Category Archives: Insights

Our Latest Investment – Beckon

Marketing professionals have more data at their fingertips now than at any other point in history. They have more channels to manage, more places to look, more administrative dashboards to monitor, and more decisions to make.

What Current Digital Marketing Looks Like

You have to:

  • Keep up with Facebook insights and the latest algorithm changes to know which post to sponsor or what graphic might receive the most engagement.
  • Check out Twitter analytics to see which hashtag received the most attention and what tweet received the most retweets and engagement.
  • Sign into Google analytics and your website dashboard every single day in an effort to understand who visits your site and what they do when they arrive.

And this is just the tip of the iceberg.

Marketers need to know who their potential customers are and what they are most likely to engage with. In today’s world of big data, you have several of choices. You can spend more time than you have looking at the data and formulating a plan for each channel your company uses, outsource this work to an agency, or to utilize a new option known as predictive analytics.

Predictive Analytics Will Transform Marketing

Dashboards like Beckon, a marketing software company that lets marketing professionals put the power of their data into their own hands and take appropriate action faster than ever before, will transform the marketing world. Beckon uses channel performance data, machine learning, and a myriad of business specific data points that can help marketers determine what, when, and where your content will receive the most engagement. The days of using anecdotal or generic data that may not apply to your brand or your followers are over.

Beckon is a dashboard and platform that collects data such as clicks, impressions, likes, and other engagement data and rationalizes that information into trends that can be used to make quick and concise marketing decisions that generate revenue and encourage customer retention. Beckon takes “the mess” out of all the data available to marketers and makes it easier to understand and easier to act on.

With predictive intelligence from Beckon assessing big data that is currently scattered across multiple channels, you’ll be able to give your followers, audiences, and potential customers what they want, when they want it. By doing this, you’ll increase engagement, build your brand, convert more leads, and increase revenue all while spending less time figuring out the data.

CMO’s and other marketing professionals continue to have an increasing number of channels to manage and a growing amount of data to filter through. Predictive intelligence solutions like Beckon will help solve this issue for marketers, and we are excited to be a part of the journey!


Why Beckon Beckoned to Me: The Arrival of Marketing Performance Management

Beckon 1

In today’s online and mobile world customers are educating themselves about products and services long before any flesh and blood sales persons utters a word. Consumers can easily find their own way to detailed product information, user reviews, professional reviews, demonstration videos, user generated unboxing videos, sales rankings, price comparisons, social media sentiment, buying guides, and more. For this reason, marketing is more important than ever and the Chief Marketing Officer has never been more powerful nor controlled more budget, for both media and technology.

At the same time, however, the job of a marketing leader has never been harder or more stressful. The digital landscape has become so vast and dynamic that the marketer must master an endless parade of new channels. Just as they were getting used to Facebook, Twitter, and Instagram, along comes Pinterest and SnapChat, and undoubtedly the next hot channel is just around the corner. With an expanding universe of marketing channels comes an ever increasing volume of data. With all this data available, CMOs are expected to quantify their results with the precision of a CFO. While each new channel begets a host of new adtech and marketing tools to help the CMO manage campaigns, measure performance, and optimize results, each of these solutions produces data and reports in their own unique format.

Beckon 2

It has gotten to the point that when the CEO asks “how is our marketing doing?” it strikes fear in the heart of the CMO. This perfectly benign question usually kicks off an all-night exercise of cutting and pasting data and charts from various marketing execution systems into a lengthy presentation to answer the CEO’s question. When PowerPoint (now in its 28th year) is the tool of choice for marketers to aggregate and translate performance data from their various systems you know the situation is dire. Making matters even worse is the fact that many large brands can’t even access their own campaign data as it is held hostage by their various marketing agencies. Not only does the client get charged a markup by the agency for report requests, but it’s the classic case of the “fox guarding the henhouse” to ask an agency to report on their own performance.

Several years ago, a former marketing leader from a Venrock portfolio company did a stint as an Entrepreneur-In-Residence in our offices. She identified this lack of a single “CMO dashboard” integrating data from various point solutions as a problem she had experienced firsthand. Essentially she wanted a “System of Record” for marketing. After several months of researching potential technical solutions she concluded that, despite the crying need for such a product, building one would be too difficult. She gave up frustrated and joined another best of breed marketing tool company. This unsolved problem stuck in my head.

