For ISG, the proposed acquisition of US-based healthcare insurer Aetna by retail pharmacy chain CVS helps to confirm an accelerating trend toward enterprise verticalization – a market-wide disruptive force that we see not only in healthcare, pharma and associated industries, but also in manufacturing, financial services, IT services, and other arenas. And while regulatory and investment environments are important enablers of this emerging trend, we see the widespread availability, adoption, application and adaptation of digital business and IT strategies – especially as regards business data – as the real force driving these initiatives, and reshaping entire industries as a result. The impacts on enterprise IT, and on those providing IT to enterprises, will be likewise transformational.
Business synergies, improved market presence, and extended revenue streams are, as always, critically important to making mergers and acquisitions work. But in today’s digital business reality, data is the bigger factor. The adoption and adaptation of digital technologies and strategies catalyzes and enables the efficient creation and use of more types of business data in more ways than ever. This helps to make vertically-integrated business models more attractive than ever, because their integrative nature enables a tremendous scale of data leverage. The more vertically integrated the business, the greater the data leverage it can exert.
The CVS-Aetna deal, as proposed, would result in a vertically-integrated entity combining the roles of healthcare provider and payer – traditionally very separate in the U.S. The two companies are involved at both ends of the typical American medical transaction spectrum: Aetna provides insurance coverage that pays for what CVS sells. Both have tremendous amounts of data regarding the entire spectrum of U.S. healthcare and associated behaviors, goods and services. Combined, they can exert tremendous influence over patient healthcare coverage, costs, and care. This represents a potential reshaping of the U.S. healthcare industry, affecting roles and business models of healthcare providers, pharmaceutical firms, medical device and service providers, and even major retail chains.
Conceptually, such a vertically-integrated entity could improve what the industry calls “patient intimacy,” akin to what the Financial services industry calls a “360-degree view of the customer.” Again, it’s about ways to leverage the data. In this case, a vertically-integrated payer-provider would be able to have all relevant patient data available and applicable to streamline and smooth over what is too often a rough series of multiple, wandering paths for patients and providers to traverse. The patient/consumer experience could be made much less frustrating and more personalized – as could providers’ experiences – potentially increasing perceived value, loyalty and use. That being said, regulatory hurdles are likely to inhibit at least some such improvements. U.S. healthcare market regulation is not set up to enable all the possibilities that a CVS-Aetna vertical integration could deliver.
The verticalization trend – if it proceeds as expected in healthcare and other industries – will also reshape the roles, and value, of enterprise IT. New business models will require more nuanced and agile IT in more areas of more types of business, accelerating and expanding the role of internal IT departments as services brokers and providers while requiring more capabilities. And the business value of data in such environments should drive more, accelerated, much-needed investment in more effective and innovative IT security.
From the IT provider perspective, vastly complex businesses brought together will need more services that enable and support their transformation, as well as their integration. We do not expect to see a widespread return to the massive outsourcing projects of yore. More likely is an expansion of the current trend toward more projects, and more types of business IT delivered and used as services, in more ways. Data center, system, and process integration, security, and IT and business operational optimization will be core opportunities. Automation will play a huge role in IT and business optimization; machine learning and associated AI will be keys to enabling data analysis and its application. But the core value requirement for enterprises will be data leverage.
Meanwhile, we also expect to see more disruption in markets affected by verticalization. First, not every enterprise in healthcare, for example, will be able to verticalize to the extent that a CVS-Aetna can. But their business models and markets will certainly be affected as the vertical trend progresses, and will also center on more and better ways to utilize business data. They will need more and better ways to leverage that data with speed and agility, and will need resources and capabilities to make that happen.
Second, in past market shifts caused or accompanied by consolidation and integration of large providers, we have seen the emergence of new, and usually disruptive, types of businesses that address unexpected, unmet commercial and consumer needs. These often are new types of intermediaries applying digital IT in innovative manners. One example in healthcare and pharma is Capsule, which bills itself as a “next-generation pharmacy” with predictive-analytics-based prescription refill management and custom patient/customer communications, effectively personalizing a traditionally non-digital consumer experience.
In sum, the planned CVS-Aetna merger is not only a potential disruptor reshaping healthcare markets in the U.S. and elsewhere. It is just as importantly a harbinger of the disruptive trend toward business verticalization, and its effects on market structures, business models, and enterprise IT. Not every business in a market will participate in the trend, but every business in that market will be affected. Change is the new business norm, and digital transformation is the new business requirement.
About the author
In his role as leader of ISG Insights’ overall research agenda, Bruce Guptill coordinates analysts’ focus on guidance regarding digital disruption, emerging technologies, market shifts and the changing value of enterprise IT for clients’ changing business needs. His own analysis and guidance focus on how disruptive technologies enable business innovation and improvement for enterprise clients, and how these in turn disrupt and reshape software and IT services providers’ business and markets.