Xerox, Dell, and Hewlett-Packard Each Buy Into IT Outsourcing Market

Growth opportunities are expected in outsourcing of information technology services to providers

IN RECENT WEEKS, TWO BIG PLAYERS spent billions to buy seats at the healthcare information technology (IT) table. Just one week apart, Xerox Corporation and Dell, Inc., acquired Affiliated Computer Services, Inc., and Perot Systems Corp., respectively.

This rash of transactions is noteworthy for several reasons. One, it continues a trend of consolidation within the IT industry. Two, it also continues a trend of major IT companies using acquisitions as a way to enter the healthcare IT market. Third, it sends a strong signal that clinical labs and pathology groups should have a proactive strategy for health informatics within their organizations.

It was September 28 when Xerox announced an agreement to acquire Affiliated Computer Services, Inc., for a price of $6.4 billion. Affiliated Computer Services has annual revenue of $6.5 billion. It offers information technology outsourcing services to industries that include healthcare, telecommunications, education, and transportation.

Just days earlier, on September 21, Dell Corporation and Perot Systems Corp. jointly announced that Dell would purchase Perot Systems for $3.9 billion. This was a big deal in the healthcare informatics sector, because Perot Systems holds a major share of the outsourcing market in this IT sector.

“If you look at the outsourcing business in healthcare, Perot seems to own the market,” observed Mike Smith, General Manager of Financial and Services Research at KLAS, a health informatics research firm based in Orem, Utah. According to Modern Healthcare, of the hospitals in the United States that outsource their IT, roughly half are clients of Perot Systems. Perot Systems reported a 2008 net income of almost $2.8 billion. Nearly half of that was from its healthcare operations.

Dell, Xerox, Hewlett-Packard

It is significant that both Xerox and Dell bought their way into the health informatics sector. It was just last year when Hewlett-Packard Co. did its own acquisition of a billion-dollar IT outsourcing company that holds a significant share of the market for health IT services.

In May, 2008, Hewlett-Packard acquired Electronic Data Systems (E.D.S.), which is another Texas-based healthcare IT entity founded by Ross Perot. It paid $13.9 billion for E.D.S., which had annual revenues of $22 billion at the time of the acquisition announcement. E.D.S. is a major IT outsourcing vendor. It manages more than 100 data centers worldwide and has an active healthcare business.

Collectively, Xerox, Dell, and Hewlett-Packard spent $24.2 billion to acquire large IT companies which each hold sizeable market shares in the healthcare IT outsourcing sector. It is significant when three major Fortune 500 companies decide to enter the information technology outsourcing business within weeks and months of each other.

And they are not the only major corporate players trolling for opportunities to buy their way into the health IT sector. Just a few weeks ago, on October 22, General Electric Co., announced the launch of its new $250 million fund to invest in healthcare technologies. This is part of GE’s “Healthymagination” initiative to invest $6 billion by 2015 to develop and introduce technologies with the potential to transform healthcare.

GE’s new fund is targeting three broad areas of health for investment. One is healthcare information technology, including electronic medical records, clinical information systems, healthcare information exchanges, and value-added data services. The other two investment areas are diagnostics and life sciences.

Strategic Insights

For pathologists and clinical laboratory managers, these various developments provide several useful strategic insights. First, the fact that Xerox, Dell, and Hewlett- Packard ponied up billions of dollars to acquire businesses that are among the leaders in IT outsourcing services indicates their confidence that IT outsourcing will be a high-growth sector in coming years.

This has interesting implications for hospital laboratories and pathology groups that service community hospitals. Should more hospitals and health systems decide to outsource their IT to third party companies, this will require laboratories and pathology groups to be ready for the consequences of these arrangements. Labs and pathology groups should understand what is needed to deal with an outside vendor running their hospital’s IT services.

Second, the outsourcing businesses acquired by Xerox, Dell, and Hewlett- Packard have customers across many industries besides healthcare. This is a reminder to pathologists and clinical lab directors that technology adoption outside of healthcare tends to move much faster than within healthcare. Thus, any lab or pathology group that wants to implement a proactive informatics strategy would do well to study IT outsourcing innovations outside healthcare. That will give them a head start at understanding how health systems, hospitals, and physicians are likely to utilize IT outsourcing arrangements.

Cloud Computing

Each of the acquisitions done by Xerox, Dell, and Hewlett-Packard affirm another trend: cloud computing. This is the provision of informatics services over the Internet as a utility.

New technologies are making it feasible to manage ever-larger data centers at reduced cost. In turn, that makes it possible for major corporations to save substantial amounts of money by migrating their in-house IT structure to an outsourcing arrangement based on cloud computing.

Examples of clinical labs and pathology groups using cloud computing are still uncommon today. However, that may change in the next 24 months.

Dell’s Perot Systems Is Major VistA IT Source

PERHAPS THE BIGGEST UNKNOWN regarding Dell, Inc.’s acquisition of Perot Systems Corp. will be its impact on the evolving market for open-source healthcare IT. In the United States, the primary open source product is the VistA IT system, developed for clinicians by the Veterans Affairs Department.

“Dell is going to be inheriting one of the top three corporate pools of VistA knowledge in the country; DSS, Inc., and Medsphere Systems Corporation being the other two,” stated Fred Trotter, founder of Houston’s Liberty Medical Software Foundation. “The question is: Does Dell recognize what it’s got, and does it plan to pursue an open-source strategy?”


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