Digital front doors and transparency a new normal for healthcare?

U.S. healthcare is no stranger to an environment of continuous change and has not been spared the effects of the COVID-19 global pandemic in 2020. The unique circumstances born from the need for social distancing during the pandemic have accelerated healthcare consumers' demands for digital transformation. The ask comes from all healthcare continuum vantage points – patients, providers, payers, and vendors. Healthcare must change its practices to allow for more seamless digital interactions to meet these demands.

As with other service industry sectors, healthcare consumers want the option to access their health services virtually – evidenced by an increase from an 11% utilization of virtual visits in 2019 to over 45% in 2020. Some larger health systems have made this transition without significant challenges, expanding telehealth contracts, and receiving service reimbursements for both commercial and federally funded insurance types. However, many providers were faced with the decision to either suspend their practice or invest in digital platforms or services to offer virtual visits. Cognizant's Core Admin Solutions support providers' internal processes to offer telehealth and payers and providers in efficiently & quickly submitting process associated claims and authorizations via Trizetto's Touchless Authorization Processing (TTAP). The demand for telehealth has become an independent demand from the initial catalyst of social isolation and continues to be at the forefront of patient expectations. Even the senior population is thought to have few barriers to accessing virtual care, with 84% of sampled senior consumers stating they do not have any technical challenges in attending a virtual appointment with their doctor. With the remote operation of the doctor's visit comes the corresponding demand for total digital transformation; payment processing, e-prescription writing, prescription home delivery, and remote patient monitoring. Multi-faceted companies, like Cognizant, offer a variety of bundled or unbundled services and platforms to help healthcare providers and payers address the increased demands for digital interactions. This new digitization is also thought to reduce costs by increasing care coordination, administration, and manufacturing efficiency.

Providers and Payers are finding that digital products also offer the opportunity to clinically manage their patients and members remotely, with IoT, remote monitoring devices, and health wearables. The consumer can utilize various devices, measuring vitals, health coaching through AI, and tracking other metrics related to health risk factors. 65% of consumers utilize some type of wearable. With this percentage of adoption and available data, providers and payers have an exciting opportunity to address their patients' and members' health outside of the doctor's office. Vendors offer bundled platforms or paired digital services to collect, aggregate, and analyze the patient/member data to facilitate care management efforts by both their clinicians and their health plans. Though this digitization also requires a financial investment from the organizations, the vendors promise a visible ROI in cost savings and improved health outcomes.  

Driving the transformation

Regulatory bodies have been pushing healthcare providers and payers towards a digital transformation, most recently with the ONC Cure's Act Final Rule. The rule was created to increase interoperability and access to consumer's own health information. Though the rule pushes providers and payers towards the shared goal of an enhanced patient experience, compliance with these requirements will come at a cost. By 2021 payers will be required to allow consumers access to all their claims and health information and to develop APIs to share data with other organizations and regulatory bodies. Though the compliance will be a financial investment for providers and payers, vendors such as Cognizant can implement or offer platforms to achieve such price transparency.

The Centers for Medicare and Medicaid Services (CMS) has similarly taken steps to guide providers and payers towards a better patient experience. In the 2021 Medicare Advantage Final Rule, CMS announced a change to its CMS Star Ratings measures, increasing the weight of the patient experience metrics. Payers must now invest more heavily in their consumer requirements – digital transformation to achieve an end-user-friendly suite of digital platforms. Cognizant addresses another of these drivers by offering several applications and platforms that facilitate both back-end processes and consumer-facing platforms in assisting payers in meeting heightened digital demands from their consumers. Cognizant's continued investment in Trizetto products offers payers such an opportunity for an enhanced user experience with an automated enrollment platform. Such an offering would make a payer more attractive in the upcoming Medicare Advantage and ACA Marketplace OEP (open enrollment period).

Healthcare organizations are also feeling the pressure for change from InsurTech companies and their partnerships with healthcare providers. These initiatives are attracting members and patients with their omni-channel user interfaces and strategic focus on digital platforms and processes.