A few years later I met Beckon. The team at Beckon have been marketers, built marketing point tools, worked in agencies, and have built, installed and used systems of record in other enterprise functional domains such as finance and sales. Having seen the problems facing modern marketers firsthand they have taken a novel approach to building a system which can pull in data from over 100 different marketing point tools. While some of this data is available via well supported APIs, much of the data comes in via spreadsheet imports and email parsing (think TripIt.)   The next thing Beckon does is normalize the data so that marketers can compare different campaigns across different channels with one common taxonomy. They allow the marketing team to add metadata such as geographies or regions, product names or categories, customer segments, agencies, objectives, and so on, in order to put the marketing results in appropriate context. They allow for What If analysis, planning, and time series tracking. Beckons creates beautiful visualizations and answers to plain English questions that don’t require analysts skilled in SQL queries. And because this is not a BI tool, but rather an application built “by marketers, for marketers”, it is loaded with best practices for omni-channel marketing performance management right out of the box with no IT Department involvement.

Beckon 3

Over the past year some of the best brands in the world have adopted Beckon. Coke, Microsoft, GAP, and BSkyB are among the clients using Beckon to manage their omnichannel marketing. The real sweet spot for Beckon are mass marketers and indirect sellers who spend across at least five different channels. While I have written about my keen interest in predictive and intelligent software, the truth is that relevant, advanced modeling is only possible if the data sets the models are built on are comprehensive, normalized and continuously updated. Finance, for example, measures its performance according to GAAP (Generally Accepted Accounting Principles), a consistent, agreed-upon methodology shared within and across companies. As a result, we can understand a company’s financial performance quarter to quarter and compare performance to other companies in a standardized way. Marketers have never had a similar system. That’s what Beckon finally brings to marketing – a strong, united data foundation upon which all kinds of consistent, robust marketing analyses can flow – benchmarking, planned versus actuals, test and control, lift over baseline calculations, econometric (mix) models and more. Beckon gives marketers self-serve access to many of these analyses within its application and can also flow its standardized, merged and continuously updated data sets to advanced analytics teams and tools.

Marketing can finally have its own system of record the way sales has Salesforce, manufacturing has SAP, Finance has Oracle, and HR has Workday. Beckon is Marketing Performance Management. Finally the CMO does not have to hide when the CEO calls (or beckons) them to their office.

Beckon 4


A Courageous First Step

This article was first published in The Health Care Blog.  It is co-authored by Bob Kocher and Farzad Mostashari.

Earlier today, Health and Human Services (HHS) Secretary Sylvia Mathews Burwell announced that HHS is doubling down on the historic shift taking place across the health care industry towards value-based care, and is setting a target of having 50 percent of Medicare payments under value-based care arrangements by 2018.

 This would mean that in less than three years, around a quarter of a trillion dollars of health care spending would be made to providers who are being compensated not for ordering more tests and more procedures, but for delivering better outcomes – keeping patients healthier, keeping them out of the hospital, and keeping their chronic conditions in check.

This shift will address a central problem of the US health care system, one that lawmakers and policy experts on all sides of the issue agree is a key contributor to runaway medical inflation.

The logic is straightforward: by simply paying for the volume of services delivered, every provider has a strong incentive to do more — more tests, more procedures, more surgeries. And under this system, there is no financial incentive to maintain a comprehensive overview of patient care – to succeed by keeping the patient healthy, and health care costs down.

In making this announcement, Secretary Burwell took a step that many within HHS had been advocating quietly for years, and which many outside it have advocated more loudly.

Skeptics may ask: what does this accomplish? And why announce it now, when health care costs are already rising at the slowest rate in decades?

As someone who has served on the frontlines of the policy and the practice of this transformation, the answer is clear: because dispelling disbelief and uncertainty about this shift “from volume to value” among decision-makers in the health care industry will be key to sustaining progress.

Part of the reason for the spending slowdown is the fear among some health care executives that their “build-it-and-they-will-come” fee-for-service model may not last. According to the Federal Reserve Bank of St. Louis, health care construction, on a continuous upwards trajectory for years, dropped sharply in 2009, and even as the rest of the construction industry rebounded, dropped again in 2013. The ubiquitous cranes building new hospital wings and proton beam pavilions have paused ever so slightly as uncertainty reigns.

But imagine if this announcement by the world’s largest payor is joined by private sector leaders, signaling urgency and determination. The skeptics and the straddlers will have a definitive answer, and it will accelerate the transformation already underway. Innovation in how healthcare is delivered can succeed only if there is a sustained commitment to change to go along with the technological advances in data and analytics that have revolutionized other sectors.

