September 2, 2022

Buy vs. Build in Healthcare: should you build it because you can?

I was listening to this podcast on the product choices Spotify made as an evolving company. The title of this episode, “When your winning bet becomes your losing bet” immediately caught my attention.

The context: early on in their journey, Spotify decided to build their own cloud infrastructure. Reasoning? They had the engineers, believed they could do it better than what was available on the market and most importantly they considered the infrastructure that ran their business so important it could only be proprietary tech. 

All stars were aligned to build instead of buy, which they did. Initially what they built served them well, but not for long as they started to notice the following:

“Meanwhile, the rest of the internet had started to catch up. The pay off in terms of latency and reliability that came from running our own data centers diminished every day, as cloud computing got better, faster, and cheaper.

In the podcast they go on to discuss how an initial bet on proprietary technology with the aim to build a competitive edge, might turn out to be a bet on table stakes which doesn’t differentiate you vs. competitors. 

But realizing this is tough, because we are humans:

“When you’ve spent enough time to get into the nitty-gritty details of doing something yourself, zooming back out and realizing that this isn't the most important thing that I should be doing right now, that's like a personal challenge and not something that comes naturally to humans.”

Ultimately it comes down to whether the resource allocation you decide on is the right one to support your sustainable competitive advantage:

“The question isn’t if you can do it better, it is if you should do it better. As a company, you have limited resources, so your biggest cost isn’t actually going to be the direct cost of the thing you would buy. The biggest cost is actually the opportunity cost of what you would have been able to do with all those smart people, if they didn’t have to build this thing instead. The thing that no other company could build and that you couldn’t buy anywhere. The thing that actually differentiates you.”

Bringing this back to healthcare - an analysis of 50 high performing health tech businesses reveals 2 distinct profiles, each with their market potential, P&L structure and challenges: you’re either a technology company or providing (care) services.

As a care provider, a big chunk of your cost is the team providing care to your patient population. Doctors, nurses, care coordinators, coaches, everyone needed to ensure the best possible care journey for your patients. The ability to organize the work between these stakeholders across the care journey in an efficient way is what makes the difference in your cost of goods sold.

“Technology will help you reduce COGS. However, the marginal cost of delivering care will vary by clinical model and condition acuity, among other reasons. We don’t expect all companies to leverage only light-touch-technology approaches but rather to leverage technology to enable clinicians and provide omnichannel experiences. Over time, companies can get better at managing the efficiency of their provider panels (i.e., increase the number of patients a provider can see over time) through better processes and technology, as well as by leveraging different types of providers operating at top of license (i.e., leverage health coaches, nurse practitioners). All of these levers can affect clinical quality and outcomes and thus require a delicate balance between technology deployment and robustness of clinical efficacy to improve how you deliver care.”

As a technology company, you are in the business of building technology. As a care provider, you’re in the business of providing care by using technology. The only sustainable competitive advantage as a care provider is the ability to show better outcomes at a lower cost than your peers. The only question then becomes: what technology can you buy that accelerates that competitive advantage, and what’s so unique to you that you just have no other option but to build it yourself?

PS: if you’re interested in learning more about buy vs. build in healthcare, read a complementary view by Rik on his personal blog

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