Product Suites to Achieve the New Normal

Amongst Cognizant's comprehensive suite of product offerings, their digital healthcare platforms and services support over 200 million lives in the U.S. Payers and providers alike have the option to select a la carte products or bundled services to meet the changing regulatory requirements and evolving demands of their consumer and patient bases. Cognizant continues to exact leadership and be forward-thinking in its current and planned digital transformation offerings and continued investment in Trizetto Healthcare Products ($100m):

• Core Payer and TPA admin solutions, for claims processing and management
• Payer-provider solutions, for facilitating contract pricing and modeling and payment administration. Cognizant has planned offerings for onboarding and credentialing
• Government and Quality Solutions, for enrollment and encounter data management, and support of quality rating measures and reporting. Cognizant is planning offerings for enhanced care coordination
• Care Solutions, for clinical and utilization management and value-based benefits. Cognizant is planning offerings for for automated authorization and referral management
• Data orchestration SoE solutions for data aggregation and engagement. Planned offerings include additional integration and analytics for interoperability.

While Cognizant, and other vendors, offer a wealth of products and platforms for health systems and payers, for many the financial investment required has been a barrier. But COVID-19 is having an impact, in spite of an estimated four-month loss of $202.6bn for hospitals and health systems in the U.S. Every U.S. health system recently interviewed by NelsonHall regarded digital transformation as more important as a result of COVID-19, with increased investments planned in SaaS and cloud infrastructure. Overall, hospitals & health systems in the U.S. have shortened their planning horizons to address short-term priorities and investments. One major healthcare system stated that their planning horizon was now weeks rather than years. The same reduction in planning horizon is also evident in healthcare payers, but here with a need for customer retention combined with a much stronger emphasis on cost control.

As is true in other sectors, the pandemic will likely increase the acceleration of digital transformation initiatives across healthcare, with a clear focus on achieving short-term results (rather than in years), producing very immediate improvements in both productivity and customer experience.

The healthcare revenue cycle management (RCM) BPS market is becoming technically more advanced as vendors experiment with RPA to drive greater efficiency and productivity, and to improve competitive positioning. Here I look at one such vendor, Access Healthcare, and the lessons they have learned from their own RPA initiatives.

Access Healthcare generates ~$145m in revenue delivering RCM BPS through 11,000 employees, with operations based mainly in India. Both its President and founder, Shaji Ravi, and its Chairman, Anurag Jain, had worked for Perot Systems’ (and then Dell Services’) healthcare practice prior to Access Healthcare being established in 2010. Access began to make strategic technology investments after Anurag joined in 2012, with the objective of improving productivity significantly beyond what was possible with its India-based labor arbitrage business model.

Lesson 1: Assess whether to build or buy your own RPA platform

Initially, Access Healthcare experimented with various RPA packaged software such as that offered by the leading horizontal vendors. According to Jain, his company discovered that trying to apply RPA packaged software to healthcare RCM processes ultimately proved inefficient. “[Packaged RPA software] is like a big Lego set with no instructions,” he said. “Efficiency with IT assets is the key and we found it more efficient to build our own technology platform.”

Ultimately, the company decided to build RPA capabilities onto the company’s existing IT platform (based on Microsoft.NET and SQL Server), calling the platform arc.in.

Lesson 2: Broaden your perspective when identifying efficiencies from RPA

Experimentation with RPA prompted Access Healthcare to think more broadly about the efficiency of its internal IT function and other areas of its organization, including HR management, data management, and workflow. The company resolved to integrate these considerations into the development of its enterprise platform to simultaneously streamline the management of people, data, and finally, customer-facing RCM processes.

As Access Healthcare worked to move beyond labor arbitrage and a transactional business model, Chairman Anurag Jain said he realized that “the real objective is not to make the customer’s processes and transactions more efficient but instead to make their work disappear.” The implication, he continued, is that it requires deeper partnerships with clients that incentivize all parties to generate and share the benefits from the work that disappears.

