Build vs. Buy, Round II: The Little Giants

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Another data point in the build versus buy debate came to light recently with the announcement that Kaiser Permanente, the country’s largest HMO, would be scrapping a multi-year, $400 million-plus custom development effort to create a patient record system in favor of a packaged solution. The custom effort was led by IBM, and resulted in a charge by Kaiser in the last quarter that basically writes off the entire project.

A close look at this deal reveals an important corollary to my argument that buy is often better than build. In fact, as the Kaiser deal points out, buying enterprise software doesn’t have to mean buying from the top-tier vendors at all, despite the common perception that the suite vendors are invincible. Highly verticalized specialty vendors can beat both big custom systems vendors and suite vendors. It’s all a matter of focus.

Let’s start by being fair to IBM: the systems that are being replaced weren’t necessarily bad. Indeed, Kaiser was given an award for its patient record system in 1999, and the IBM-developed system was initially implemented in Colorado and other pilot sites to considerable acclaim. The result is that, even before it decided to spend $1.8 billion, Kaiser patient records and information systems were more automated than most of its competitors.

So why is Kaiser throwing out a relatively successful system from one of the industry giants to go for a very big bang with a very small partner, Epic Systems? There are a lot of very good reasons on the business side, from cost efficiencies to supporting research to complying with regulatory requirements such as HIPAA. But on the technology side, Kaiser is doing this in part because it can.

While I’m still a little leery about the timetable for this project — rolling out a system that will serve Kaiser’s 11,000 physicians and 8.4 million patients may be more than anyone should attempt in a single, three-year “bang” — I’m impressed with the caliber of the companies’ supplying the software, even if they’re orders of magnitude smaller than their predecessors or erstwhile competitors.

Deep Understanding of Market

If you follow the health-care system provider market, you’ll have heard of Epic before. This is an award-winning, privately held company that does a little more than $100 million in business from its home base in Madison, Wisc.

Epic has a lot of things going for it, including tremendous momentum in the market for its products. There’s no doubt that little Epic is going to have some big partners, such as Braxton (the former Deloitte Consulting). And Kaiser’s own massive IT staff will also be deeply involved. But Epic’s understanding of health care systems is vast enough that it can serve as the linchpin in nothing less than the biggest health informatics implementation in the country.

Epic’s database partner, Intersys, is similarly sized and positioned. Intersys is smaller — also a private company, its revenues were reported to be $65 million in 2001 — but its ties to health care are no less solid. Intersys’ founder also founded IDX, a major health care VAR, and through its work with other VARs and Epic, the company’s Cache database shows up in a lot of health care systems.

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The Future Of Enterprise Software (Again)

It’s clear that Epic and Intersys merit their part in the Kaiser deal. The lesson is an important one for understanding what build versus buy can really mean in the market. The idea that the likes of SAP, Oracle, PeopleSoft, and Siebel can dominate the bidding for every major deal in every major market by dint of their size and the breadth of their products is a lot more shaky than these vendors would probably like to admit.

In every vertical market there are major players — a collection of little giants — that can and do win deals that make top-tier software executives green with jealousy. And these aren’t just the smaller deals that high-flying top-tier sales won’t get out of bed for.

It’s a healthy lesson, pardon the pun, for the entire market: Winning a strategic piece of a $1.8 billion packaged implementation is a particularly rare prize in a particularly lousy economy. And it doesn’t necessarily take a multi-billion software vendor to do the job.

Joshua Greenbaum is a principal with Enterprise Applications Consulting, a technology and marketing consultancy in Daly City, Calif.