New Financial Services in U.S Healthcare

As part of the U. S. Healthcare series in association with Intelenet, SSON spoke to Susir Kumar (MD & CEO, Intelenet) and Suresh Ramani (President – North America Sales & Operations, Intelenet) about outsourcing trends for the next year, acquisition of captive centers by BPO and how changes in the U.S healthcare represent opportunities for Intelenet.

* View all content in U.S. Healthcare Series 

SSON: Let’s start with a look at BPO generally. We’re just seeing the back end of a global recession - how has this affected Intelenet over the past few months?

Susir Kumar: OK. A BPO is basically the back end of a company’s operations, so we handle their customers’ transactions. Through the recession period we have seen, for example, banks issuing a lesser number of credit cards; banks giving fewer mortgages; the new accounts that are being opened up have reduced. We are the back-end supporter of these clients of ours: the volumes coming in from these clients of ours have actually gone down, so if we were issuing 60,000 cards a month for a particular client it perhaps went down to as little as about 5,000. We became extremely concerned about issuing any further loans [while] people were just not willing to spend money or buy things, and all of that had a significant impact on the number of transactions and the number of calls coming in.

What we first saw in this initial phase of this whole recession was volume reduction, and a whole lot of companies being extremely concerned about whether they would survive through this phase of recession or not. So everyone started strategizing around how to survive. We had a set of companies which thought by taking certain actions they would survive, and then we had a set of companies which were pretty concerned about their survival. So in some companies we actually saw some drastic measures being taken, and now people were not expecting the traditional outsourcing deals. They were asking us "Tell us how you can accelerate the cost savings process? I know you can give us 50% reduction of costs after 18 months: is there a way that you can give us 30% right now?" So it was a completely new expectation that came in, and I think after the first six months of recession we saw a lot of companies coming out with the question, [so] we had to change our value proposition or our offers to clients and prospects… Then we started observing, over the next six months to about nine months, that these companies were making faster decisions: in the past it would take anything between six to 18 months to take a decision on outsourcing or offshoring, but during this phase we were seeing companies taking decisions as quick as maybe two or three months.

We noticed that clients who had outsourced just about 15% or 20%, were all talking to us about how they could increase the outsourcing/offshoring percentage, and get their costs down; so we also went after every company that had outsourced just a small component, and we told them that "yes, in this case you are saving $5 million a year, or $10 million a year; here is another opportunity where you can accelerate and increase the scope of offshoring and outsourcing, and you could save potentially double or triple the amount that you are currently saving." The third thing that we saw was, [before the recession] people would not make an offshoring or outsourcing decision if the saving was, say, less than 40%. In the new environment we saw that even if we gave a value proposition of savings of 15%, people would make a decision. Three years back we would never go to a company if the value proposition was just a 15% saving.

I think right now we are in this phase - where from the bottom our clients have actually been growing about 5 to 10%, so we have already seen more cards being issued, more mortgages being given, more people traveling; in the travel segment that we handle, we are seeing a lot of demand coming up. And in the last six months most of the companies that have downsized their own labor force, are all believing that there is going to be some growth in the next six to 12 months. Albeit, these companies are not convinced that this growth is going to be sustainable; people are generally believe that 2012, is where they will see a growth equal to what they saw in 2007-2008. So the value proposition that we are offering to our clients is: ‘you guys have come out with a plan for next year that talks about 10% growth versus the bottom; rather than you building your own capacity and people why don’t you look at working with us, because you can turn on the tap or turn off the tap with us, whereas it’s more difficult for you guys to do it in your environment where it’s expensive and more regulated.’

SSON: Looking forward then, Susir, what now do you see as the biggest challenges facing outsourcing providers? And how are you positioning Intelenet to overcome these?

SK: Just to give you a summary: over the last, say, 18 months to 20 months, we’ve actually seen a reduction or a contraction of our existing business of around 10% to 15%. But there is new demand which is offsetting this shrinkage, and net-net we are still seeing a 10% growth. The good news is that people are making faster decisions and looking at outsourcing more. Because of these multiple reasons and the fact that we are giving them capacity as a value rather than just cost, there has been a growth in our existing-to-new business, to the extent of almost 25%, which after offsetting the 10%-15% shrinkage still accounts for 10% net growth. So that’s the bottom line of the whole thing.