Lesson 3: An effective, scalable technology platform can generate M&A and partnership opportunities

An RCM BPS company with an efficient and scalable technology platform can expect to benefit by extending its technology capabilities across the operational functions of other RCM BPS companies and across other RCM market segments. And this can create opportunities for acquisitions of, or partnerships with, other RCM BPS companies.

Jain has pursued this line of thinking as he considers what he believes to be his firm’s cost advantage over other, less technologically advanced, RCM BPS vendors. He groups these cost advantages into two categories: workforce management and automation/analytics.

Workforce management

Access estimates that this category generates a 7-10% operational cost advantage over competitors. The costs of Access Healthcare employees equal those of management, which together far outweigh all other costs. Hence, technology that reduces management and employee costs is prioritized for investment. Access has developed proprietary technology for:

• Workflow tools: data and tasks from 150 payers and 300k+ providers are routed to appropriate teams and individuals, resulting in greater per-seat productivity
• Performance analytics: monitoring systems predict when employees are likely to be dissatisfied, when management intervention is necessary, and how managers can address dissatisfaction
• Automated incentive program: employees are motivated and monitored through use of a reward program that can equate to 20% increase in salary and accelerate promotions
• HR systems: help automatically manage a 2% per month attrition rate while simultaneously growing headcount. Every month, Access uses its software tools to manage 4k candidate assessments and 2k people in the recruitment process.

Automation/analytics

Access estimates that this category generates an 18-23% operational cost advantage over competitors. It estimates that when a bot is successfully deployed, a CSR can be spared 30-40% of his or her effort in executing a given process. After experimenting with tools from UiPath, and having evaluated Blue Prism and Automation Anywhere, Access discovered that it gets better results from its proprietary “echo” RPA software suite developed on its in-house arc.in platform. And because the platform is developed on Microsoft.NET using SQL Server databases, it is relatively easy to find the talent necessary to build and maintain its systems. Points of note here include:

• Process improvement team: The Six Sigma team operates with a holistic view of enterprise and client processes. This team identifies/prioritizes/writes requirements for automation opportunities
• 100+ developer team: This team builds and maintains the proprietary platform and tools, and includes 40+ developers to configure and deploy the proprietary “echo” RPA software suite
• Modular architecture: The company believes that the automation architecture should be built with process components in mind. Micro-bots should be able to automatically hand off work to each other if necessary, and micro-bots added to a library by process SMEs should make the architecture scalable
• Bots: The flexible platform enables a 4-6 week build and deploy period for new bots, and 1k+ bots are in production. Automatic logs enable measurement of the impact of bots on transactions and clients
• ML: Machine learning tools predict payer responses to specific transactions over time, enabling Access Healthcare to define and customize more effective workflows. ML tools also help prioritize investment in building and deploying new bots
• Point solutions: The company has also created platform-compatible applications for payment posting, claims follow-up, and denial management.

Confident in the advantages conferred by its own technology platform, Access Healthcare acquired Pacific BPO, another RCM BPS company in an adjacent healthcare market segment, in September 2018. Having assessed that company’s functional processes to be largely manual, Access believes it can use its platform to generate significant efficiencies. Access also believes that it can bring a new level of technology sophistication to a market segment ripe for the introduction of process re-engineering and automation.

The challenge of rising healthcare costs in the U.S. has been obvious for decades. Or has it? Various interventions have been attempted, but health costs as a percentage of GDP are forecast to continue to climb. National U.S. healthcare expenditure as a percentage of GDP has risen from 17.2% in 2011 to 17.9% in 2017.

In February 2018, the U.S. CMS Office of the Actuary estimated that “growth in national health spending is projected to be faster than projected growth in GDP by 1.0 percentage point over 2017-2026. As a result, the report projects the health share of GDP to rise from 17.9 percent in 2016 to 19.7 percent by 2026.” GDP growth over the last two periods has kept pace with rising healthcare costs over the last two years, but when GDP growth subsides, the healthcare cost challenge will reemerge. The current stalemate at the U.S. federal level about the path forward for healthcare reflects a lack of consensus about root causes and, therefore, advisable policy.

