Recent news items about WellPoint’s decision to set up Radiant Services, a subsidiary, to outsource some back office functions have raised the issue of offshoring in healthcare once again. This time, the specific issue in question is WellPoint’s decision to push the envelope and include nursing services in the scope of offshored work. The prospect of clinical services potentially being delivered from a location like India or the Philippines is unsettling to some, not least because of the privacy issues involved in the handling of sensitive personal medical information. At the same time, the recent blackout across half of India due to the failure of the power grid raises questions about the overall risks related to offshoring and the implications for technology and business strategy.
On the flip side, the growth of SaaS applications and the maturing of public and private cloud options present more technology choices than ever before, and this time around, the costs are getting lower and lower.
To put this in perspective, the debate has to be framed in the context of some broad trends and forces in the marketplace.
Obamacare will drive healthcare to become more efficient: The individual mandate, elimination of lifetime maximum benefits, banning of denial of insurance due to pre-existing conditions etc. are just some of the factors that will impose a cost on the system ( between providers and payers, it’s essentially a zero-sum game when it comes to costs and benefits, so patients pay at the end of it all). The changing dynamic in the marketplace in favor of certain larger organizations – payer and provider alike- with greater pricing power will drive greater cost-efficiencies if medical costs and premiums have to stay under control. Combine that with an acute shortage of skilled labor in areas such as nursing and information technology, and it’s not hard to see why healthcare companies need to become more aggressive in their strategic choices.
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Labor arbitrage as a driver of offshoring has been tapped out: Recent studies by independent research groups have suggested that the India labor cost advantage is still around 60-70% relative to the U.S and will sustain these levels for another 15 years. Firstly, I question the assumption that the next 15 years will be a linear extension of the last 15 years. Also, a couple of things need to be considered. A) if you discount the impact of the weakening rupee that continues to prop up the business case, the picture may look a little different and B) the growth of aggregate demand for specialized services, such as EMR implementation support, has a far higher inflationary impact than one is led to believe because the pool of consultants is small and not growing fast enough. A case in point is the limited availability of Epic certified consultants in the marketplace.
Captive centers are emerging as a strong alternative: Despite the softening demand in the global environment (specifically Europe), service providers are struggling with high attrition rates in India, combined with a growing problem of quality of work due to an extremely young and inexperienced labor force. All this is driving up costs and is creating service disruptions that clients are no longer willing to tolerate. The larger healthcare players with mature outsourcing programs are taking matters in their own hands and setting up or expanding their captive centers. India’s software services industry body, Nasscom, estimates that “captives” already employ around 460,000 associates in India, led by mature sectors like banking and finance. Better control over operations and IP, synergies across process areas, and elimination of intermediaries, point towards a trend that’s likely to grow.
Disruptive technologies are impacting the marketplace for services: The blistering growth of public and private clouds, the growth of SaaS offerings, and the emergence of AWS, Google and others is redistributing the pie in a way that has negative implications for service providers on the one hand and technology strategy implications for CIO’s. A growth in adoption of SaaS applications inversely correlates to growth in offshoring; however core platforms like clinical information systems and legacy claim processing systems are unlikely to move to the cloud in the near term. So while infrastructure may shift rapidly to the cloud, applications may follow more slowly. The recent outage in AWS gives pause to large companies looking to move mission-critical infrastructure to the cloud.
Healthcare executives who have leveraged offshore operations significantly may be pondering the following questions:
- How far should we push the envelope on offshoring? How do I deal with growing issues like location risk and service quality?
- How do we take advantage of emerging technologies like cloud and SaaS to balance the portfolio of services?
And, for the smaller players as well as those yet to embark on their offshoring journey:
- Are we too late to the game? Can we realistically expect to close the efficiency gaps with larger players by adopting an aggressive offshoring strategy?
- Can we skip forward and aggressively embrace newer technologies like cloud and SaaS and negate the lost opportunity from offshoring?
While offshoring may not be quite dead yet, new technologies offer a viable set of alternatives today. Voice recognition, Cloud, SaaS, crowdsourcing are just a few of these options. On the flip side, the more value-added services will require human support and the higher the value of the service, the higher the cost – regardless of whether it’s delivered from India, Philippines, or somewhere in the U.S.
The responses to these strategic questions will vary from company to company, driven by various considerations. The good news is that there are more options at hand today for market participants, small and big alike. It is possible to select fr0m a broader range of options when considering an operations strategy due to the maturing of the offshoring industry on the one hand, and to selectively take advantage of emerging technologies on the other. The whales and the minnows can co-exist without being threatened with starvation or extinction.
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Paddy Padmanabhan has over 20 years of experience in technology, finance and operations, and has held leadership positions with large global outsourcing and consulting organizations. He is currently EVP and Chief Business Officer of BeyondCore, Inc, an advanced analytics software company based in San Mateo, CA. You can reach him at paddy@padmanabhan.us , find him on Linked-In at http://www.linkedin.com/in/paddypadmanabhan99 , or follow him on Twitter @PaddyPadmanabha.