Through the digital looking glass

Some dominant EHR vendors are building out their platforms for the emerging needs of health systems

By Paddy Padmanabhan

An analysis of the financial and market performance of the top 15 publicly held global technology consulting firms tells us one thing; in 2017, global IT consulting firms struggled in the healthcare segment.
Our report, we call out the WITCH companies (an acronym for Wipro, Infosys, Tata Consultancy Services (TCS), Cognizant, HC), mostly saw declines in growth rates for their healthcare businesses.
One firm, Wipro, saw a YoY decline in revenue from 2016 to 2017, while at the other end, Cognizant saw the HLS business outgrow the company.

The valuations for successful digital health startups are high.

The outlook for 2018 seems a little blurred for all companies we reviewed. Policy uncertainties at the beginning of the year seem to have given way to anxieties about the overall demand environment for traditional IT consulting companies. As a result, they all are trying to figure out their next play in the healthcare markets. Our latest annual survey report on healthcare IT demand tells us that there is a clear shift toward value-based care in the markets and a focus on digital transformation led by patient engagement and care transformation initiatives, with data and analytics being key enablers for the transformation. IT consulting companies are responding to market signals and classifying everything as “digital,” which is proving to be a meaningless term when assessing their healthcare market strategies. Yesterday’s disruptors who built multi-billion-dollar businesses over the past two decades primarily on the back of a labour arbitrage model are now being disrupted themselves by technology shifts in the marketplace. Automation, AI, and cloud are changing enterprise computing in ways that threaten the existence of many traditional technology consulting firms.

For some like Infosys, public boardroom battles leading to CEO Vishal Sikka’s resignation in mid-2017 have complicated their efforts to regain industry-leading growth rates. For Wipro, an ill-timed acquisition of Health Plan Services (HPS), which relied heavily on the now-defunct public health insurance market places, has shaken the foundation of the healthcare business and has dragged down the overall company’s operating margins. Even major multi-national firms such as Accenture have felt the impact on policy changes on their healthcare business growth. India’s biggest IT firm, TCS, seems to have effectively abandoned a vertical market strategy in favour of a horizontal strategy. On the other hand, Cognizant is deepening its vertical market strategy while maintainingits focus on digital.
European firms such as Atos and Capgemini who have been relatively less burdened by the changes in US healthcare policy environments have seized the opportunity to make aggressive acquisitions and strengthen their foothold in the market. Japanese technology major NTT’s acquisition of Dell’s services business and the merger of CSC and HP services to form the newly christened DXC have also emerged as significant players in the competitive landscape.
While consulting firms are struggling, it does not necessarily mean that the healthcare IT demand environment is weak.
Fueled by the digital transformation of healthcare and the shift toward value-based care, dominant electronic health record (EHR) vendors such as Epic and Cerner are building out their platforms for the emerging needs of health systems. The emerging digital health startup ecosystem continues to receive billions in VC money, though exits are not keeping pace. These are happy hunting grounds for global consulting firms with large cash piles looking to acquire their way into innovative platform solutions.

However, valuations for successful digital health startups are high, and some global firms with high cash piles are choosing to return money to shareholders through buy backs (or are being forced into it by activist shareholders) than to risk losing it on misplaced bets.

As all companies look to make a mark in the high potential healthcare market, they will be exploring a new fantastical world of opportunities in digital transformation. Some of these opportunities will be an outcome of the healthcare industry consolidation (Aetna-CVS, Cigna-Express Scripts) and the emergence of a new category of healthcare player who could be technology buyers as well as sellers (Amazon, Apple).

The next few years will be a fascinating and transformative period for technology firms in healthcare. Our research tells us that all the existing players are committed to growing their healthcare businesses. Our only cautionary note would be that the path to profitable growth will be different for everyone, and each must choose their path wisely.

The valuations for successful digital health startups are high.