The sector has already undergone major restructuring and intervention, both government and private sector initiatives. This includes:

• The American Recovery and Reinvestment Act of 2009 (ARRA) incentivized adoption of EHRs – the assumption was that a lack of electronic clinical records technology was a primary component of inefficiency and waste. 90%+ of U.S. hospitals have now adopted EHR technology
• The Accountable Care Act (ACA) of 2010 realigned much of American healthcare reimbursement and delivery – the assumption was that decentralized, misaligned organizations created waste and reduced quality. The ACA introduced a raft of initiatives designed to address waste and improve productivity, particularly clinical labor productivity. The results of most of these measures, including the ACA’s Accountable Care Organization initiatives (ACOs) remain inconclusive
• Consolidation: the payer and provider markets have been roiled by restructuring and consolidation. There were 1,412 hospital mergers between 1998 and 2015; physicians also have consolidated into increasingly larger groups. Moreover, the four largest insurers now account for 83 % of the total national market.” [1].

The largest target for improvement in healthcare delivery costs remains the cost of labor. But does more “technology” improve labor productivity? Not necessarily. Technology can drive rather than retard growth in healthcare costs. According to a Health Affairs (HA) article, “technological changes in the [physician and nursing] sector to date have favored, rather than substituted for, those with high skills" [2]. It depends on the type of work or process, on the technology use case, and on the organizational aptitude for adopting new solutions. Administration, management and IT are oft-cited as a source of burgeoning healthcare delivery costs, but these classes of labor may actually be seen as examples to be followed. Over the 15-year period of the HA study, compensation (change in employment x change in earnings) for administration, management and IT rose only 35.3%. Over the same period, compensation for physicians and nurses rose 80.5%.

Taking a step back, have all the industry-level efforts at restructuring mentioned above missed the mark? Have we simply failed to appreciate how unhealthy Americans have become – and therefore overlooked the root cause of precipitous cost increases? The debates and struggles regarding GDP growth, healthcare delivery cost growth, technology adoption, government intervention, and market restructuring may simply be addressing symptoms rather than causes of the rise in U.S. healthcare costs.

The “hidden in plain sight” fact may be that Americans have unhealthy habits which have national ramifications for healthcare costs. In one 2013 study, only 2.7% of the U.S. adult population could be identified with healthy metrics for exercise, diet, smoking, and body fat. As national healthcare expenditures rise towards 20% of GDP, perhaps we should ask whether the challenge of rising healthcare costs can be adequately addressed by industry-level restructuring efforts. Perhaps this challenge can better be addressed by bottom-up rather than top-down initiatives.

[1] The Commonwealth Fund, Insurer Market Power Lowers Prices in Numerous Concentrated Provider Markets, September 6, 2017

[2] Where the Money Goes: The Evolving Expenses of the US Healthcare System, Health Affairs, July 2016

The healthcare revenue cycle management (RCM) outsourcing services market in the U.S. seems ripe for disruption and consolidation. The macro factors include:

• Contraction in the number of hospital locations and hospital systems
• Speedy erosion in the number of small, independent physicians’ practices
• Increasing complexity in reimbursement models and processes
• Increasing experience and scale of off-shore service vendors
• Decreasing costs of managing RCM operations RPA followed by broader AI and digitalization technologies.

The landscape of RCM platform and outsourcing vendors is highly fragmented and provider organizations considering outsourcing have numerous options. Becker’s Hospital Review listed 110 software and/or services vendors in this space in 2016 and expanded that list to over 160 vendors in October, 2017. Will the RCM outsourcing market become the target of a well-capitalized player or set of players, and if so, will technology be a primary driver of RCM industry consolidation?

Some vendors in the RCM industry certainly appear to have advanced down this line of thinking. Recently I spoke with Anurag Jain, Chairman of Access Healthcare, an India-based RCM BPS vendor, about the disruption and consolidation that he and his company anticipate. Jain believes that if the appropriate automation can be overlaid on standardized, optimized processes and people management systems, then the opportunity to take cost out of U.S. RCM far outstrips the capacity of his own company (and, he implied, the capacity of many of his competitors) to meet that opportunity through organic growth. As a result of this opportunity, Jain foresees a major capital infusion into the U.S. RCM outsourcing industry, with consolidation being one of the consequences.

