Outsourcing of information technology services is on the rise according to a new report by Everest Group. Last year saw a 35% growth in information technology outsourcing (ITO) among medical device, pharmaceutical, and biotechnology firms. The ITO market, estimated at $30 billion in 2012, is expected to grow to $68.1 billion by 2020 with a CAGR of 12%. Transaction volume of life sciences ITO grew 21% from 2012 to 2013 alone.
Overall healthcare ITO growth is being driven by reforms impetus, payor-provider convergence, evolving reimbursement models, and value chain digitization. Everest Group estimates the net opportunity for ITO in life sciences will be U.S. $10.7 billion from 2013 to 2020. Within in this opportunity roughly $3 billion will come from infrastructure outsourcing covering a variety of services including infrastructure modernization (i.e. moving to a cloud-based infrastructure), mobility and device support, networks services, database services, and automation services such as interoperabilty.
“The healthcare industry is witnessing unprecedented churn and transformation, leading to a surge in adoption of IT and business process outsourcing. Driven by regulatory reforms, tenets of consumerization, market consolidation, and emergence of next-generation digital avenues, acceptance of outsourcing has accelerated in the space,” the report says. Across the industry businesses have turned to ITO as a means of improving R&D efficiency, addressing their changing portfolio mix, and to assist with increasing M&A activity and restructuring. The real-world, evidence-based personalized medicine and outcomes-based methods that companies are embracing call for increased implementation of analytics and infrastructure outsourcing tenets.
To address this growing demand for on-demand research and market intelligence as well as supply trends in healthcare outsourcing across each subvertical—payer, provider, and life sciences—IT service providers are strengthening their capabilities. According to the report, “Both analytics and infrastructure services require the life sciences industry to look at their sourcing portfolio and think of two primary imperatives: one, creating a strategic roadmap for the adoption of these services; and two, selecting the right service partner who can take them the whole distance.”
Jimit Arora, vice president of Everest Group and co-author of the report, says that ITO adoption in medical devices has its own nuances that are different from pharmaceuticals and biotechnology. “One of the key differences that medical devices companies have had with regard to others in the life science space has been their handling of legacy technology,” Arora says. “Software, storage, and computing have always been a key component of [medical device companies’] product development and manufacturing systems.” Arora says that most device firms have large, in-house software development teams, who have worked on a staff augmented model with the likes of IBM and other traditional IT companies. Companies such as Siemens have even had independent services arms through which they have in-sourced services or vendor-managed outsourced services. Especially, in business process services they have been early adopters (think GE-Genpact). “It is with the expanding usage of IT in other value chain areas (specifically, supply chain and sales and marketing) that white spaces became glaring for [device firms]. Hence, these are the areas where they have extensively adopted third-party services in IT,” Arora says.
According to the report, the major drive for ITO in medical devices has been consolidation among device makers. A drive for cost reduction spurred by increased price pressure brought on by the Affordable Care Act (ACA) as well as a push toward consumerization and product portfolio expansion and modernization have incentivized device makers to make acquisitions and partnerships.
This year has already seen two large acquisitions. In June, Medtronic made big waves when it purchased Covidien for U.S. $42.9 billion. As MD+DI previously reported, the move is as much about lowering Medtronic’s tax burden and accessing its warchest of foreign cash that it can now put to use in the United States, as it is about diversification, globalization and scale, the necessary tools to contend with healthcare reform. “This acquisition will allow Medtronic to reach more patients, in more ways and in more places,” Medtronic’s CEO Omar Ishrak said in a press statement. “Our expertise and portfolio of services will allow us to serve our customers more efficiently and better address the demands of the current healthcare marketplace.” Just a month prior, Covidien itself made a play into the expanding wearables market with a $128 million purchase of Zephyr Technology. “With implant pricing remaining under pressure and hospitals continuing to consolidate, medtech companies are looking to gain scale and reduce costs,” wrote Glenn Novarro, an analyst with RBC Capital Markets, in a research note about the acquisition.
“Med devices firms are looking at acquisitions responding to U.S. health policy reforms,” Arora says. “Companies are also looking to ramp up scale and broaden product portfolio to remain competitive. Results in increased systems integration, portfolio consolidation, technology rationalization, and legacy modernization work.”
[images via The Everest Group]