This is doubly important. There are still too many organizations deeply embedded in today’s payment models, who have chosen to wait and see if this value-based care movement is a passing fad.

Many have dipped a timid toe, or hedged their bets with low-regret moves like buying up practices and forming organizations that are Accountable Care Organizations (ACOs) in name only. These actions consolidate a health system’s referral base, but administrators have no intention of reducing costs, which are their revenues. Put differently, these “ACO squatters” say there are embracing new payment models, but remain stuck in the mentality of the do-more, get-paid-more system.

Unfortunately, this strategy is already too widespread, and likely to grow as long as large organizations are allowed to continue in “one-sided” (upside only) shared savings models, as recently proposed by CMS. It’s also a major reason why so few hospital-sponsored ACOs have actually achieved savings bonuses. Defensive moves by hospital systems provide a veneer of action, while consolidating regulator-blessed market dominance that can raise local prices without improving quality at all.

Without a doubt, the goal announced today by HHS will motivate widespread, real change across both the public and private health care sphere. But in order to achieve the spirit of the transformation – and not simply check the box of meeting numerical goals – I would suggest an additional metric to accompany the headline number.

In addition to tracking all dollars paid out under value-based systems (like the “fee for service” revenue generated by hospitals with an ACO contract), HHS should also separately count how much money was actually awarded or taken away as part of value-based contracts. The headline number will give a picture of how many providers are participating in value-based care programs; the second number will give a clearer policy goal of increasing the number of providers that are actually succeeding in these arrangement. This additional objective would discourage the “ACO squatting” described above, and challenge participant providers to embrace not simply the letter of the regulations, but the spirit of the program.

“You can give them a big number and you can give them a date, but don’t give them both.”

That was the sly advice on target setting given by a career bureaucrat to a newly appointed agency head. Bureaucracies protect themselves against embarrassment and deflect scrutiny, especially when they feel attacked, and the leadership of the Department of Health and Human Services (HHS) has felt intense scrutiny since the earliest days of the Obama Administration. In that light, HHS Secretary Sylvia Mathews Burwell’s announcement today of a target for reforming healthcare payments is both astonishing and courageous.


Here Is What Happens When Your Brand Doesn’t Know Its Customers

Watch the video, then click to see the hundreds of comments…


How 10 leading health systems pay their doctors

This article was first published in Healthcare: The Journal of Delivery Science and Innovation. It is co-authored by Dhruv Khullar, Robert Kocher, Patrick Conway, and Rahul Rajkumar.

We conducted interviews with senior executives at 10 leading health systems to better understand how organizations use performance-based compensation. Of the organizations interviewed, five pay physicians using productivity-independent salaries, and five use productivity-adjusted salaries. Performance-based pay is more prevalent in primary care than in subspecialties, and the most consistently identified performance domains are quality, service, productivity, and citizenship. Most organizations have less than 10% of total compensation at risk, with payments distributed across three to five domains, each containing several metrics. Approaches with many metrics—and little at-risk compensation for each metric—may offer weak incentive to achieve any particular goal.

Provider organization; Performance-based compensation; Productivity; Incentives; Value-based healthcare delivery; Quality improvement

Large healthcare organizations that seek to create value by managing population health face a Principal-Agent problem, in which one actor (here, the physician—agent) makes decisions on behalf of another person or entity (the organization—principal). Organizations have a particular set of incentives, but it is ultimately frontline physicians—who at times face different incentives—that make clinical decisions. Problems can arise when the two parties׳ goals are in conflict, when they have different tolerances for risk, or when it is difficult for the principal to verify the agent׳s actions. In medicine, these challenges can result in the delivery of too much, too little, or inefficient care, depending on how procedures and services are reimbursed.

In an effort to align the interests of Agent and Principal, many organizations in other industries use performance-based compensation schemes, in which employees are paid based on how they perform on selected metrics that promote the organization׳s overarching goals. According to the human resources consulting group Aon Hewitt, more than 90% of US companies now offer employees performance-based pay, up from 78% in 2005 and only half in the early 1990s.1 Many healthcare organizations have also shown interest in using performance-based compensation to align provider incentives with organizational goals.

To better understand whether and how leading health systems use performance-based compensation, we conducted interviews using a standard questionnaire with senior executives at 10 leading provider organizations. We selected organizations that are either leaders in reputational surveys or that are established innovators in healthcare delivery. All 10 organizations cooperated with our survey. Key findings are presented in Table 1.