Jain is excited about this prospect because he believes his company has the people, process, and technology capabilities to create a platform for such consolidation. Regarding Jain’s own company, privately held Access Healthcare recently announced that it had acquired privately-held Pacific BPO. According to Jain, as of August 31, 2018, operations of the combined entity will mobilize over 11,000 employees and 19 delivery centers in the U.S., India and the Philippines to serve over 70 customers, with the combined entity now commanding estimated revenues of $140m.

Another indication that an acceleration of industry-wide consolidation is in the air is the news that UnitedHealth is one of a number of companies looking to acquire Tenet’s Conifer business. What if Conifer is indeed acquired by UnitedHealthcare Group, and then grafted onto its subsidiary, Optum? Conifer manages $1.6bn in RCM outsourcing revenue with about 14,000 employees. Overall, Optum revenues are $91bn, and Optum’s RCM business employs 7,700 people. The scale and potential efficiencies of a combined Conifer/Optum RCM business could precipitate further consolidation. The fact that United (and Optum) are interested in acquiring Conifer indicates that Tenet, CHI, and United all see opportunity in consolidating the U.S. RCM outsourcing market, and this indicates that Access Healthcare may be one of the pioneers in a broader industry restructuring.

The insurance outsourcing industry is moving at a fast pace in response to the need for rapid deployment of digital platforms and offerings, as well as advancements in new distribution models that are emerging via ‘insurtech’ start-ups. Here I take a look at some of the key trends driving the insurance BPS market in 2017, both in terms of delivery and transformation, and by individual service line.

New distribution models, analytics & automation

Health insurance start-ups (Oscar Health, Clover Health, Bright Health, etc.) have been flourishing, followed by property & casualty insurance (Lemonade, Verifly, Metromile, Wrisk, etc.) and life & annuities insurance (Ladder, League, InforcePro, etc.), who are also seeing an increasing amount of investment. Outsourcing vendors will be actively looking to partner with, or potentially acquire, such companies in order to leverage their capabilities on an add-on basis, or using a completely transformative approach. And the insurance start-ups that will be most targeted by vendors are those investing in new distribution models.

Insurtech developments will bring more regulations at federal level in the U.S., as the application of new operational models will overtake the current state-level regulation framework of insurance companies. It is also possible that the new regulations will allow for the fostering of further innovation compared to current state regulatory frameworks.

Big data and analytics in insurance will see further growth, stemming from the vast amounts of data stored by insurance carriers. Vendors will either develop offerings to leverage such information, or will acquire companies in order to do so. It is still commonplace to find old-school insurers who are unable to analyze and leverage their clients’ and prospective clients’ data.

In terms of operating systems, vendors will continue to optimize legacy platforms with add-on proprietary or third party software, as well as retire dysfunctional and costly systems for newer ones that have modern distribution model capabilities. Digital transformation will increase among insurers, with larger numbers of insurance carriers shifting their operational model towards emerging market segments (millennials, middle-market consumers, etc.).

In the area of automation, the insurance sector has been at the forefront of RPA adoption to date, and this will continue in 2017. Meanwhile, AI technology is taking small steps towards greater adoption within insurance offerings, mostly in policyholder-facing applications. Policyholders will continue to request better, more personalized, engagement by their carriers through omni-channels, with a digital approach, with the policyholder engagement market segment seeing growth of more than 10% per annum.

Elsewhere, wider application of telematics offerings among passenger vehicles and industrial devices will allow for more accurate and individualized calculation of premiums.

Trends for 2017 by insurance service line

Property & Casualty BPS trends include:

• Launching new digital products and services in untapped markets for traditional insurers
• Emergence of fully digitally-operating carriers with a Bermuda-style regulatory framework, backed by PE/VC firms
• Emergence of new products for traditional insurers (drone insurance, on demand insurance, etc.)
• Wider application of analytics for process improvement and trend identification among policyholders.