People are also negotiating more. And people have actually tested the market in the last 18 to 24 months and trying to squeeze a little more out of service providers like us. When they came in through this phase of recession and asked us for a 5% or 10% discount, we gave it to them because these are long-term relationships, and we have to reciprocate in some form in their time of difficulty. Now this is becoming a new norm for pricing.

We have also learned in the last 18 months or 24 months  to run the operations more efficiently. So what we have been telling the clients in the last 18 months is, "ok, you guys want a 10% discount, we’ll give you a 10% discount. But don’t dictate to me in terms of where the operations should be run from, what should be the span of control, what should be the kind of technology - you tell me what is the end result you want, in terms of efficiencies, in terms of turnaround times, in terms of accuracy, and let me decide how and from where to run the operations, and I’ll give you the 10% discount." So what has happened in the last 18-24 months is we have been given the freedom to decide how to run and from where to run the operation.

Net-net, though we have reduced the price, we have been able to get the same margin as what we were getting in the past..

Another big challenge is that people are asking for more and more financially structured deals, rather than the regular outsourcing which is a per-FT price or a per-transaction price; it’s becoming a little more complex. They are asking us to fund the redundancy, they are asking us to fund the set-up costs; there are a few clients that are asking us to take an outcome-based pricing, and we’re taking more and more of that. I think from a risk perspective, we are now required to factor in if at all we have funded the redundancy - and if the contract is say over a period of 5 years, if it actually gets terminated before that, then we will not have to cover the entire funding of redundancy that we have done.
Companies are also coming and telling us, "guys, just take our operation lock stock and barrel, and you guys decide the onshore/offshore mix, etc: this is what we want as outcomes." And what that means to us is investment; taking over the risk of pensions of these employees and costs associated with just aligning that new business that we buy out with our business, and so on and so forth. In the last six months we have done about five acquisitions of just the back-end operations of a company. And that always has the challenge of integration - and the risks.

SSON: That’s an interesting point: at the moment we’re seeing a lot of BPOs buying into shared services captives, for example Cognizant and UBS: is that something on your agenda for 2010?

SK: Yes they are, and actually, one of the advantages we have is we’re not a listed company, and being a part of Blackstone, we do have access to capital. When you acquire a back office of an existing company, what you need is capital, and an ability to take the impact on your P&Ls for the first six months or a year of buying out the company.

For example, if I were to buy the back office of an existing company, the company would expect a reduction of costs of, say, 20%. In the moment that you buy it and you start billing 20% less the next day, you’re actually incurring a loss in your books, because the cost structure and the way the operations are designed needs you to spend, for example, 100 and you’re only actually billing the client about 90. There’s a hole in your P&L. Only after about six months to one year you will start reducing your costs, you will start building efficiencies in the processes and so on and so forth, and you will be able to bring down your costs from 100 to, say, 80 or so - and because the client is paying 90, you start making a profit of 10. What this means to us is it will impact on our P&L accounts for a period of one year. But because we are not listed it really doesn’t matter to us; and the good thing is, normally when you do a transaction like this we ask them for a lock-in – to provide us a commitment of business for a period of time. And as I told you we did about five transactions in the last six months: all of those five transactions have come with a revenue commitment for a period of time.  You will see us do more and more of these kinds of deals both onshore as well as offshore.

SSON:  Who have you done transactions with over the last five months?

SK: We have done one transaction with one of the large banks, we are about to finish off a transaction in the UK.  We bought two captives from travel companies, we bought one captive from a very large bank, we about to buy one very large captive from a transport company in the UK and we have also bought another company in the retail space, reasonably big: about 200-300 seats.

SSON: Moving on, Susir - let’s take a look at healthcare?  We are running this a US healthcare series with Intelenet, can you give us some insight into the work you are doing directly in this space?

