Significant Growth in Healthcare Outsourcing opportunity for Indian IT Vendors in 2012

At the end of June 2012, the US Supreme court upheld the main elements of the Patient Protection and Affordable Care Act, which President Barack Obama signed into legislation in the year 2010. The law mandates all the American citizens to buy health coverage in 2014 or else pay huge penalties if they fail to buy and the employers should offer healthcare coverage for their full time employees and their dependents or they will face penalties. After this decision more than 30 million uninsured Americans are estimated to buy healthcare insurance because of the reform, and new projects are expected by Indian IT Vendors like data conversion, creation and management of electronic health records, as well as claims processing and insurance sales. Indian IT Vendors can actively vie for the deals worth up to $22 billion (Rs 1.2 lakhcrore) and according to NASSCOM, Healthcare accounts for another 4% of the IT-BPO industry, which is expected to grow slower this year, at 11-14% from 17% last year. According to TPI, a sourcing advisory the new law allocates about $37 billion for creation and management of electronic health records, data conversion, beta testing and change management.

According to Everest Group report titled, “IT Application Outsourcing (AO) in the Healthcare Payer Industry – Annual Report 2012”, the US$20 billion healthcare IT outsourcing (ITO) market nearly doubled its cumulative contract value in 2011 compared to 2009. Processes that are outsourced to Indian IT vendors include Application development and maintenance, testing services, and software package implementation and North America market is the primary market that outsources in healthcare payer segment. India is the preferred delivery location in this segment followed by China, the Philippines and Latin America and more than US$3 billion worth of payer AO contracts are due for renewal between 2013 and 2018. The Everest Group Service Provider Landscape analyzes more than 15 AO service providers, eight of which are mapped on the PEAK Matrix. The Leaders include Accenture, Cognizant and IBM; Major Contenders include CGI, Dell Services, Infosys and TCS; and Emerging Players include Mphasis. Other aspiring service providers in the payer AO space include Fujitsu, HCL, Hexaware and Mahindra Satyam. 

<!--[if !vml]--><!--[endif]-->Cognizant Technology is far ahead of its peers in terms of Healthcare vertical revenues with US$1.74 billion 37% (YoY), followed by Wipro, TCS, Infosys & HCL Tech. Infosys dethroned HCL Tech and it shows that Infosys is seriously targeting more deals in this vertical as evident with 42% YoY growth. Even TCS is also focusing aggressively on healthcare segment and Cognizant is keeping up its growth. Cognizant was the first player who bid aggressively in healthcare vertical and has built significant domain capability in healthcare and domain which makes it difficult for other Indian IT vendors to match it. Table source: “Report Card for the Indian IT Majors: Pecking Order Analysis of the “WITCH” Group”

Healthcare Vertical has become a critical for all the Indian IT vendors due to the ongoing reforms in the US and also the trillion dollars spend that is expected in coming years in United States. Analysts estimate the US’ healthcare market at $2.5 trillion and projected to grow to $4.6 trillion by 2020. For capturing this opportunity Indian IT vendors have to invest in developing and acquiring domain expertise in terms of people, processes and technologies. Analysts also predict that there will be significant rise in the M&A transactions particularly in Healthcare domain as most of the Indian IT vendors do not have necessary domain expertise and skills in healthcare domain and they are aggressively looking at the M&A route to acquire companies that have healthcare domain skills and expertise. Regulatory conditions also force the Indian vendors to set up delivery centers in United States and service the clients locally and also have to recruit local talent for this. Infosys and TCS have announced that they are looking for acquisitions in this segment both in US & Europe.

IT Application Outsourcing (AO) in the Healthcare Payer Industry – Annual Report 2012, published by Everest Group, an advisory and research firm on global services identified five key themes is fuelling IT services demand in the U.S. healthcare payer market: Compliance with regulatory reform, Consumerization, Claims transformation, Convergence of information across healthcare entities, Consolidation and M&A. Healthcare vertical also provides an opportunity for the Indian IT Vendors to also focus on nonlinear revenues that will lead to more revenues and increased margins and profitability. Outsourcing penetration levels is very low in the healthcare Payer Industry and in future this segment is expected to grow rapidly and present a significant opportunity for the Indian IT Vendors to focus and improve their presence. 

Discussion Points:
1.What is the impact of PPACA act on healthcare BPO particularly for Indian Outsourcing vendors?2.What are the strategies adopted by Indian Outsourcing vendors to capture revenues from US healthcare outsourcing due to the changes and reforms in Healthcare?
3.What are the processes in healthcare that can be outsourced to Indian vendors?

Global BPO Industry - F&A Outsourcing, Procurement Outsourcing and HR Outsourcing

Global BPO Industry

The Global Outsourcing market is valued at USD 40 billion global sourcing market. The global outsourcing market continued to steadily grow in 2010 with an annualized growth rate of 6 percent. In 2010, the outsourcing market saw Business Process Outsourcing (BPO) transactions increased 12 percent. The market recovery was led by traditional industry verticals, such as BFSI (banking, financial services and insurance), and buyer geographies, such as North America. Asia continued to lead offshore activity, offshore adoption also spread to other locations. Last year saw 39 new delivery centers in India followed by 32 in Eastern Europe, 27 in Latin America, 25 in the Philippines, 16 in China and six in Africa.

