Interview with Emdeon CIO Damien Creavin on outsourcing
SOURCE: The Hindu Business Line
DATE: Oct 12th, 2008
Factbox:
Emdeon is a healthcare payment services company headquartered in Nashville, TN. They supposedly have 500 people in Cognizant working with them in India. http://www.emdeon.com/
It is interesting to see that a number of firms with ownership stake from PE firms have been looking and exploring offshoring to manage their cost. With the exit strategy for a number of the PE firms being extended , firms are looking at ways to extend their cash and reduce cost. Smaller firms when managed properly can leverage offshoring more effectively to help them with their cost structures.
ARTICLE
Why does a client outsource functions to India? What does he want from an Indian service provider? Quality? Inexpensive labour? How does he know the vendor qualifies? Do client referrals matter? Or are there site visits where the vendor is grilled?
eWorld met with Damien Creavin, Chief Information Officer, who has been with Emdeon since 2004, to understand the thought process behind selecting an offshore and outsourcing vendor. Since April 2007, the company has outsourced several of its functions to Cognizant Technology Solutions in India.
Emdeon Inc is a result of various acquisitions and mergers that its preceding avatars have gone through. Recently, it became privately owned by General Atlantic Partners and Hellman & Friedman, both private equity investors. It is now set to go public again, according to the prospectus filed with the Securities and Exchange Commission (SEC) in the US. Emdeon’s products integrate and automate business and administrative functions of insurance companies and healthcare providers. It had revenues of 808.53 million for the year ended December 2007.
The conversation:
Could you take us through the decision to outsource to Cognizant?
I was invited to essentially transform IT. After six months, it became apparent to me that there was an opportunity to rationalise the technology landscape without compromising the company’s ability to make profits and in some cases drive down cost of ballooning technology operations.
Within six months of my joining, there was compulsion to seek out an Indian partner.
Were you toying with outsourcing within the US before you decided to offshore to India?
I was committed to offshoring from the outset. The only previous experience I had had with an Indian vendor was during the Y2K remediation — that partner did an extraordinary job. We had a huge legacy platform at Time Warner in Cobol. My experience with offshoring was pleasant.
So, I was well disposed to working with an Indian partner.
To give you the context, a large computer marketing company at that time had taken consumer support activities from India back to the US. I believe that the key to successful outsourcing is good, strong management.
Our investor, GA, has had some success with investments in technology in India. All this taken together, it wasn’t a very difficult decision for us — to have an Indian partner.
GA asked us to look at companies in its portfolio — and then there were some obvious choices, Cognizant being one of those. We decided on an initial group of five companies. Then we started the process of evaluation.
Evaluation was initially focused on understanding how these companies operated, what their offerings and strengths and weaknesses were. It was an elaborate interviewing process. I spent six days across six Indian cities in April 2007.
I was really impressed by these organisations; what they do and how they do it, and they were pretty candid about where they had expertise and where they didn’t.
At that point, what was important to you? Domain expertise, customer reference?
During the initial round of discussions, it was all very general. We did come here with the assumption that all these providers would have access to technical talent. There wasn’t a great deal of focus on that.
One of the interests that I had as CIO was not the typical focus on labour arbitrage, but to tap into a pool of highly skilled labour that was in India in abundance in a way not available in the US. That was my personal view and not that of company. It was an interesting side bar aspect as I interviewed these organisations keeping with the goal of driving down the cost of technology upgrade.
We did not focus on technology. We had not come with pre-conceived notions. We wanted to know whether they could they be good partners, what range of things could they do and from their point of view what they thought their strengths and weaknesses were.
We returned to the US with six-seven different points of view and collated that into a single report. We also quantified, built a framework to evaluate these companies. We retained some outside help to build this framework. We narrowed the list from five to two.