SK:  There are two things. Firstly, Blackstone has about ten companies in the healthcare space in the US, either on the provider side and the payer side. Secondly, we are looking towards the regulatory changes that are taking place in the US: The new regulations will mean if a person in the US goes and applies for insurance, that person has to be given an insurance policy. Today they may just go and tell a customer that they will not give insurance coverage at all.  The Obama administration is opening up insurance in that, earlier, insurance companies could only provide insurance for people in a particular jurisdiction - which could be a particular state, for example the state of Arizona. Now they have allowed these insurance players to give insurance policies across the United States. 

So taking Arizona again for example - say there were four large insurance companies giving health insurance; all of a sudden now there are companies from New York that are issuing polices in Arizona, there are companies in Texas issuing policies in Arizona. The number of companies actually providing insurance cover has gone up by virtue of this new regulation.  So in suammary, they cannot deny people coverage and the competition has actually gone up.  By virtue of this we believe that both the insurance payers and insurance providers will have an implication on their cost and profitability. 

A new code is also being prescribed. If you look at any medical diagnosis or procedure in the US or across the globe, it needs to be codified.  For example if someone is diagnosed with four ailments, each of those needs to be coded; or if some surgery has been performed on a particular person then this again needs to be coded. This coding helps to keep medical records, and also helps to pay the insurance company and the hospitals - so insurance companies use this code to work out how much to pay for hospitals based on whatever ailments they have. Now this code is undergoing a change from what is called an ICD9 to an ICD10 which increases and changes the way things are codified. 

So what does all of this mean to companies? Firstly, they will need to retrain their people in coding, they need to change the systems that they use for coding and, because the number of codes has gone up, they need to get more people into coding. The government will monitor payers and providers to make sure the coding is done properly.  All of this will cause a huge impact on the healthcare companies in terms of costs and profitability so our value proposition at this point in time is that we can come in and help with codification. You don’t need to train people at your end, because we can either get these people onshore in the US or we can help you with an offshore solution.  When you provide an offshore solution, the cost comes down - or it helps with the new issue we have in terms of competition and the universal access. As we have access to the ten companies in the Blackstone portfolio, we are already doing work for a few of them, we can just leverage this expertise and get across the whole market.  So the reason we are focusing on the US is, one, to take advantage of the new situation, and two, to leverage the expertise we are already building by virtue of doing work for a few of these Blackstone portfolio companies, both on the payer and the provider side.

Suresh Ramani: I think if you were to draw a context of where US healthcare has been traditionally and where it is moving, I think there is cause for worry.  If you look at the spend in 2008, they spent about $2.4 trillion on healthcare - which is about 17% of GDP - and of that $2.4 trillion, 80% of that went to 20% of the population of the US of the insured. That number today is going to double, within the next eight years the spend on healthcare will be about $4.5 trillion. So you can see the exponential growth and with all the reforms which Susir has talked about, such as universal access and going outside the state to insure, the risk appetite of all the providers is going to go up. 

The other big piece is the unfunded mandates which are the conversions of ICD9 to ICD10 which as a program, I think, whether other countries have adopted, the US has to adopt, and that will be a regulation which has to come into effect by 2012.  So, these are again costs that the providers and payers need to absorb.

Another big component to this is in terms of the reimbursements which will come down, because the Obama administration wants about $400 billion out of the spend to pay off the deficit.  So if all this is going to happen, the payers have to focus on their operating costs if at all they are to survive - or there will have to be a story of consolidation or elimination out of the 1,800 payers in the American market. 

There is also the issue of regulatory compliance. With all these changes, it is difficult to keep processes up to date; as a result healthcare insurance carriers are not meeting obligations to the state, to the federal government - and they are paying huge penalties. So Intelenet can step in here and fix these problems. The most important piece to that is not only do we consult but we actually implement process improvements. The other piece to this is that we get solutions which are both BPO and technology related so there is process optimization that we focus on and an enabler to that is outsourcing or offshoring. So clearly three things: regulatory compliance, driving down operational costs and improving quality, I think are our three pillars, if you will, of our service delivery.

SSON: Susir, you talked about the services that are being outsourced: processes and compliance etc, and you mentioned coding. What other services do you expect the healthcare industry in the US to outsource to you?

