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Leadership challenges in the convergent healthcare and IT sector by Michael O’Callaghan and Chris Campbell By Hagen Schweinitz

September 2012 The healthcare industry is undergoing a groundbreaking transformation driven in large part by technologic innovation that is leading to new devices, systems and business models. In order to succeed in this new market, healthcare and IT companies both need to understand the drivers of change, the opportunities for this new market, and the talent challenges this convergence creates.

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While the replacement of doctors and caregivers by robots may remain a 1950s sci-fi fantasy, information technology (IT) already has made a noticeable impact on the healthcare ecosystem of hospitals, physicians, home caregivers, private and public payers, pharmaceutical companies, medical device companies and consumer electronics companies. And there is much more to come. “IT in healthcare is still at its first innings,� as the chief executive of one major healthcare products company put it. IT companies across all sectors, including software, hardware, mobile communications, electronic content and portals, professional services, and many others are just beginning to tap into the healthcare market. Korn/Ferry International interviewed a number of senior executives from the healthcare and IT sectors who provided candid insights into the drivers and possible outcomes of the changes on the horizon.


Shifts underway in the healthcare industry The executives we spoke with identified seven factors as the leading causes of the change roiling the healthcare industry. Empowered patients. Patients have more information, and sometimes more say, in their treatment for illness. They also have become more conscious of the importance of preventative care quality of life during and after treatment. Research conducted by IT services provider Cognizant found that patient care has evolved from “an episodic model to a continuum, with an emphasis on prevention, wellness and management.” Technology is increasingly used to actively monitor and control health and evaluate potential countermeasures. According to an IBM study, consumers increasingly are willing to pay out of their own pocket to preserve their health and general wellbeing. Stalled drug development. The pharmaceuticals sector faces a patent cliff: after years of high-profit blockbuster drugs, patents are expiring with few replacement products in sight. “There are very few unmet needs in pharma left and diseases are more and more specific,” a pharmaceuticals executive says. “The whole industry is under huge pressure to develop new products. But research and development (R&D) has become a painfully complex and difficult process, with technological demands having increased tenfold over the last years.” Medical records and billing. Hospitals also need to master advanced billing systems to ensure their liquidity. With the adoption of Diagnosis Related Groups (DRG ) patient bills are starting to contain much more medical data, and need to be integrated with current medical systems. New entrants in medical device market. Manufacturers of medical devices are finding their core technologies supplanted by new tools or systems. A senior executive of a leading medical devices manufacturer says, “We involuntary became an IT company because our main processes have been replaced by IT, and more and more hardware devices’ functionalities have moved in into software.” Insurers counting pennies. Payers are under huge cost pressure due to an ageing population and age-related health issues. Europe’s national healthcare systems are facing unexpected deficits, which has led to widespread reviews of reimbursement policies challenging and imposition of price controls. For health care providers, reduced reimbursements increase overall cost pressure.

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Public sector initiatives. Many government initiatives aim to provide a platform for integrated care, such as America’s Patient Protection and Affordable Care Act and Health Information Technology for Economic and Clinical Health Act (HITECH Act); the NHS National Programme for IT programme in the U.K.; or the European Union Directive 2011/24/EU on patients’ rights in cross-border healthcare. These attempts to create cross-border health ecosystem with integrated digital care records, electronic prescribing, standardised medical imaging software, and the related infrastructure has altered the healthcare industry substantially. Investment capital. According to a survey by strategy consultancy Bain, the healthcare IT market attracts a lot of investor attention despite the fact that deals are hard to execute because of high valuations and strong competition from strategic investors. Still, investors are trying to capitalize on the regulatory and reimbursement developments and target companies that focus on hospital-physician alignment, new methods of healthcare delivery, payment models, and consumerdirected healthcare options.

