Millennium Alliance Provider Transformation Provider IT Services Market Overview Sven Lohse

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1 Millennium Alliance Provider Transformation Provider IT Services Market Overview Sven Lohse Healthcare IT Services Strategies IDC Health Insights October 17-18,

2 Market Segment Definitions IT Consulting Systems Integration IT Outsourcing Other IT Services Project based IT services such as IT strategy and IT process reengineering, with contract size of less than $100k and duration of less than one year Project based IT services with contract size of over $100k and duration of less than one year Contract duration of over one year for IT services such as application management, network and desktop outsourcing, and hosting IT infrastructure Those IT services not included in the categories above, such as software deploy and support, hardware deploy and support, IT education and training, network consulting and integration, and custom application development. No contract size or duration limits apply 2

3 Salient Trends Causing Disruption of IT Services Market Post-reform era budget priorities depress demand for external IT services vendors Providers are maintaining spend for external IT services While the pie for IT services spend is static, but in future it will be cut differently Providers require reorganization and consolidation of capabilities provided by IT service vendors Demand for IT consulting is lukewarm; for IT outsourcing it is cool; demand for IT services could increase after election Key drivers are value-based care, clinical and operational analytics, and patient engagement Drivers of IT services vendor consolidation include cost pressure, business model change; use of advanced analytics to increase productivity Providers require greater partnership and return from remaining vendors, including greater risk-sharing embedded in SLAs Shortages persist in supply of external talent related to analytics, mobility and cloud, and for senior trusted advisors that can advise on strategic change 3

4 Segment Sizes and Growth Projections US Healthcare Provider External IT Services Spending, (All Hospitals) $US Millions ($US Millions) 14,000 12,000 10,000 8,000 6,000 4,000 2, CAGR IT Consulting: 4.4% Systems Integration: 2.7% IT Outsourcing: 2.8% Other IT Services: 5.1% IT Consulting Systems Integration IT Outsourcing Other IT Services Source: Worldwide Healthcare IT Spending Guide, May,

5 Larger Providers are More Bullish About Increasing Spending for IT Consulting Q. Looking forward over the period of , do you anticipate that your overall IT Consulting and Systems Integration services spending will increase, stay the same or decrease? (% of respondents) beds beds beds Increase Stay the same Decrease Don't know The outlook is relatively static, with growth at rate of inflation, or slightly greater MU is no longer a key driver of IT consulting spending Each hospital segment is similar 34% of hospitals (>200 beds) anticipate increasing IT consulting spending in 2016 over prior year Strategic drivers of overall IT spending include quality measurement and performance improvement; and patient engagement Note: hospitals with fewer than 200 beds were not surveyed Source: IDC Health Insights' Annual Provider Survey, , n= 200 5

6 Hospitals Respond Conservatively about Increasing Spending for IT Outsourcing Q. Looking forward over the period of , do you anticipate that your overall IT outsourcing services spending will increase, stay the same, or decrease? (% of respondents) Like the view of IT consulting, the outlook for IT outsourcing is static with growth approximating the rate of inflation, or less 31% of hopsitals (>200 beds) expect to increase IT outsourcing spending, but the bulk of hospitals expect spending to remain static beds beds beds Increase Stay the same Decrease Don't know Source: IDC Health Insights' Annual Provider Survey, , n= 200 6

7 Are Hospitals Strategically Ill-advised on How to Allocate Spending for IT Outsourcing by Functional Capability? Q. You indicated you expect the IT budget for outsourcing services to increase over the next 12 months. Which of the following capabilities are driving IT outsourcing services budget increases? Patient engagement Business and operational analytics Remote health monitoring Patient experience Infrastructure and platforms Applications and data centers Mobility (patient facing) Mobility (staff facing) Clinical analytics Combined clinical-financial Revenue cycle management Care management Pay-for-performance incentives Privacy and security related beds beds beds Social media PCMH Other (% of Respondents) Core competencies are often the last ones considered for IT outsourcing, but in healthcare this seems not the case What does this data say about patient engagement? Privacy and Security capability is almost universally retained inhouse. But haven t hospitals proven they need help from external experts? Business and operational analytics would seem core capability in future dominated by value-based care, yet it is a driver for increasing outsourcing Note: Labeled responses are those of the largest hospitals (>1,000 beds) Source: IDC Health Insights' Annual Provider Survey, , n= 63 7