SK:  There are two sets of people in this space: providers - basically hospitals and payers who are the insurance companies.  On the providers’ side, there are also companies which provide medical equipment - so again another huge market.  For example, the services we provide for hospitals are coding, billing services, contact center support, claiming monies from insurance companies - if somebody goes through a procedure then we need to ensure that the doctor writes it on a form and the form is scanned and it comes to us - we need the machine, we need to do the right coding, we need to send it to the insurance company to check that it is covered.  If it is not covered by the insurance and it’s a deductible amount, we need to go after the insured. Then we need to raise a bill and say the payers challenge what we have invoiced, we negotiate and close those issues. Then there are complaints, and complaints management. On the payers side we receive invoices, we pay invoices, and we reconcile accounts.

SSON: Are you providing these services from onshore or are you providing from locations in India?

SK: There are clients who are asking us to do some piece of work onshore in our location, or in near-shore locations, or offshore. So, we are working with all of the models. We are offering clients both India and the Philippines. The Philippines has a lot of nurses who are either looking at going to the U.S. or who have returned back from the U.S. So that is a big pool that we are tapping into to say that "if you work with us in the healthcare space, it may be an added experience for you guys when you seek a job in the U.S". Or for people who have come back from the US, when they already know the nuances and systems there, they can be readily employed in an environment such as the Philippines. We also have a site in Poland, again a good site from where we provide services in healthcare.

SSON: You are obviously looking very closely at the US healthcare space; do you foresee Intelenet possibly expanding into other countries?

SK:  We have had a client from the UK for the past 8 years. But as there is a huge demand now from the US, we are all focused on the US. [But] we will be going beyond the US to other geographies. India itself is a huge market. The amount of people who are getting covered under insurance in India is huge; everybody now wants cover and there are a lot of healthcare companies, both on the provider and payer sides, coming into India. This is a completely new market for us.

SSON:  So why do you think new customers - within the US or India further down the line - should sign with you as opposed to any of your competitors?

SK: I did mention to you that we have about ten companies in the Blackstone portfolio, all of whom we’re working with pretty closely - and the work that they give us covers almost the entire range of work that healthcare insurance companies look at outsourcing. Now these companies have not been used to offshoring and outsourcing as much as the financial services sector, and one big thing they will look for is, "are you guys really doing this, why I am looking at outsourcing?" And we are able to demonstrate an actual live case of the work they’re expecting to outsource. Also what we have done is significantly enhanced our management of healthcare, so we have of late recruited about half a dozen people who are some of the best-known people in the healthcare industry in the US; these are the guys who actually build applications for healthcare companies. We’re also leveraging, through the Blackstone portfolio, networking with people who are actually working in the companies, to see how they can work along with us, to build solutions for some of the companies in the U.S. We have a program where we can actually import people who are working with healthcare companies as part of the Intelenet team.

SSON: What other sectors do you think will provide you with the greatest scope for expansion over the next few years?

Suresh Ramani: I think there are some key areas that are going to grow in the US market. One is utilities and the second is government spends, but healthcare makes the biggest growth pie. Clearly speaking for us as an organization the US contributes about one third of our revenues. We’re equally distributed in the Indian market as well as the UK market. On an overall basis we see the banking industry again moving, not at an aggressive pace, but at a reasonable pace over the next 18-24 months; we can see some good traction in the marketplace. And we are very strong in the banking and financial services space. We have today close to about 8,000 people working in this market, and doing all the types of processing that you can think of doing for a bank. In short, if we had the money, we would be a bank ourselves!

Another area of growth for us is travel and hospitality. Susir started off pointing out that people are not travelling so much, but it’s a matter of time: when the economy starts looking up, there will be demand for travel as well as hotels. So that’s an area where we already have invested, both onshore and offshore and we have close to about 3,000 people in that space, so that’s again a focus area for us.

Telecoms is a focus for us especially in the Indian market; that’s a sunrise industry, with every month about 1 million customers being added in the Indian market space. Telecoms account for close to about 10% of our revenues today. And of course we are getting into new markets: Australia, we have a presence there, and we also do work for utility companies from Australia. The Middle East is again a good opportunity that we see for banking. And Europe of course with Poland coming in. We also have a center in Mauritius which caters for French opportunities. And all this will give us an identity of being a global player located in these markets who also can do work for these markets from low-cost destinations. So clearly we are moving away from a brand identity of an Indian-based BPO provider to a global BPO provider.

