I am being asked more and more about the opportunity in India in medical outsourcing. We have to look at two very different activities which are being clubbed under the medical outsourcing term
1. Healthcare outsourcing : This has been the traditional IT/BPO outsourcing model, wherein healthcare companies in the US - Providers & Payors have been outsourcing IT and BPO work like Medical Transcription, Insurance Billing, etc to Indian firms. Wipro made a big splash a few years ago when the announced the outsourcing by Mass General Hospital of their radiology reading to Bangalore.
2. Medical Tourism: Increasingly, there is talk of medical tourism to India, given the high cost of healthcare in the US, Japan and the long waits for treatment in more socialist healthcare countries like UK, Canada and others in mainland Europe. We are seeing two types of companies emerging from India to cater to this market. The packagers - in essence these companies tie-up with hospitals as well as leisure travel providers and can offer a patient, say a heart transplant in Mumbai followed by a 2 week recuperation period in Goa. The other type is the hospitals themselves which offer high quality medical and surgical services.
Will this trend catch on? Are a significant number of people going to travel to India to get these services? What is the entry barrier against similar activities propping up say, in the Caribbean? What is India's competitive advantage?
Let us explore this in some detail
In favor of India:
- For one, most of the developed world has experience with Indian doctors in their own countries and these doctors have on average, been of a very high quality
- Secondly, Indian hospital chains, especially Apollo, Fortis & Max are really stepping up their infrastructure, equipment and talent quality as well as their presence all around the country.
- There have been good experiences by patients from all over the world and the cost of surgical services could be as low as 1/10th of that in the US or Japan.
- The Indian government has created a Medical Visit Visa for one year duration, signaling that the bureaucracy will not be an obstacle in this business model
- Thailand has been attracting 1 million plus medical tourists per year, and has been in Medical Tourism for much longer than India.
- Healthcare is not always a price sensitive decision and patients don't always want to visit a beach after a heart bypass surgery.
- The reputation of India is not as a healthcare hub, in fact rich Indians have been traveling outside of India for healthcare for a long time
- Just improving hospitals is not enough, the public infrastructure needs to improve as well
- Patients could have anxiety of their doctor not performing their surgery or being involved in post operative care.
- Patients will not be governed by their country laws in case of problems with their procedures. And problems do happen
- India needs to go up against more established players like Thailand & Malaysia
Here is some more stuff to read:
In my view, the offshore business has a "value add" problem. By that I mean, there is a problem that adequate value is not being added.
In a recent conference where I was a panelist, Rajesh Hukku of iFlex compared the Indian Offshore Model to Bollywood story lines. He said, very accurately, that there were, but a handful of story lines in Bollywood - the lost brothers, the rich girl meets poor boy; the rich boy meets poor girl, etc - and that as soon as any one of them became a successful movie, all the other production houses rushed to create a movie with the same story. He added that the Indian Offshore Model was the same - there were in essence a handful of story lines.
About 10 years ago the offshore model's sales story went like this
- we can do it in India where there are abundant resources,
- we can do it faster taking advantage of the time zone differences and running 2/3 shifts in a 24 hour day,
- we can do it cheaper because of the cost arbitration, and
- we can do it better with the ISO/CMM/6 Sigma certifications.
The offshore model's story today is...., you guessed it - almost the same. More services (like BPO) & service lines (QA, etc) have been added, but the fundamental basis remains the same for most companies. While the top 5-6 companies have been able to climb up the value chain either to business consulting or organizing their services vertically, the bulk of the offshore companies are still hawking the same story.
The offshore model has gained tremendous acceptance, very fast and most companies are scrambling to hire fast enough to deliver their projects. One thought hence could be - we are obviously adding some value; why change what is not broken.
This argument will stand the big players in good steed - the TCS, Infosys, Wipro, Cognizant, etc. They have an established base, a critical mass, a repeat clientele from where they make 90% plus of their yearly revenue. But it will not hold good for the small and medium sized companies, as other companies and countries replicate their current "value".
The small and medium companies cannot be content with being a clone of the big players. They need to innovate into untested areas and create their own niches and/or open up new markets.
Where are these opportunities? Let us explore that for a moment.
