Healthcare services vendor First Consulting Group has announced that the University of Pennsylvania Health System won’t renew its outsourcing contract with the company, another blow to FCG’s ailing outsourcing and services segment, which accounts for most of its business.
The contract, which ran for six years, officially expired on March 31, and the two parties have entered the six-month post-expiration transition period that was built into the deal.
UPHS will be taking a major part of its IT department back in-house, including application services and project management, according to an FCG statement. But the health system is negotiating with a separate, unnamed provider to continue outsourcing infrastructure services, FCG said. In its 2006 annual report, the company said multiple service providers were competing for the UPHS contract.
The UPHS deal represented a handsome portion of FCG’s sales, accounting for $26.7m of the company’s $264.1m in revenue in 2006. It was one of three large outsourcing contracts that FCG has, with the other two being University Hospitals in Cleveland and Continuum Health Partners in New York, said Mike Zuercher, FCG’s senior vice president for corporate affairs and general counsel. He said that the contract expiration wouldn’t affect is guidance of $64m to $66m in revenue for Q1 of this year
FCG’s health delivery group, which includes its outsourcing and services groups, made up nearly $170m, or about 64%, of overall revenue last year.The company warned in its annual report that the group would take a big hit if we are unable to execute a longer term renewal with UPHS or if we are unable to enter into new outsourcing engagements.
The rest of its revenue is divided rather evenly between its health plan, life sciences, and software services segments, but the company said that revenues in our business units other than outsourcing currently are not expected to change significantly from their levels at the end of the 2006 year, except for some increase from health plans.
FCG shares dropped nearly 8% on Monday morning following the news but climbed back up to close at $10.11, down only 2%.
The comapny has lost big outsourcing deals before; in 2005 both New York Presbyterian Hospital and UMass Memorial Health Care terminated their deals with FCG, which were responsible for the 5% drop in its revenue from 2005 to 2006. FCG was able to make up some of the slack with new signings with Continuum and Centura Health in 2005, but the company is still very exposed to what appears to be a tough health care outsourcing market.
There’s competition on the consulting side from the likes of Deloitte, IBM, and Accenture, not to mention from outsourcers with specialized health care practices such as ACS and Perot Systems. Throw in the Indian vendors and the healthcare software providers such as Cerner and Eclipsys, which have their own services teams, and the field becomes even more intense.
FCG is in the process of revamping its outsourcing and services sales model and trying to improve its pipeline, and it expects that some weakness in revenues in these segments may occur in the near-term during transition to the new model. Whenever this is, FCG will surely need to capture some large deals to keep its revenue stream afloat; a few high-profile wins against its competitors would also be a good sign of its health in the market.