SSON: And is acquiring businesses in those locations a key priority for you?

Suresh Ramani: Absolutely. Like, in the US we already have two centers up and running with close to a thousand people; we have a partner signed in Australia. Susir talked about having a site in the UK now. So big markets, yes, certainly I think that’s a growth engine for us. We want to be present with a reasonable population in each of these countries.

SSON: Where would you like to see Intelenet in five years’ time?

SK: What we’re really trying to be is a one-stop shop for all the things associated with outsourcing and offshoring. There are companies who want multilingual solutions; there are companies who want multi-geography solutions; there are companies who want consultancy solutions; there are companies who want technology solutions; there are companies who want actual business process solutions, which might be either in terms of costs or in terms of efficiency; there are companies who want analytics. So everything which is a pain around the business process side, is what we want to really provide. That’s our focus; in the next five years that’s what we want to be: a company that can design, a company that can put in the relevant technology for implementing the design, and a company that can execute the business process. So we are looking at a one-stop shop for all the things associated with the business process.

SSON: Comparing yourself with other Indian BPOs such as Wipro or Tata - there’s plenty that have emerged out of India - how would you put yourself at the forefront, as an organization?

SK: If you look at Wipro and TCS - all the IT companies, all the large Indian IT companies, they are predominantly focused on IT and BPO is a sub-segment of it. If you look at the percentage of revenue that comes from BPO versus IT, BPO is a very small component. Compared with the IT companies, we are a focused BPO company - and I think that people who are seeking a large impact, like telecom companies or retail companies or banking companies, who have a lot of dependency on good operations to get in new business in new markets, they in the long term would rather work with a focused BPO company than an IT company that has got a subset of BPO, number one.

What we do is basically bolt on technologies which can build efficiencies into the processes that are outsourced or offshored - so we have scanning solutions, workflow solutions, ERM solutions, etc. Whereas the approach that an IT company takes is to build a solution. So that’s a difference between the two of us. There are instances where we lose deals to some of these IT companies; there are instances where we win deals against them. It depends how the buyer is looking at it: if they want more IT and less BPO they’ll go to companies like TCS or Wipro. If they’re looking at specialized BPO services, they come to us.

There’s also going to be competition from the Accentures and the IBMs of this world; but I think there are also issues with them in terms of cost, in terms of flexibility, in terms of speed, and that they’ve become too big, and we think very clearly we have an advantageous position against these guys because of the size and nimbleness and speed and the flexibility with which we can clear transactions. That’s where we have seen we have been able to win deals against these guys.

SSON: And do you consider yourselves competitive on price?

Suresh Ramani: Absolutely. We are best in class.

SSON: Of course you’re going to say that! Finally, I’d like to ask you: what is your definition of the perfect outsourcing relationship? And the perfect client?

SK: I think in terms of the services that we provide, everybody provides more or less a similar service. In the long term what really matters is the element of trust. And my definition of a true relationship between the company that is outsourcing and the company that is providing a service is that you can really live like a partner. So for example if you see the recession that we’ve had in the last 24 months, people have come and asked us for things which aren’t written in the contract. They’ve said, "we’ve actually given you a commitment of a minimum, a minimum commitment of so much: I can’t live up to the minimum for the following reasons." Have we gone and sued them? Or have we really recognized that there has been a difficulty? I have not gone by the pure letter of the contract, but really responded like a true partner, and helped people through difficult times. And they have responded back, most of the companies to whom I gave discounts and to whom I let off a lot of conditions in the contract, have in the last three to six months come back and said "look, Susir, we’re looking at something new, and we really want to work with you; we don’t want to call for an RFP, we just want to stick with you guys because we trust you." 

SSON: So the good favor comes around again?

SK: Absolutely. I think trust, flexibility, transparency, openness: those are key, those are key.

Suresh Ramani: And I think this might sound very clichéd but we strongly believe that when you get into a relationship with a potential prospect it’s not a question of "what’s in it for me?" We try and work towards understanding what’s in it for them. And if you get to do that over a period of time I guess you start benefiting yourselves. The question is not getting in first; it’s rather getting it right the first time.