Life & Annuity BPS trends include:

• Insurers outsourcing more responsibility to vendors that are able to provide specialized actuarial and predictive analytics services targeting customer retention
• Insurers requiring guidance on regulatory product adjustment from Solvency II implementations
• The middle-income and millennials market in the U.S. will see increased growth, as investments in digital channel communications expand
• Vendors will continue to improve customer service levels, CSAT scores and customer retention rates.

Healthcare Payer BPS trends include:

• The future of Obamacare and health insurance exchanges in the U.S. is uncertain after the Trump election. There will definitely be changes in the ACA care models and payers will most probably bear some of this cost of change in healthcare policy
• Consolidation among lower-tier healthcare payers will continue its momentum in 2017, creating opportunities for legacy platform retirements and updates from outsourcing vendors, eliminating disparate assets in newly-formed organizations
• Population health management and wellness programs through innovative delivery and distribution models will see significant growth, as well as engaging with patients through omni-channels, improving retention and satisfaction
• Applying analytics that identify opportunities for process improvement, as well as reducing fraud, waste, and abuse will be a top priority for payers
• Distant monitoring of patients and telemedicine will also see increased growth
• Preventive care and wellness offerings, in conjunction with traditional healthcare insurance, will see a rise in demand.

We now turn our attention to Dell Services, which has adopted an automation focus across its life and healthcare insurance BPS processes.

Focusing on healthcare payer & provider and life insurance process automation

In 2016, life insurance accounts for around 30% of Dell Services’ overall BPS revenues and healthcare payer accounts for approximately 35%, with healthcare provider making up the balance. Dell Services takes a platform-led approach to its BPS:

1. It has its own LifeSys platform for life insurance, on to which it migrates a client’s book of business and provides administration services in its own environment; or

2. It partners with a third party supplier for platform capability and tailors it to fit the needs of the book of business, from which it can then provide services, e.g. Dell Services uses partner ikaSystems for its healthcare payer platform needs, on top of which it layers its Dell Business Process Management Suite (DBPMS) tools. The tools include:

3. An enterprise dashboard: including KPI tracking and trend analysis for SLA metrics

4. Client extranet: including an issues log

5. Queue management: including skill-set based routing and priority allocation.

Automation Ideation led by BPS delivery teams

Unlike other providers, who tend to be led by their clients with respect to automation, the process at Dell  Services starts with an internal ‘ideas generation’ stage, achieved either through Dell’s ‘LEAP’ (Listen, Engage, Act, Progress) portal where agents are able to log ideas, together with perceived benefits (and are rewarded if their ideas are selected) or via the Business Process Improvement (BPI) team who carry out a ‘click study’ to identify ways in which the process could be re-engineered or automated. In line with its peers, an internal concern about increasing automation was the inevitable change in job composition; for this reason, the LEAP portal is considered particularly important to ensure employees are involved and engaged in driving the initiative forward. In addition, supervisors are targeted with an annual 5%-15% AFTE target. Once an idea has been selected, a feasibility study takes place before the idea is tested and bots are deployed by the central AFTE automation team. Bot management is then passed to the operations team while the bots are monitored through the central bot command center.

Balancing AFTEs with FTEs

In line with the market, Dell Services has concentrated its efforts on applying automation to high volume processes, which account for ~30% to 35% of its overall book of business. To achieve this, it is targeting the introduction of ~300-400 AFTEs year on year, though this is not a static number since clients are on-boarded throughout the year. The overall aim is to achieve around 6% productivity improvement per annum.

Although Dell Services does use third-party RPA platforms, it has developed its own “AFTE” platform incorporated within the Dell Business Process Management Platform. AFTE bots rather than third-party bots are typically deployed where the Dell BPMS platform is already being used or is to be used.