One of the things we wanted to do was to keep emotion and too much subjectivity out of the evaluation. So we worked on the framework for evaluation. Simultaneously, we also took personal reactions — so it was not entirely mathematical. That allowed us to get down from five to two very quickly. We moved very quickly to determine who were likely to be able to deliver not only IT but also BPO. We weren’t committed to have one guy do both but it would be a bonus if the vendor could deliver both.
So how many vendors do you have now and how many people do you employ in-house?
Cognizant is our single partner. Both for IT and BPO. We have 500 people back in the US.
Did you consider having more than one vendor, to derisk?
We are constantly evaluating that. When our run rate expense reaches a point where we have to have two vendors, we will.
What happened after your first trip to India?
There were some discussions in the US. We returned to India. This time we came back with a very specific strategy. The goal was to drive down the cost of technology upgrades. I wanted to see if either of the two in the shortlist could deliver a broad range of IT services. So customer support centre, data centre, systems operations, application development and maintenance, quality assurance (QA) were all on the list. We evaluated the two vendors on how each would deliver on these service fronts. We actually asked Cognizant to deliver a proposal for the entire range of those services, whether or not we would place orders immediately for each of them.
We had multiple workshops and there was a tremendous amount of work — between Emdeon and Cognizant and between Emdeon and some of our advisors — that took several months. I think I frustrated some colleagues by being so deliberate about the process. (Smiles)
But looking back, it was the right thing to have done. There was no ambiguity, whatsoever, about what we were going to do and over what period of time this would play out.
Did you consider having your own captive unit in India?
No. That was part of the original discussion. A number of folks advised me that I should consider it. One individual — the CTO of a large technology company — had run a large captive organisation successfully — and he urged me to consider it seriously.
I wasn’t convinced. If we had been a company very practised at this, or if we had had international experience then it made sense. So I quickly dismissed it.
I am told that savings from offshoring typically range between 40 and 60 per cent.
I think that is a little on the high side, for our current relationship with Cognizant. For specific reasons, we designed the first wave of work to not only allow us to achieve cost savings but to fully explore Cognizant’s capabilities. If I were simply going after costs, we could have realised higher savings, but that wasn’t really what we wanted. As a result, we forewent some savings. I think the 25-45 per cent range is more like it.
Another interesting discovery we made is that the difference in technology costs in the US in certain areas and those in India are much smaller than you would assume. Some roles cost us quite a bit and some weren’t that costly.
But our goals were met. We have a very specific savings target for which we are on track. Emdeon and our investors have been very happy with this.
Then savings are not annually computed?
We have a ramp-up. You go through a transition period that involves onboarding the offshore partner and eliminating some captive roles and you have significant one-time upfront expenses. We had some strong legal and technology counsel. That was very expensive. Our goal is to get to a specific steady state savings target three years after the program started. We would probably exceed those targets.
The good news is that if you do this properly, this could be highly determinic. It doesn’t have to be vague. You can’t predict to the dollar, but you can predict with a high level of accuracy where you will end up, if you have the right partner, processes and technology, right framework and the right counsel.
One of the concerns of offshoring is it’s a bit of a black hole. First, you don’t know if it would work. If it does, you don’t know if you save as much as you want to. That is more a function of how you structure and how you choose your partner.
Is your industry-recession proof?
No industry is. We are not immune to recession. Capital investments are now influenced by a poor macro economic environment.
What impact does that have for you as CIO? Budgets? Discretionary spending?
We are now a private company with aggressive investors. We are also well-positioned in the American healthcare landscape. We are a special case. To extrapolate from our special case to the general could be potentially be misleading.
We have products and services that help with the administration of healthcare and our investors agree with our approach. This gives us the opportunity to make headway when other companies are struggling.
So there’s no pull-back on spending?
No, and that’s a good thing, if I can continue to spend those dollars wisely.
Have clients now certain about how bad things are? Or is there uncertainty still?