The service provider landscape witnessed significant M&A activity in 2010. M&A activity in the near to medium term is likely to focus on Tier-2 IT and pure-play BPO service providers. The captive model continued to grow with 132 captive set-ups and only six divestitures last year compared to 77 and 114 set-ups in 2008 and 2009, respectively.

Global F&A Outsourcing

The Finance and Accounting Outsourcing Annual Report 2011, published by Everest Group  states that Finance and Accounting Outsourcing market is expected to grow 15-20 percent and top $4B in annual contract value in 2011. As per Everest, the FAO vendor landscape features Accenture, IBM, Genpact, Capgemini, Infosys BPO and HP as leading service providers. Other service providers include TCS, Wipro, WNS, ACS-Xerox, Steria, Vengroff Williams & Associates (VWA), Outsource Partners International, Cognizant, EXL Services and Intelenet. Also included in the report are emerging providers: iGate-Patni, Minacs, HCL and KPIT Cummins Infosystems.

FAO market growth continues to see strong adoption across most industries with manufacturing, financial services, retail, travel and logistics, and energy and utilities accounting for 70-75 percent of total FAO spending in 2010. Outsourcing of accounts payable, accounts receivable and general ledger continue to be the most outsourced processes whereas outsourcing of financial planning and analysis is an emerging trend. An end-to-end process-driven approach to FAO is also emerging as opposed to a traditional functional and piecemeal approach. More than 50 percent of the new contracts in 2010 had end-to-end scope (Procure-to-Pay, Order-to-Cash, Record-to-Report).( Everest report)

F&A Outsourcing – Future Outlook & Changes

F&A Outsourcing move beyond the labor arbitrage, Price, Cost and basic process improvements to standardization and advanced analytics. Buyers looking for more technology enabled business models, vertically oriented solutions and enterprise business outcomes including increased revenues. Process firms and technology platform firms to provide the next level of outsourcing. Clients are looking for innovative pricing models, innovative  solutions and relationship management. FAO vendors are focusing on ways to create differentiations in terms of products and services and build a long term relationship with the individual clients.

Global Procurement Outsourcing

The multi-process Procurement Outsourcing (PO) market will grow 15-20 percent and reach US$1.5 billion in annual contract value (ACV) in 2011, representing managed spend of about US$190 billion, according to the Procurement Outsourcing Annual Report 2011 published by Everest Group. Everest Group’s PO market projections for 2011 include: End-of-term activity will be significant as 45 percent of PO contracts, valued at nearly US$3 billion, are up for renewal within the next three years. The small/medium-sized business (SMB) segment will see higher adoption levels, influenced by new platform-based offerings that include Software as a Service (SaaS) as a delivery model.

Beyond procurement, buyers were increasingly interested in adjacent supply chain processes such as fulfillment and transportation and logistics management. Manufacturing companies led adoption followed by the consumer packaged goods and retail sectors together accounted for 35 percent of market share in terms of TCV. The United States led PO adoption, accounting for 45 percent of contracts signed, followed by Europe with 43 percent. A significant traction is expected from Asia Pacific and Continental Europe. 

Everest Group’s Performance/Experience/Ability/Knowledge (PEAK) matrix classified Accenture, IBM and ICG Commerce as leaders in the PO market that together accounted for nearly 75 percent of the overall market by ACV and 50 percent of new contracts signed in 2010. Classified as major contenders are sourcing-focused providers buyingTeam, Global eProcure, and Xchanging as well as procure-to-pay-focused providers CapGemini, Corbus, Genpact, HP, Infosys, TCS and Wipro. The report also classified DSSI, HCL and HCMWorks as emerging players.

Global HR Outsourcing

A stronger economy brought new contract activity in the multi-process Human Resources Outsourcing (MPHRO) market and a strong rebound in mid-market adoption in 2010, according to the Human Resources Outsourcing Annual Report 2011 published by Everest Group and projects the MPHRO market will grow by 8-10 percent and reach around $3.35 billion in 2011. With 46 new deals signed in 2010, average contract size and term length continued to decrease, largely due to a decrease in the number of processes outsourced within new deals and annual contract value (ACV) grew by US$170 million to reach approximately US$3.07 billion.

Cost reduction, managing compliance, greater alignment between HR and business, and access to technology are the key drivers for MPHRO adoption. Payroll and benefits are the most commonly included processes in MPHRO contracts. North America followed by Europe increased its share of adoption by 33 percent. Asia Pacific, experiencing rapid economic growth, also saw an increase in deal signings. Healthcare and energy verticals saw increases in deal signings. India is the most popular off shoring location; however, Southeast Asia and Eastern Europe are quickly emerging as major offshore locations.

Everest Group’s Performance/Experience/Ability/Knowledge (PEAK) matrix classified Accenture, ADP, NorthgateArinso, Aon Hewitt and IBM as market leaders that further strengthened their positions. Everest classified ACS-Xerox, Capgemini, Capita, Ceridian, HP, Infosys, Logica, TCS, Wipro, and Caliber Point as major contenders. Also classified in the report are emerging players Genpact, HCL, Neeyamo and Xchanging.

Source: Everest Group