High volume processes (in which AFTEs are being used to varying extents) within each of Dell Services’ insurance services include:

• Life insurance:
  • Data entry and indexing: freeing up FTEs to carry out other activities such as policy holder services where less work is typically carried out by AFTEs – though this is something that Dell is looking to change and where Dell is investing in automation initiatives
  • Policy issuing: currently, the work is handled 50% by FTEs and 50% by AFTEs, with Dell seeking greater tool maturity before it is able to drive greater automation here
  • Premium accounting
• Healthcare payer:
  • In-bound calls: FTE-led
  • Adjustments: FTE-led
  • Adjudication: 50% AFTE, 50% FTE
  • Claim processing: FTE-led
  • Member enrolment: FTE-led
  • Provider maintenance: 50% AFTE, 50% FTE
• Healthcare provider:
  • File download: exclusively AFTE
  • Medical coding: 50% AFTE, 50% FTE
  • Change entry: FTE-led
  • Payment posting: AFTE-led
  • Credit balancing: 50% AFTE, 50% FTE
  • Accounts receivables: FTE-led

A simple example to illustrate some of the quantifiable benefits that have been achieved through automation can be seen through the work that took place to automate call center operations at one of Dell’s life insurance clients. Prior to the introduction of automation, call center agents were required to use a number of screens to capture customer information, which often resulted in comparatively low accuracy, and a high handling time. The system was not user-friendly and baseline training typically took around 10 weeks. Ultimately SLAs were being missed. To address this, Dell condensed the numerous screens into one screen and introduced rule-based processes to ensure no manual calculations were required to complete the form, unlike previously, where up to six manual calculations were required. As a result, AHT fell from 471 seconds to 374 and training took ~7 weeks, as opposed to 10. The quality of data capture increased from 88% to 95% and the average time taken to update notes fell from 110 seconds to 15 seconds¸ because the system was largely able to perform updates itself.

Plans to Implement Machine Learning within Dell BPM Platform

Over the last four years, Dell has extended its capabilities from simple script based-processing, to the development of AFTEs, including an associated AFTE command center. Going forward, the intention is to incorporate a self-learning capability, implement technologies such as NLP and machine learning within the Dell BPMS platform, and to secure end-to-end automation in the processes that are already largely being carried out by AFTEs, e.g. indexing.

TriZetto has a headcount of 3.7k (Cognizant at end of H1 2014: 187k.4). In its last 12 months, TriZetto had $711m in revenues and a non-GAAP operating margin of 18.4% (Cognizant in 2013: 20.6%).

TriZetto LTM revenues breakdown by service/product line is:

• Payer software: 40% (~$277m)
• Consulting: 23% (~$164m)
• Hosting: 13% (~$92m)
• BPO: 5% (~$36m). BPO services are provided on the Payer side
• Provider SaaS: 20% (~$142m).

Cognizant has higlighted the acquistion of TriZetto as an important step in the company's history:

• Towards a non-linear growth business. TriZetto is obiously an ISV business and has higher revenue per head (~$190k) than Cognizant (~$50k). Howevever, Cognizant is not buying a provider of plartforms: TriZetto is essentially a traditional ISV selling on premise perpetual licenses, where applications are implemented and customized by the client
  - SaaS revenues represent 20% of revenues, BPO services 5% only
• As a revenue generator with planned $1.5bn in additional revenues over 5 years. TriZetto has been a flat growth vendor overall in spite of M&As. In addition, the additional $1.5bn in additional revenues does not mean that Cognizant will triple revenues of TriZetto. Taking an assumption of revenue synergies happening towards the endof this 5-year period, TriZetto could reach sales of ~$1.3bn, up from $700m currenly. This is nice but hardly exponential for the company of the quality of Cognizant
• TriZetto with its software product business has high margins. Yet, TriZetto has lower operating margins than Cognizant. In addition, TriZetto under the ownershipby Apax Partners, offers little cost synergies. This means that under Cognizant, which will be focusing on revenue growth and investment in sales and products, the operating margin of TriZetto is likely to go down.

This lack of growth raises the question of price. Cognizant has not provided detailed information regarding its net profitability. Yet $2.7bn in cash for a company with flat revenues at best, a net profit likely to be  in the $70m-$100m range and no cost synergies expected seems a bit expensive. However the market seems comfortable with the price Cognizant paid for TriZetto: Cognizant's share price was relatively flat after the annoucement.