Problem-solver or competitor? A variety of technologies—such as cloud computing, smartphones, social networks, software as a service (SaaS) and unified communication—provide a multitude of solutions and drive innovation in the healthcare sector. The growing base of smartphones are already used for healthcarerelated matters. According to the app development tracking service 148app.biz, about 2 percent of the nearly 600 apps for sale on Apple’s iTunes story are in the medical category. Another 2.5 percent fall under healthcare and fitness. In hospitals, clinical decisions and medication management have been vastly improved by linking to online evidence-based medicine tools and data, such as drug dosage calculators. Reducing drug errors not only eliminates corrective treatment, it also helps hospitals avoid costly lawsuits. New technologic approaches such as cloud computing and SaaS, offer healthcare providers much-improved scalability and cost-effectiveness for non-core processes. At the same time, they offer healthcare professionals more flexibility and efficiency by providing access to data from any internet connection. Increased use of mobile devices and cloud technologies do, however, expose healthcare companies to a greater risk of privacy and security risks.

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According to a senior leader at one of the global IT firms, around one-third of all data in the world is already being generated by healthcare-related sources. In the near future, as decreasing hardware costs enable the processing and storage of high amounts of data, that accessible information will become ever more useful. Data collected remotely from monitoring chronically ill patients can be stored in digital health records alongside “rich” data such as MRT scans to provide wholesome and comprehensive information on patients. The need to handle such high data volumes already has led to strong technological advancement in picture archiving and communications systems (PACS) providing comprehensive real-time data analytics. At the same time, the explosion of unstructured mass data often exceeds the capacity of traditional data management tools, leading to new technological challenges for users and administrators.

Industries from two different worlds While technology may seem to provide an easy way to overcome some of the strategic challenges in healthcare, the technology and healthcare industries have significant cultural differences. Traditionally, healthcare is a conservative industry with a high degree of regulation and structure. It has a complex system of decision makers, payers and patients. Each national health system has its own regulatory standards. The IT industry has a different heartbeat: very short product lifecycles, unique product development methods and an informal company culture. Disruptive innovation, where unexpected new products regularly make existing ones obsolete, demands a fast-paced development culture. In a recent study, IT services provider Cognizant found that developments in technology will enable new market entrants in healthcare services to leapfrog the established brick and mortar players and create non-traditional business models. However, the IT industry often utilizes the concept of “co-opetition.” This allows competing firms to join forces for a variety of purposes— from joint-venture R&D collaborations that spread the risk of investing in emerging technologies to policy-inspired alliances designed to move the entire industry forward. Experience with co-opetition could provide the necessary link between IT and healthcare industry, despite their dissimilar modes of operation. That’s not to say that IT-healthcare partnerships have been straightforward.

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“The healthcare sector is a very broad and complex market. At this time, we are struggling to serve all parts of it,” said a senior leader from one global IT company. “Instead of providing one-size-fits-all products, we have gone back and redefined where we want to be in this market and what our value proposition is going to be.” Another says, “We had a painful time letting go of our established standard products to instead develop specific solutions hand-in-hand with healthcare industry specialists. This went along with a transformation of our sales force who were used to operating in a very simple and transactional way.”

Effect on talent and leadership Such major shifts have led to a significant change in the requirements for executives across all areas of a company, starting with the composition of the C-suite. “Twenty years ago there were all chemists in our management board; today we have engineers and people with a clinical background,” says a senior leader of a medical devices company. Sales teams. The sales function has been the front line in the healthcare revolution for IT firms. “We were used to complex sales cycles by our manufacturing and FMCG [fast-moving consumer goods] customers,” says a senior IT executive observes, “but the degree of fragmentation of the healthcare market and the high number of stakeholders and decision makers proved to be a real challenge for us.” IT sales will need to become much more consultative, customer-specific and solutionoriented. All the executives Korn/Ferry interviewed stressed the importance of understanding the target industry and its specialities. IT companies particularly need much deeper insight into health industry trends, value chains, organisational culture, and who holds decisionmaking power. For example, in hospitals, key procurement decisions for IT solutions are now often jointly made by the medical director and the chief information officer (CIO). Product management. The product management function is the crucial link for translating customers’ requirements into technical specifications. A CEO remarks that “This is where we see the biggest skill gap. The market is nearly exhausted when it comes to people who can bridge the gap between our product development teams and the highly specific demands of the customers. In this area we are highly dependent on healthcare industry knowhow.” The specific knowledge of national requirements and regulatory frameworks has also become much more important. A leader from an IT company notes that “Executives must be capable of adopting global strategies to local markets.”