In general, there are delayed projects… the obvious thing is that capital investments get greater scrutiny. It’s true in healthcare and elsewhere, Research reports would tell you that we are in a down-cycle in technology investment, like we were after 2000.
But like Jack Welch said, if you can capitalise on your situation in weakened conditions, when you come out of it, you are well positioned to increase market share.
If you had to go through the whole exercise of choosing an offshore vendor again, what would you do different?
Absolutely nothing. I speak to a number of different kinds of people and companies about this. I was under enormous pressure to make a decision quickly. But, I steadfastly stuck to my plan to get the right counsel, right framework, etc. I would not change a thing in retrospect. It’s an initiative where our goals have been achieved.
What kind and how much work does Cognizant do for you now?
Of the service towers, QA represents the largest. Application development and maintenance represent the smallest. The mix in between comes from things like data centre operations. That could change.
In the original design, I felt that Cognizant was well positioned to help us in QA. QA was also a troublesome thing for us. That was a design constraint. Interestingly, we are asking Cognizant to do QA the way we did it. But once we reach a steady state, we would expect Cognizant to tell us how else to do it and hence generate savings or increase efficiency.
How is pricing structured? Based on time & material, fixed price or risk-reward sharing?
All of the above. We have the service tower strategy. Fixed price service made more sense. Then we would simultaneously evaluate different projects and resort to T&M pricing. One of the nice outcomes from our work is that we built a master services agreement that allows us to add work orders — literally add an order in a few days. I frustrated my colleagues, and possibly Cognizant, in insisting on this agreement. But now, all of us agree that we are seeing the benefits of that.
We had eight or nine work orders with fixed price contracts. We now have 28 or 30 work orders now. The incremental work in having an additional order is minimal. Half of the contracts are fixed-price.
Three years from now, are you looking at options other than India? If labour arbitrage continues to be important, China could be a choice.
We are constantly evaluating what is the best way for us to do this. Our work is now concentrated in the US. That may not be so in future. As leader of the technology unit in the company, we will seek out best quality of service offerings. I was born in Ireland and have been an international citizen most of my life. I am open to sourcing skills in such a way that it gives me the best opportunity for tech upgrade. If that meant unwinding relationship with Cognizant or whoever else and go back to the US, then so be it.
But we have not specifically considered China or another country for the near future.
Any examples of how Cognizant made a difference?
We have a number of initiatives targeted to reduce the complexity of the technology platform. Ours is a large technology estate, largely due to our acquisition strategy. We have an initiative today to consolidate12 transaction platforms. We have a joint Emdeon-Cognizant team that has onshore and offshore elements. We interconnect hundreds of thousands of providers and hundreds of payers and we have to migrate those across platforms onto one. We have an enormous time constraint. We have to do this quickly.
Cognizant is in the thick of this. It has demonstrated in different ways an ability to help us do it quickly, by being highly organised or just being novel. The process of data migration is onerous. In healthcare, moving data is even more difficult, for, in the provider and payer community you have technologies that are both primitive and very sophisticated. When you do data migration, you run a risk (of data loss or corruption).
Cognizant innovated and helped us do it in such a way that the migration was transparent to the customer. We didn’t have to touch our customer.
Looking forward, real time claims is soon to be upon us. Today, several hours or several days after a patient has paid, a claim goes to the payer. Several days to months later, the payer pays for it.
Doctors would like to be paid sooner. So, real time claim is proposed as a solution to that problem. It is truly in its infancy now but there is a sense that it would be an important part of the fabric of claims payment.
The first version of this would be available at the end of this year. Cognizant is not only helping us with legacy solutions but also with new technologies.
How many people do you currently have in-house?
About 500.
We understand that 70 per cent of offshoring projects fail. What has been your experience?
Zero failure. It’s to do with management. Nothing to do with offshoring. Not that there are no cultural barriers. I was born in Ireland. You could drive 20 miles from my home and be exposed to a whole new culture. But much too much is made of these things. It’s essentially management.
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