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Disappearing acts—coping with LIS mergers

November 2001
Eric Skjei

Whither CoPath?

According to one familiar source—CAP TODAY’s annual LIS survey—vendors’ urge to merge is alive and well.

In the last five years, the number of vendors in the lab information systems market has declined by 35 percent and the number of products marketed by those vendors by 25 percent, judging from those who elect to participate in CAP TODAY’s LIS lineup. In 1996, 60 LIS vendors marketed 67 products. Today, the figures are 39 vendors and 50 products.

Nudged by a tough market, LIS vendors are turning to a tidy solution—gobbling up the competition. Cerner’s acquisition of Dynamic Healthcare Technologies, announced Sept. 6, is the most recent, but there are others. Siemens acquired SMS (Shared Medical Systems) in July 2000, and after Sunquest acquired Antrim four years ago, Sunquest itself was acquired by Misys PLC this year. And the list goes on.

But while consolidation makes good business sense, its impact on labs is far from clear.

By definition, consolidation replaces many, smaller competitors with fewer, larger competitors. As that happens, LIS customers inevitably find themselves confronting tough questions, such as: What will happen to our current LIS vendor, and to our technical support? Will this new company be as easy to work with as the old one was? Will we be able to do things the way we always did? Will there be a migration path for us, and, if there is, should we accept it or look for other alternatives from other vendors?

Moreover, because the LIS is a typically mission-critical tool in most health care environments, wrestling with these questions can be an intense and even emotional process.

"Frankly, some clients go into a scare mode," says Sue Tarkka, marketing consultant, laboratory medicine enterprise for Cerner Corp. "They’re afraid their product is going to go away, and they start to ask things like, Will I be forced to get rid of my system sooner than I want? Will I be forced to accept a lower level of support or service? Will there be a legitimate upgrade path? If there is, will it be an improvement on what I have now? Will we be able to afford it?"

In some cases, of course, the anxiety is justified. Acquisitions and mergers can lead to an abrupt loss of service and support for the LIS user, and to alternatives that are complex and costly.

"Often the acquired company seems to suffer drastically," says Richard Jefferson, director of sales and marketing for Antek. "There are cases where it has been immediately clear that there will be no upgrade to the products of the acquired company, and it may be for good reason—those products may be technologically outdated."

In such cases, Jefferson adds, the laboratory using the acquired company’s software had better start thinking about upgrading or replacing its LIS, even if that LIS is working perfectly and the lab is happy with it. The day will come, he notes, when that lab will decide it needs to grow, needs to change a feature or function in its LIS, or simply needs immediate technical support. "Sooner or later it will have a serious technical problem, and when it does, it is going to want to have somebody on the other end of the line," he says.

In other cases, however, the anxiety of the lab whose LIS vendor has been acquired is an overreaction, one that typically soon subsides, to be replaced by the process of evaluating possible alternatives, a tire-kicking step that some LIS veterans argue is understandable but largely irrelevant.

"I see a lot of people whose LIS vendor has just been acquired out there making the rounds," says Susan Bollinger, director of marketing and sales for Hex Laboratory Systems. Generally, this isn’t necessary because the acquiring company will normally do all it can to prevent newly acquired customers from leaving the fold. "I would venture to say that 95 percent of the time, or even more frequently, the new owner will make it very attractive for those clients to stay, simply because it doesn’t want to lose them," she says.

As consolidation reshapes the landscape of an industry, size itself may become an issue, raising as it does such basic questions as: Do larger companies serve their customers better? Are they more stable? Or are they less responsive, less nimble, more complacent than smaller players?

Consolidation has its upside, to be sure, one that many if not most LIS customers will benefit from. The companies that are left in a consolidating market are almost by definition those that are stronger, less distracted by competitive tensions, and, in most cases, better positioned to bring new technology, new resources, new opportunities to the LIS market and its customers.

Moreover, size can be equated to some degree with experience, and thus to competitive advantage. Smaller companies in any industry tend to be the newer—and thus the less experienced—companies. And in any business, experience matters.

"If you’re a small company with only a handful of clients, you may not have the expertise and the infrastructure to respond to a customer’s needs for specialized services, such as interfacing to other systems," says Antek’s Jefferson.

But size works both ways. "The benefits of larger companies in a market like ours," says Walter Henricks, MD, director of laboratory information services at the Cleveland Clinic, "is that they have greater resources to bring to bear on research and development, a generally greater ability to integrate, and stronger financial solvency." The pitfalls of a market dominated by fewer, larger companies are more uncertainty with respect to current platforms and the prospect of forced migration, he adds. It could be said, too, that "those larger companies now working in the LIS market may have less of a clear, strong, central focus on the lab and its needs—some of them have already made the decision to reach beyond the lab, to try to become a comprehensive, wall-to-wall source for clinical computing in general," Dr. Henricks says.

Endangered as they may seem to be, smaller LIS companies do have distinct virtues and competitive advantages, say many laboratorians and vendors, and this may stand them in good stead in a consolidating marketplace. "Smaller companies may be more interested in your business, more eager to please, more innovative," Dr. Henricks says. "But the risk here is that they also may not have on hand the resources needed to support complex and high-volume operations or take on the type of innovative projects that require large investments of time and money before they can be brought to market and generate revenue."

Financial strength is increasingly the make-or-break issue. Smaller vendors focusing on the clinical lab market today face a fight for survival, one that is getting tougher. "Our perspective, frankly, is that smaller companies face an uphill struggle, mainly because survival in today’s LIS market requires a lot of capital," says Julie Hull, product manager, laboratory medicine enterprise for Cerner Corp.