This acquistion will put on hold any other significant M&A for Cognizant for while as the company will be focusing on small tuck-in acquistions to strengthen specific capabilities and focus on share buy-backs.

Telecoms and media, Firstsource’s dominant sector (44% of revenues this quarter, around $56m), was the slowest growing vertical. The fastest growing was healthcare, with 15.8% y/y growth to ~$41m. This vertical was a contributor to the 17% growth in the U.S. Growth in the U.K. (15.3%) has been fuelled by the BFSI sector.

Attrition has decreased considerably in offshore centers in India and the Philippines (49.2% from 57.3% in Q2 FY 2014) and especially in onshore centers in the U.S. and Europe (33.8% from 47.4% in Q2 FY 2014); although these figures are still dramatically higher than its European and U.S. based peers. Attrition in its domestic serving centers continues to be a concern (92.8% from 85.6% in Q2 FY 2014).

Guidance for full FY 2014 remains upbeat:

• Moderate revenue growth fuelled by expansions from current customer management contracts, continued growth in the healthcare vertical and expected ramp up in BFSI collections
• Operating margin expansion of 150 to 200 bps, due to ongoing consolidations of low margin accounts, increasing efficiencies across business units, growth in offshore delivery and increasing collections business in Q4. 

Initially the partners will work together to improve quality of community healthcare in Suffolk, with Bromley Healthcare acting in an advisory capacity and supporting clinical leaders. In the long term, they intend to join forces to bid for a range of opportunities in community services and integrated care across the UK.

This move is part of Serco's drive to enhance the quality of its healthcare services in Suffolk after the service came underfire when  NHS commissioners, reportedly, found it missing targets. Improving the quality of services is key to Serco's ambitions to grow its healthcare business. Major recent contract wins have included the troubled £140m Suffolk Community Health contract, won in 2012 and the £120m Anglia Support Partnership, awarded in 2011.

If we look at where the growth is coming from:

• The more established ADM services (where Infosys took its eye of the ball in FY 13) contributed an estimated $173m in additional revenue, or 35.4% of the y/y growth of $490m. (Infosys achieved $53m growth in its ADM businesses). Enterprise solutions contributed over 19% of the growth. Assurance services and IT infrastructure services both continue to enjoy very strong growth and between them contributed over 27% of the y/y growth. IT infrastructure services and BPO both crossed the $400m revenue mark this quarter. The only service line not delivering double digit topline growth is the software business (TCS BanCs), for which the market is soft
• By vertical, the y/y growth is dominated by BFSI, which contributed an impressive $200m (nearly 45 of overall growth) in incremental revenues this quarter: full FY 2014 revenues are likely to approach $5.8bn. TCS is confident of sustaining ongoing growth in this vertical. In two other verticals, the difference between TCS and Infosys is marked:
  • Telecoms: Infosys continues to experience negative growth (down 10% in Q3 FY 14) and says its client budgets for next year are down. In contrast, TCS saw accelerated revenue growth this quarter (17.8% estimated, or $50m)
  • Life sciences & healthcare, which Infosys indicated a few years back was a new target market but now considers is soft.  TCS, in contrast, is enjoying over 30% growth, again with $50m in additional revenues.

These data points, are, of course, simplifications, but they do expose significant gaps between the two.

Among the regions, y/y revenue growth, unsurprisingly, continues to be dominated by North America (an estimated $232m in additional revenue. But Continental Europe contributed an impressive $122m in additional revenue. If anyone is in any doubt about its penetration of Continental Europe, TCS is likely to achieve over $1.5bn in revenue in the region this FY, with the U.K. delivering around $2.3bn. It is a major player in EMEA, and by far the largest IOSP.

Looking ahead, TCS is very bullish about prospects for FY 2015. CEO N Chandra commented on expecting FY 2015 to be a "much stronger" year than FY 2014. With 16.5% topline growth in FY 2014 nine months year-to-date, that indicates very aggressive targets for next fiscal. Should we expect some acquisition activity for IP-based capabilities, to boost efforts to drive non-linear growth?