Global IT Outsourcing and Services companies in Healthcare in 2020: all bets are off
Damo Consulting’s annual review of the healthcare and life sciences (HLS) business of 12 major global IT consulting and services firms, now in its 5th year, shows that healthcare revenue growth has lagged overall company growth for all companies. Within HLS, the life sciences segment has performed better than healthcare for the companies covered in the report.
As I write this, we are deep in the midst of an economic and social disruption caused by a global Coronavirus (Covid-19) pandemic. Healthcare providers are in the frontlines of the crisis. They have had to embrace telehealth and virtual care models overnight as they try to save lives while keeping healthcare workers safe despite the acute shortage of personal protective equipment, ventilators, and testing kits. Life sciences companies are in a race to produce a vaccine. Public health officials across the globe are trying to enforce shelter-at-home and social distancing guidelines. National governments everywhere are injecting massive amounts of liquidity into the system to support the millions who have become jobless in a matter of days.
There will surely be gainers and losers as we emerge from the crisis.
In the coming weeks, companies covered in our report will start releasing their earnings and forecasts. The picture is likely to be mixed. Wipro, which announced its results this past week, revealed a 6.3% YoY decline in its profitability for Q1, and suspended its earnings guidance for the year. The unexpected announcement of CEO Abidali Neemuchwala’s resignation earlier this year has likely created additional complications for the company as it navigates its way through the pandemic-induced crisis. Cognizant, which has by far the highest dependence on the healthcare sector for maintaining growth, has seen revenues and margins shrink over the past few quarters. Its Q1 earnings will reveal the additional impact of COVID-19 on its financial performance and outlook.
CIOs in long-term contractual relationships with outsourcing service providers such as the ones covered in our report, will have to carefully assess their business continuity options to ensure uninterrupted support for healthcare operations. Fortunately, or unfortunately, healthcare providers have a low exposure to offshore providers, which minimizes risks of disruption to the COVID-19 response. However, longer term cost pressures may accelerate a shift to offshore-based delivery models, something we are already seeing in project work. The impact of COVID-19 on the workforce in countries like India and Philippines, which account for the majority of the offshore workforce pool, may require a rebalancing of capacity and a seamless transition between locations across and within the countries. In these countries, the majority of the labor pool comes to work in massive building complexes concentrated in technology hubs with robust telecommunications and security infrastructure. Work-from-home policies implemented in these countries will expose new security vulnerabilities which will be on the minds of CIOs across the U.S.
The WITCH group of companies (Wipro, Infosys, TCS, Cognizant, and HCL) collectively grew their healthcare sector revenues by $509 million, from $9.07 billion to $9.58 billion or by 5.61% during the calendar year 2019 compared to the same period in 2018. The overall HLS operating margins for the three companies that reported segment-wise OM’s (Wipro, Infosys, Cognizant) was 24.99% in 2019, compared to 27.21% for the same period in 2018. However, these numbers may not provide any guidance to what lies in store for 2020.
Amidst the crisis, healthcare IT consulting and services firms that carefully assess the market shifts and position themselves accordingly will find significant new opportunities. The ones that had greater exposure to payers, such as Cognizant, have seen declines. All companies in the WITCH group have done well in the life sciences segment but continue to have a low presence in the healthcare provider segment, which is where we see the highest potential for growth. Whether the firms will pivot successfully to seize the opportunities from telehealth and virtualization of care remains to be seen.
Our analysis of the healthcare IT consulting and services firms in this report continues to provide valid and relevant insights into the structure of the IT services industry, their performance trends, and their relative strengths and weaknesses. This 70-page report is a one-of-kind comprehensive overview of the financial and operating performance of the major IT consulting and services firms in the healthcare space. Download your copy and let me know your thoughts.