Nevertheless, smaller LIS companies don’t necessarily see the future in the same foreboding terms. "Larger is not necessarily better," says Hex Laboratory Systems’ Bollinger. "While many larger companies are stable, many smaller companies are equally stable, carrying less overhead and operating more prudently." Though some may indeed not have the resources to support complex operations, "maybe this isn’t the part of the market the smaller companies are selling to," Bollinger points out. And the smaller companies do offer distinct advantages. In fact, she asserts, her customers often find large size itself in a vendor can be problematic. "If you ask them if it is harder to deal with a larger company, they will agree," she reports. "They find that sometimes they just can’t cut through the layers they need to in order to reach the person they want to talk to, or even to find out who that person is, to get something done."

Sensitive to these concerns about their size, larger LIS companies are consciously working to respond to them. Says Brenda Carbon, product manager for Siemens Medical Solutions Health Services Corp., "At times we run into the assumption that a competitor that is smaller, one that is still primarily focused on the lab, will give customers better service, because it is supposedly closer to its customers’ concerns and needs, that it will be more responsive, less bureaucratic."

Today, Carbon says, well over a year after Siemens acquired SMS, she is confident her customers are not finding that Siemens is more bureaucratic or unresponsive to them. They are, for example, still working with the same technical support personnel they worked with before the acquisition. "They’re seeing minimal disruption to the way we worked before the acquisition, they’re working with the same people, and at the same time, they’re also getting the advantages of all the technology and resources that Siemens brings to bear," she says.

Particularly in a mature industry like the LIS market, consolidation is typically and primarily driven by a bid for a greater share of the market. The logic is simple: If the market isn’t growing, or is growing slowly, the most direct way to boost revenues, profits, and shareholder value is to own more of it. In a mature market, that translates into taking over someone else’s share.

Moreover, in a mature market this logic is intensified by the fact that a steadily increasing proportion of vendor revenue will derive from replacing or upgrading existing systems rather than selling new installations. "Other than financial systems and a few other business functions, the lab has been automated longer than any other area in health care," notes Siemens’ Carbon. "We are now in a replacement market, and what that means for smaller vendors is that their revenue stream will suffer if they just stay focused on the lab industry."

The alternative is to compete in adjacent markets. For LIS vendors, this has meant areas like radiology and pharmacy information systems, clinical data repositories, and, most recently, practice management and Web-based systems that provide access to order entry and results reporting. Yes, it is true, agrees Cerner’s Hull, her company’s consolidation strategy is driven in large part by a desire to increase its market share, particularly in market segments that represent niches not previously well served by the company or that offer opportunities for upgrade sales.

"The Citation acquisition is a perfect example," Hull says. "Citation was a good niche player for a smaller market that Cerner did not target." Cerner acquired Citation in 2000 because Cerner had made the conscious decision to go to community hospital clients and offer them a community hospital solution.

"We went after the Citation acquisition because we were making an entry into the community hospital space and we did so because we had a solution specifically designed for community hospitals, the Community Hospital suite, a repackaging of Cerner systems at a smaller scale," Hull explains. "We spent a great deal of time examining the functionality of the Citation product and then essentially doing an appropriate repackaging of existing HNA Millennium software to meet the specific needs of smaller, community hospital clients."

This strategy paid off from an after-the-sale, upgrade point of view, Hull adds. "Not only that, we have had some success in going to that Citation client and saying, ’Look, we know you’re in there automating that laboratory, we know you also have concerns regarding quality and patient safety, so let’s talk about what happens when you plug your pharmacy product and your ordering system into a single integrated system.’"

Behind the immediate worries raised by a trend toward consolidation loom other, larger concerns about the nature of innovation and competition in the LIS market. What, for example, does the trend imply about the longstanding tension between heterogeneous, best-of-breed strategies requiring a high level of interface functionality and well-integrated, homogeneous, single-vendor solutions? Does the rise to market dominance of certain vendors suggest the best-of-breed strategy is vanishing? Where does innovation flourish—in a market of many, smaller vendors or in a market of fewer, larger vendors? Will the deeper pockets that often come with size prove to correlate directly with a growing investment in research and development?

Larger companies may indeed have the assets needed to invest in new product development and other innovations, but that in and of itself doesn’t mean they will choose to do so, says Hex’s Bollinger. In her view, it is more a function of the company’s culture than it is of its bottom line, head count, or number of client sites. "I think the key trait is not resources but the company’s mentality," she says. "There are large companies that simply don’t want to invest in R&D, while others are completely committed to it."

Financial strength does play a role here, Bollinger concedes, but the process is a subtle one, and one that does not necessarily put the larger company at an advantage.

"Yes, large companies do normally have the resources to develop something before a customer needs it, and then market it," she notes. "And, yes, a small company like ours can’t afford to do development simply for the sake of development." A firm like Hex, she explains, usually waits until a real need appears at a client site before it decides to innovate. "We generally wait until a customer says, ’I need this,’ and then do it for them," she says.

Even so, Hex Laboratory Systems, founded in 1981, was among the first to offer an LIS on the Linux platform and to offer thin clients along with PCs or terminals. "We also released a Web-based order entry-result inquiry product this year," Bollinger says. "None of these were requested by customers but just keeping up with technological advances and trends in the laboratory." That much of Hex’s feature enhancement is customer driven is not necessarily a competitive disadvantage, she adds. In fact, it may be the larger firms that are at a disadvantage.

"What that means is that we’re getting paid to develop and innovate, whereas larger companies that have the resources to develop a product or a function ahead of time, before they have any likelihood of income from it, may not, when they reach the marketplace, find that the real need is real enough or large enough to justify their investment." They may, in effect, find they have succumbed to the classic dilemma of research and development in the software world, that what they thought was the leading edge was the bleeding edge.

Eric Skjei is a writer in Stinson Beach, Calif.