as the deployment of multi-channel services, enhanced uses of analytics and stronger vertical industry specificity.

Expansion into German local government is a possibility with avocis that has a number of contracts in the sector. This is Capita’s founding market and Andy Parker, the CEO, has already said that he sees much similarity between the UK and German local government sectors. However, expansion into this sector will be after that of avocis’ bigger private sector market. It is unlikely to target the German local government for the first 12 months after the acquisition.

Challenges

Capita’s biggest challenge is integration of these companies along with all the other acquisitions that it has made recently. In recent years Capita has spent:

  • £271m on 13 acquisitions in 2013
  • £310m on 17 acquisitions in 2014
  • £199m spent on 4 acquisitions to date in 2015

These have been in a diverse set of companies, ranging from software and data for utilities and transport sectors to residential and commercial mortgage administration. The company is also expanding its services portfolio into new verticals such as agriculture and science services.

Managing this expansive empire while building efficiencies into services and workforce management is not going to be easy.

Yet Capita continues to deliver growth year after year. In previous years, it managed to significantly boost its CCO business with the acquisitions of Ventura and Vertex in the UK. In DACH, it has to deal with challenges of a different culture and languages as well as the usual aspects of integrating businesses, so we will be watching this space with interest.

There is no doubt that Capita is a master at business expansion. Service providers that want to expand into new service lines and geographies would do well to follow Capita’s German gambit.

Steria Continues to Grow UK Public Sector Business | Sherpas in Blue Shirts

Steria has reported strong growth in public sector revenues in the United Kingdom, significantly outperforming its other markets in Q3 2014. This is set to continue as the company gains new public sector clients thanks to its joint ventures with the British government.

Overall, Steria’s Q3 revenue grew by 7.3% organically year on year to €454.4 million.

In the same period Steria’s UK revenue grew by +24.7%, driven largely by its shared services joint venture, Shared Services Connected Limited (SSCL) with the Cabinet Office and also by NHS Shared Business Services (SBS) with the Department of Health.

Revenues for the same period declined by -5.4% in France, and by -15.1% in Germany.

Steria reported organic growth in its other Europe zone region including Scandinavia in Q3 2104 of +8.1%, boosted by strong growth in the public sector of +14.2%.

Business process services has been an engine for Steria’s revenue growth. It accounted for 53% of the revenue in the UK, and recorded a stellar growth of +52% in the period.

The growth in UK public sector is set to continue as the much anticipated move by the UK’s Ministry of Justice (MoJ) to award the running of its back office shared service to SSCL was confirmed last week. The contract brings with it the Home Office which uses MoJ’s shared services. These are major government departments which join SSCL’s 18 existing clients including Department for Work and Pensions (the UK’s biggest government department), Department for Environment, Food and Rural Affairs, and Department for Education.  Steria also reported growth in other segments of the UK public sector including +7.6% in Defense and +37.4% in Homeland Security sectors.

Steria’s approach to growing its shared services operations follows the pattern of first expanding the client base and then adding more services to its portfolio. The NHS SBS operations, for example, started with F&A and payroll and has expanded into primary care services and procurement.

This is a pattern that I expect SSCL to follow. The contract with the Cabinet Office allows for scope and service line expansion as well as adding new clients from both public and private sectors. There are a number of factors that will drive other government agencies to move to SSCL. One is the lack of capital funding for legacy upgrades. Another is the government requirement that existing departmental shared service centers have to operate on par with commercially run centers. This is not easy to achieve by civil servants with limited funding and without service providers’ experience of standardizing and industrializing services.

These factors combined with strong encouragement by Cabinet Office will mean that the majority of central government departments and their agencies will move their shared services either to SSCL or its main rival ISSC1 (run by arvato) over time. There is plenty of business for both service providers. Steria estimated a TCV of circa £1bn (€1.3bn) over 10 years at the time of the contract announcement in 2013 and is likely to achieve this.

Q3 results did not show the operating margin. Steria stated that owing to operational issues, largely in Germany, it will be unable to meet its operating margin target for 2014 and anticipates a slightly negative net attributable profit for the financial year. The outcome-based nature of the SSCL deal with the UK government is likely to negatively impact the bottom line too initially with investment in activities such as client on-boarding and consolidation.

Finally, a word on Sopra with which Steria is merging in a friendly tie up; For the same period, Sopra announced smaller revenues of €341.5 and also a smaller growth of +0.5%.  In France Sopra’s revenue grew by 2%, highlighting the complementary nature of the two merging businesses. Sopra’s revenue in Europe (excluding France) grew by +4.1% to €63.1.  Between them, the two companies will have profitable businesses in multiple regions of Europe: UK, France and Scandinavia. Additionally Setria’s broad portfolio which includes BPO and IT infrastructure management enhances Sopra’s application and system management services.  The two companies will have to address some common growth challenges too e.g. lack of growth in Germany and also the financial services sector.

Look out for more commentary on this merger from Everest Group in the coming months.

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