8 Key Drivers for IT Consulting Spending are Underpinned by Investments in Value-based Care Q. You indicated you expect your IT consulting and systems integration spending to increase in the next 12 months. Which capabilities are driving services budget increases? Business and operational analytics Clinical analytics Combined clinical-financial Revenue cycle management Patient engagement Patient experience Care management Mobility (patient facing) Mobility (staff facing) Remote health monitoring Pay-for-performance incentives Infrastructure and platforms Applications and data centers Privacy and security related beds beds beds PCMH Social media Other (% of Respondents) Reading between the lines we see value-based care driving IT consulting spend IT investments related to new operating models and population health management initiatives are key drivers for those hospitals that are increasing their IT spending Analytics investments required to underpin these initiatives are being pursued with more intensity by the largest organizations Note: labeled responses are those of the largest hospitals (>1,000 beds) Source: IDC Health Insights' Annual Provider Survey, , n= 68 8

9 Cutting Up the Pie Differently: How will Vendors Respond? Drivers of Change Cost control: in the wake of reform, providers will focus more on controlling the cost and rationalizing their portfolios of IT service vendors Outcomes- and value-based contracts: Providers will expect IT service vendors to recast contracts in order to align incentives and assume more risk, just as they have with payers Analytics: Just as analytics can improve clinical productivity and clinical outcomes, analytics leveraged by IT services firms can improve the productivity of IT service firms Impact on IT Service Vendors Sophisticated vendor management will reduce portfolios of IT service vendors. Those remaining will be managed more effectively and economically Contracting between providers and vendors will include more risk-based components; govern a larger portion of total revenue; and force a realignment of account management skills Provider hospitals will evaluate IT service vendor analytics and analytic software development capabilities with more rigor, both at the level of SLAs, and at the level of analysis and reporting on SLA performance Winning IT services vendors will be larger and multi-dimensional; more aligned and embedded Alignment of incentives (sharing more risk), with longer term, deeper client relationships Offerings are broader, deeper, and vendors take pains to be simple for clients to manage Capabilities that improve productivity (analytics) are faster and cheaper to deploy 9

10 Essential Guidance for Providers Buying IT Services Cost control leads directly to build out of the provider s vendor sourcing management office IT services budgets have to be restructured around business model change (e.g. insurance exchanges, value-based reimbursement) and their resulting technology requirements Master services agreements (MSAs) need to anticipate consolidation of IT service vendors and relationships based more fundamentally on shared risk Providers invest in robust vendor sourcing management capabilities to consolidate IT service vendors under contract, improve risk-sharing, and optimize relationships according to best practices Priority for budgeting is shifting to help providers scale new business models - on the exchanges and for new reimbursement models such as ACOs and PCMHs. Also important is planning for acquisitions (either in the payer or in the provider markets) The size and complexity of vendor teams will continue to grow as providers incorporate new competencies in strategic dimensions (e.g., consumer engagement) as well as technological dimensions (e.g., mobility) Providers that update Master Service Agreements (MSAs) with key external IT service vendors guarantee better access to talent and strengthen partnerships based on more shared risk. This helps control contract cost and address strategic challenges with speed, quality, and productivity 10

11 Essential Guidance for IT Service Vendors Serving Providers Expect restructuring and consolidation of IT service vendors Offer breadth and depth in services and software; become easier to manage Develop expertise with risk-based contracts Invest in analytics that can be scaled effectively Providers are already reducing costs and achieving performance-based and value-based operational goals. Some have their sights trained directly on the costs of external IT services vendors IT services firms that go to market with a rich combination of depth and breadth in service offerings will be easier and less expensive for their clients to manage. Whether through internal development, M&A, and partnerships, IT service vendors need to present clients with highly flexible, comprehensive suites of offerings Risk-based pricing expertise that applies to a range of functional capabilities will help align the vendor with the provider client - from mission through execution IT services firms need to leverage adaptive, internal software development capabilities at scale over broad practices. Expect, however, that the development of such hybrid capabilities will change IT services firms to resemble software firms more closely. Hybrid offerings will make "service offerings" something of a misnomer 11

12 Survey Details Respondents By Hospital Role Respondents By Hospital Type CIO, CTO, or Chief Information Security Officer (CISO) Chief Medical Officer (CMO) / Chief Medical Information Chief Operations Officer (COO) Senior VP/VP of IT/IS Senior VP/VP of line of business (e.g., Marketing, Ops, Director of IT/IS beds (23.0%) beds (31.5%) Director of line of business Manager of IT/IS Manager of line of business beds (45.5%) Other (% of Respondents) n = 200 Note: hospitals with fewer than 200 beds were not surveyed Source: IDC Health Insights' Annual Provider Survey, , n=