Establish the Foundations for Commercializing IT as a Managed Service Provider

Preparation and considerations for becoming a successful MSP.

Analyst perspective

Prepare and align internally to succeed as an MSP.

Healthcare organizations are facing significant financial pressures in a high-cost, low-margin industry. To improve financial viability and competitiveness, they are exploring alternative revenue sources, such as commercializing internal IT operations by becoming managed service providers (MSPs). However, this transition involves several challenges:

1. Strategic alignment: There is often a lack of strategic alignment on how the MSP model will support the overall business strategy.
2. Workforce challenges: Finding and retaining skilled IT workers is difficult, compounded by rising labor costs.
3. Technological advancements: Keeping up with technology advancements is crucial to meet the competitive standards of the MSP market.
4. Executive buy-in: Securing executive buy-in for investments beyond core competencies is challenging, as IT is not traditionally seen as a revenue-driving function.

Successfully shifting to an MSP business model requires a mindset change, new business models, regulatory compliance, and robust service delivery frameworks. Healthcare organizations must carefully prepare and align their strategies to overcome these hurdles and achieve their financial and operational goals.

Sharon Auma-Ebanyat
Research Director, Healthcare Industry
Info-Tech Research Group

Executive summary

Info-Tech Insight

Healthcare organizations often underestimate the extensive requirements of commercializing their internal IT operations as an MSP. It is crucial to understand that this transition demands a focused approach that does not detract from their core competencies. Therefore, comprehensively assessing organizational and IT capabilities is essential to establish foundational IT improvement initiatives before considering such a shift.

Health systems are under financial pressure

Healthcare organizations continue to face operational and financial challenges:

1. Shrinking Profit Margins: Hospitals have been facing shrinking profit margins due to rising operational costs, including labor and supply expenses. The COVID-19 pandemic exacerbated these issues, leading to significant financial strain.
2. Rising Labor Costs: Workforce shortages and the need to offer competitive wages have increased labor costs significantly, putting additional pressure on hospital budgets.
3. Underpayments for Services: Hospitals often receive payments that are below the cost of providing services, particularly for complex and essential healthcare services. This has led to financial deficits.
4. Economic Pressures: Broader economic pressures, including inflation and changes in healthcare reimbursement policies, have further strained hospital finances

Margins are compressing

84% of health systems reported that lower reimbursement from payers is a top cause of lower operating margins, exacerbated by rising labor costs.

Source: HFMA, 2024

5.2% reimbursement growth has not kept up with the 12.4% economy-wide inflation, leading to substantial underpayment.

Source: American Hospital Association, 2024

Commercializing IT can increase financial stability

Cost savings and revenue generation are common drivers of commercializing IT.

Key benefits of commercializing IT:

1. Recurring Revenue: By offering IT services to external clients, healthcare organizations can generate a steady stream of income through subscription-based models. This predictable revenue can help stabilize finances and support long-term planning.
2. Economies of Scale: Managing IT services for multiple clients allows healthcare organizations to leverage economies of scale. Bulk purchasing of software licenses and hardware can reduce costs, and centralized management can improve efficiency.
3. Cost Savings: Providing MSP services can offset the costs of maintaining an in-house IT department. The revenue generated can be reinvested into the hospital's core operations, enhancing overall financial health.
4. Enhanced Expertise: By commercializing IT services, hospitals can attract and retain top IT talent. This expertise not only benefits external clients but also improves the hospital's internal IT infrastructure and operations.
5. Market Expansion: Entering the MSP market allows hospitals to tap into new markets and client bases, further diversifying their income sources and reducing dependency on patient care revenue alone.
6. Improved Technology: Continuous investment in IT infrastructure to support MSP services ensures that the hospital stays at the forefront of technological advancements, which can also benefit patient care and operational efficiency.

Healthcare examples of commercializing IT

Hospital Systems Offering EHR Solutions
Large hospitals can provide EHR solutions like EPIC Community Connect to smaller hospitals, helping them access advanced systems without high upfront costs.

Radiology Enterprises Offering PACS
Radiology enterprises can supply picture archiving and communication systems (PACS) to hospitals, clinics, and smaller practices, enabling them to use advanced imaging technology without significant capital investment.

Health Insurers Offering Claims Processing Services
Health insurers can offer claims processing to other insurers, including healthcare, P&C, and life insurance, streamlining operations and reducing costs.

Providing Service/Help Desk Services
Healthcare organizations can offer IT support, troubleshooting, and maintenance services to other entities, helping them manage IT needs efficiently.