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Research and development. Software is developed in a much less structured way than the traditional hardware-creation process, with iterative and incremental development driven by cross-functional, self-organizing and non-hierarchical teams. A senior leader says of the change, “Our R&D executives, who were brought up in the hardware development world, were overwhelmed by the creative and at the same time chaotic bullpen culture of agile software development teams.” Senior executives. Senior leaders need the flexibility and agility to deal with a variety of partners in a complex industry ecosystem. “We recently entered a joint-venture with another major company,” says a CEO. “In our company, there was a spirit of ‘If it is not invented here, it’s worthless.’ In order to make the joint-venture successful, we not only needed to learn new skills, but to adopt a totally new attitude. No one can be on an island anymore.” Another senior leader observes, “Innovation now often happens outside the company. We needed to change the way we dealt with innovation processes and had to learn to embrace user groups, which provide the grass-roots feedback we now use for product development.” Legal. Last but not least, the legal function will become more important as IT systems may fall under the national or federal regulations, such as the Food and Drug Administration (FDA) in the United States. In 2008 the FDA released its Medical Device Data System proposal: any IT product which is used transmit, store or process medical data would be defined as a medical device with all the regulatory implications that implies—an aspect which is especially new to the software manufacturers.

Leadership ingredients for the IT-healthcare market All of our interview partners confirmed that success in this new healthcare IT market demands new skill sets of executives. To capture the views of our interview partners in a structured manner, we used Korn/Ferry’s Lominger Leadership Architect® and its map of sixty-seven competencies—characteristics generally considered beneficial for career success, including behavioural skills, technical skills, attributes and attitudes. Strategic Skills emerged as particularly vital, and its subset Understanding the Business, which comprises Business Acumen, Technical Skills and Technical Learning, was rated as mission-critical. A skilled senior

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leader who has high ratings in these competencies is deeply knowledgeable about his industry; he understands and even anticipates current and future trends, policies, practices, and technologies and has a very good view of the competition and the dynamics of the market. Our interview partners rated these competencies as must-have prerequisites. Of even greater importance were the following competencies, all part of the Creating the New and Different cluster: Dealing with Ambiguity. Executives who excel in this competency find it easy to make decisions without having the total picture, can comfortably handle risk and uncertainty and can effectively cope with change. This is of high importance in a shifting industry such as healthcare IT, where boundaries are moving and long-term consequences of actions are hard to predict. Strategic Agility. Leaders who are future-oriented can deal with conflicting scenarios and articulate a credible perspective. They also are able to anticipate future consequences and trends with great accuracy. Our interview partners believe that amongst the four competencies this would be the one that would be most desirable— especially because of the multiple sub-trends, factors and demographics that influence healthcare IT. Innovation Management. Strength in this area means a leader is able to create an environment where innovation is actively encouraged and harvested. They capture new ideas and commercialize them and show good judgement when evaluating ideas and suggestions. Creativity. Leaders must connect dots, question established practices or business models and try out new, often disruptive concepts and approaches. In IT, previously unheard-of concepts such as social networks, often developed by a single individual, have re-defined the mechanism of a whole industry sector and made other business models obsolete. These competencies are all part of what Korn/Ferry defines as “The Big 8”—a constellation of skills that are related to high performance at all organisational levels, but are rare. Only 12 percent of executives count four or more of the eight among their top-tier strengths. Individuals who possess multiple Big 8 competencies are worth identifying and investing in as they will provide high-impact and valuable contributions to organizations.