While the offshore model has been successful in pulling the rug from under CSC, Cambridge Technology, Sapient, (ineffect, forcing them to join them), it has not been able to make a dent in the business models of services companies like Convergys, ADP and others.
Convergys is a leading telecom billing services company, while ADP is predominantly an employer services company. These companies have domain expertise in specific industry segments around which they built proprietary technology around which they wrap their services (think something like Quickbooks). This is a value add driven from Intellectual Property and has more sustainability. It has sustainability beyond cost arbitration, beyond process certifications, beyond hiring resources.
Indian Offshore companies need to acquire or build IP in specific industry segments areas and then wrap their IT and BPO services around this. This will propel the small and medium offshore companies into their own.
Let me try and see if I can explain the offshore cost structure.
1 - THE BOTTOM UP CALCULATIONS
Nasscom reports that the average median annual salary for a software engineer in India increased from $6,313 in 2004 to $ 7,010 in 2005 - an increase of 11%.
Nasscom has also reported a 12% salary increase in 2006 over 2005 and this will bring the annual median to around $7,850.
Customers should be careful to use these numbers and divide them to calculate the cost of a person to their offshore vendors. The number that most companies use is cost to company or CTC. The CTC is usually an additional 15 - 20% of salary - so let's say the average median CTC for 2006 will be $ 9,420. To this are added the Infrastructure & SGA expenses
2 - THE TOP DOWN CALCULATIONS
Now let's look at this from the other side. Your offshore vendor is making roughly 20 - 30% EBITDA. That is the profit from operations - before any financial adjustments like interest, taxes or depreciation.
What it also tells us is that between what you are charged per hour and what it costs your vendor per hour is a margin of around 20 - 30%.
So, it is not as high as you may think, but there may be some scope for negotiations
3 - THE NEGOTIATIONS
Weigh the other aspects of what the offshore vendor brings to you
- Milestones based delivery
- Absorbing salary increases for a period of time
- Hard to find skillsets or resources
- Process, Domain, Experience, etc, etc
Recently a prospect used the Altman Z score as a part of their evaluation of our company. The Altman Z score is an insolvency score and is a combination of 5 weighted financial ratios which determine the financial health of a company.
The 5 financial ratios in the Altman Z-Score and their respective weight factor is as follows:
A. EBIT/Total Assets
B. Net Sales /Total Assets
C. Market Value of Equity/Total Liabilities
D. Working Capital/Total Assets
E. Retained Earnings/Total Assets
These ratios are multiplied by the weightage as below, and the results are added together.
Z-Score = A x 3.3 + B x 0.99 + C x 0.6 + D x 1.2 + E x 1.4
The Interpretation of Z Score:
- Z-SCORE ABOVE 3.0 -The company is safe based on these financial figures only.
- Z-SCORE BETWEEN 2.7 and 2.99 - On Alert. This zone is an area where one should exercise caution.
- Z-SCORE BETWEEN 1.8 and 2.7 - Good chances of the company going bankrupt within 2 years of operations from the date of financial figures given.
- Z-SCORE BELOW 1.80- Probability of Financial embarassment is very high.
Our score was above 20, so we did well on this indicator.
Electricity Converters – India uses 220V, 50 Hz AC Electric Current. Converters may be purchased in the U.S. for use with laptops, hair dryers, etc. A power converter/mini multi way adapter can be useful.
Luggage Locks – You might want to consider using a Transportation Security Administration (TSA) approved combination luggage lock as opposed to a lock that might have to be cut off while your bag is being checked through the airport. These types of locks are available on-line and at many luggage dealers.
Tipping – Restaurants usually add a service charge, but it is customary to tip taxi drivers, porters and other service providers, and it is always appreciated.
Office Dress Code - The dress code is informal/semi-casual throughout the year.
Be sure to bring…
- Extra eyewear (glasses/contacts)
- Prescriptions – carry them on the plane with you plus 1-week worth of extra prescriptions. It is also wise to carry copies of any critical prescriptions. You don’t want to put them in your luggage and not have them if your luggage is delayed or lost. Bring 1 weeks more of your prescriptions than you need, just in case. Most US medicines will have an Indian equivalent, however the brand names are not the same.
- Sunscreen with Deet
- A roll of Toilet Tissues for every week in India