A US diagnostic imaging organization commercialized its unified radiology platform

INDUSTRY
Healthcare

SOURCE
CIO, Medical Imaging Organization

MSP services can boost collaboration and efficiencies

Providing MSP services is a catalyst for investing in and improving your IT infrastructure and services.

The MSP market is growing

Factors impacting growth

Increasing complexity of IT systems – Organizations with multiple IT systems are finding it challenging to manage these systems and are outsourcing to managed IT service providers.

Cost savings – Due to the high costs of maintaining an IT department and hiring highly skilled staff, it is less expensive to outsource.

Scalability – Organizations that face seasonal shifts in demand are adopting managed IT service providers that can adapt to changing business needs.

Access to new technologies – Manager IT service providers have the knowledge, skills, and resources to keep up with the latest technology.

Focus on core business functions – Healthcare organizations are outsourcing IT services to managed IT service providers so they can focus on their core operations.

Sources: Statista, 2023

Info-Tech Insight

There is an increased demand for healthcare organizations to outsource to other healthcare organizations due to the need for specialized expertise, cost efficiency, and the ability to focus on core patient care services while leveraging the strengths of partner organizations for non-core functions.

Entering the MSP market comes with challenges

Healthcare providers launching an MSP will need to overcome:

1. Economic Uncertainty and a Competitive MSP Market: MSPs struggle with planning and investment due to ongoing economic instability and inflation concerns.
2. Cybersecurity Threats: The increasing number and sophistication of cyber threats require MSPs to constantly update their security measures to protect client data.
• The number of bad actors is increasing.
• New clients expose further legal liability if a breach occurs.
• Holistic cyber protection requires more comprehensive solutions against modern threats.
3. Talent Shortage: MSPs find it challenging to hire and retain skilled tech workers, as the demand for tech talent often exceeds supply.
4. AI Integration: MSPs face difficulties in ensuring proper training and implementation of AI, which can lead to costly errors and inefficiencies.
5. Evolving Client Expectations: MSPs must continuously adapt to meet the evolving demands and expectations of their clients, who seek more personalized and advanced services. MSPs must also adapt to both small and large client needs. Small clients have greater needs than large clients due to lower IT maturity.

Acquiring customers and handling security threats are the biggest challenges

Statista, 2024

Be prepared to overcome challenges of becoming an MSP

Gauge whether becoming an MSP is worth pursuing

Three key factors must be satisfied to commercialize IT into an MSP.

If you can answer yes to the above questions, you can consider pursuing commercializing your IT as an MSP

Info-Tech Insight

By evaluating core competencies and resources, understanding market demand and the competitive landscape, and ensuring regulatory and compliance readiness, a healthcare organization can strategically position itself to successfully commercialize IT services, unlocking new revenue streams while maintaining high standards of service and compliance.

Build foundations for commercializing IT as an MSP

Key Factors

Phase 1

1. Establish Strategic Alignment

Gain buy-in from key stakeholders before moving forward with commercializing IT services into an MSP.

1.1 Stakeholder Engagement

Communicate with executives and business leaders to establish business context and alignment, leveraging CEO-CIO Alignment diagnostic results.

1.2 IT Performance and Business Value

Assess IT performance and business value to establish business alignment, leveraging CIO Business Vision diagnostic results.

1.3 Market Analysis

Define and understand your differentiator in the market and your unique value proposition. Focus on defining your specialization, your value, and the customer experience.

1.4 Define Drivers – Mission, Vision, and Guiding Principles

Define your mission, vision, and guiding principles as the north star for your MSP business.

Phase 2

2. Assess the Current State

Leverage your organization's business-aligned IT strategy and capabilities to assess the current maturity of your IT services.

2.1 Organizational and IT Capabilities

Review the full capability map for your organization.

2.2 IT Maturity That Supports Organizational Capabilities

Identify the IT capabilities that directly support each high-priority business capability using Info-Tech's IT Management & Governance Framework, which consists of 50 core processes that can be used to align IT with the organization's priorities.

2.3 Governance, Risk & Compliance (GRC)

Develop an effective GRC strategy that ensures compliance, manages risks, and fosters ethical behavior.

Phase 3

3. Determine the Future State

Determine what services you will provide and how you will effectively operationalize your future MSP business model.

3.1 Define Service Offerings

Consider both internal and external factors when designing your service catalog.

3.2 Business Model & Funding

Determine your IT MSP funding and pricing model.

3.3 Performance Metrics & Customer Management

Establish KPIs for both business and customer success.

3.4 Change Management

Assess current change management to create a plan for improvement.

3.5 Marketing

Establish a marketing plan for your services.