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Introducing new leaders These new strategic demands have spurred a rise in external hiring of leaders in both the healthcare and IT industries, increasing competition for qualified executives capable of dealing with this specific market. A senior leader from a major medical devices manufacturer remarks, “The competition for qualified leaders is fierce. I have brought a CTO in from outside healthcare but with strong technical skills. That was a trade-off I had to make as the talent supply was more than scarce. I also recruited marketing executives from software companies and was lucky being able to attract the few with dedicated healthcare industry knowhow.” For healthcare companies, recruiting and integrating IT professionals can challenge their traditional corporate culture and values. A leader from an IT services company notes, “IT people are motivated intrinsically… They need freedom [and] a budget they can spend.” Compensation in IT often differs in level and structure from other sectors as well, which can make it more difficult to attract and integrate executives. A major medical devices company has even developed a special induction programme for people outside the healthcare industry, providing the new hires with sector-specific knowledge.

Conclusion The convergence of the healthcare and IT markets will create many new opportunities—and at the same time present a number of leadership challenges for companies and their senior management. Traditional skill sets will become less important and strategic factors—such as the ability to deal with ambiguity, innovation management and being able to make complex, multi-dimensional decisions—will be the missioncritical qualities of senior executives. Healthcare companies need to brace themselves for the influx of new executives from the IT industry by providing the necessary organisational and cultural prerequisites. The threshold for successful executives will be higher, but the rewards will be worth it.

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Acknowledgments

Our sincere thanks to the following executives for providing input to this article:

Professor Dr. Christian Johner President Institute for Information Technologies in Healthcare

Hans Erik Henriksen CEO Cetrea A/S

Jan De Witte President and CEO, GE Healthcare IT & Performance Solutions

Luc Thijs President Agfa Healthcare

Manuela Müller-Gerndt Healthcare Leader, IMT Germany IBM

Dr. Martin Heldt Country Manager, Switzerland IMS Health

Martin Kopp Head of Global Industry Business Unit Healthcare Providers SAP

Dr. Michael Dahlweid Chief Medical Officer, Healthcare Sector CSC

Oliver Croly Vice President and General Manager, GE Healthcare IT EMEA

Peter Herrmann Managing Director, Continental Europe iSoft (a CSC company) Thanks also to the Korn/Ferry colleagues who helped assemble the information for this paper:

Ulrika Hagle Patrick Mooney Penny Sadler

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References Heather Fraser, YangJin Kwon, and Margaret Neuer. “The Future of Connected Health Devices: Liberating the Information Seeker.” IBM Institute for Business Value, March 2011. James W. Cortada, Dan Gordon and Bill Lenihan. “The Value of Analytics in Healthcare.” IBM Institute for Business Value, January Shea, William. “Five Key Trends Reshaping the Future of Healthcare.” Cognizant 20-20 Insights, April 2012.

Kata Murphy and Tim van Biesen. “Global Healthcare Private Equity Report 2012.” Bain & Company, March 15, 2012. George Hallenbeck. “The Big 8 Skills Give Lift to Rare-Air Executives.” The Korn/Ferry Institute, July 2012.


Hagen Schweinitz is a Client Partner and a member of the Global Technology Markets and Global Life Sciences Markets practices. He is based in the firm’s Frankfurt office.

About The Korn/Ferry Institute The Korn/Ferry Institute generates forward-thinking research and viewpoints that illuminate how talent advances business strategy. Since its founding in 2008, the institute has published scores of articles, studies and books that explore global best practices in organizational leadership and human capital development.

About Korn/Ferry International Korn/Ferry International is a premier global provider of talent management solutions, with a presence throughout the Americas, Asia Pacific, Europe, the Middle East and Africa. The firm delivers services and solutions that help clients cultivate greatness through the attraction, engagement, development and retention of their talent. Visit www.kornferry.com for more information on Korn/Ferry International, and www.kornferryinstitute.com for thought leadership, intellectual property and research.

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Š 2012 The Korn/Ferry Institute


Leadership Challenges in the Convergent Healthcare and IT Sector