Table 1Physicians at these organizations are largely salaried with relatively minor adjustments for performance. Of the 10 organizations interviewed, five pay physicians using productivity-independent salaries, meaning that salaries are determined by a physician׳s specialty and experience and usually pegged to national or regional benchmarks—but not tied to measures of productivity like Relative Value Units (RVUs). Five systems pay physicians using a productivity-adjusted salary, in which salaries are based on a physician׳s recent RVU-productivity.

Our interviews suggest that compensation models vary greatly by medical specialty. Organizations emphasize performance-based pay more in primary care than in subspecialties. Compensation for procedural subspecialties is more closely linked to RVU-productivity, whereas non-procedural subspecialties tend to receive an unadjusted salary. This discrepancy may be due to the relative market power of subspecialists as compared to primary care physicians, which likely strengthens their bargaining position with provider organizations. Moreover, because performance measurement initially emerged in primary care, policymakers have a more robust set of validated quality metrics here than in the subspecialties. A relative dearth of quality metrics serves to maintain status quo volume-based compensation.

Interviewed organizations tie a relatively low percentage of total compensation to performance. At the Cleveland Clinic, Mayo Clinic, and Iora Health, for example, physicians are 100% salaried. At Group Health and Kaiser Permanente (Southern California) more than 90% of total physician compensation is salary. Importantly, even organizations that tie little or no compensation to performance attempt to track and encourage performance on a variety of metrics by conducting internal performance reviews. Furthermore, performance data for individual physicians is transparent in most systems; physicians are able to see their own performance and rank, as well as that of their colleagues.

At most organizations, senior leaders set overarching strategic aims, and then work closely with frontline physicians and department chiefs to develop fair and meaningful performance metrics. Group Health, for example, is undertaking a five-year process in which each year several departments meet with senior leadership to develop metrics to improve quality and efficiency in that specialty. Most organizations use a combination of group and individual metrics to make allocation decisions about compensation. Leaders note that some outcomes can only meaningfully be understood at the system-level (e.g., utilization patterns), while others are more appropriately assessed at the physician-level (e.g., patient satisfaction). Across systems, the most consistent performance domains were quality, service, productivity (generally measured by RVUs), and teamwork or citizenship.

Research has long shown that physicians respond to financial incentives. Productivity in medical groups tends to increase as a larger share of physician compensation is tied to his or her individual production, and this finding has been replicated in a number of specialties and organizational designs.2 and 3 But while studies suggest financial incentives can increase productivity in the traditional sense (number of patient encounters or hours worked), it is unclear if they do so when productivity is redefined as value or quality per unit time. Some have raised concerns about the ability of performance-based compensation to achieve desired outcomes, arguing that it creates unintended consequences such as avoiding high-risk patients, focusing on narrowly-defined metrics at the expense of holistic care, and “crowding out” internal motivation and professionalism.

A recent article by Mostashari et al. argues that primary care physicians should be thought of as CEOs responsible for $10 million in annual revenue and that physicians should be accountable for the overall quality and costs in health systems as senior executives are in other organizations.4 Our study of leading provider organizations, however, suggests that physicians generally have far less compensation at risk than senior executives in other industries.

Most organizations have less than 10% of total compensation at risk, and payments are typically distributed across 3–5 performance domains—each containing several metrics—so that physicians may be responsible for 10–20 metrics during any given measurement period. Approaches with many metrics—and very little compensation at risk for each metric—offer a relatively weak incentive to achieve any particular goal. Some physicians may hit performance targets just by chance, especially if thresholds are low, and even physicians who change nothing could potentially receive as much in payments as those who make significant changes. Furthermore, physicians cannot focus on everything at once and may be uncertain about where to devote their efforts.

This observation should be taken with some caveats. Firstly, even organizations with many performance domains may choose to focus on only two or three metrics in a given measurement period. Secondly, some researchers have found that small incentives can change physician behavior. For example, a recent Massachusetts General Physicians Organization (MGPO) quality-improvement program significantly increased hand hygiene compliance and electronic prescribing using incentives totaling less than 2% of the average physician׳s income.5 Thirdly, many leaders emphasized institutional culture, not financial incentives, as an important driver of quality and performance. Finally, performance-based compensation is certainly not the only method to address the Principle-Agent problem. Non-financial incentives such as public reporting and internal performance reviews and recognition may also be effective.

Despite calls for greater value-based purchasing, physician reimbursement continues to be driven primarily by volume of care delivered. In organizations with performance-based compensation, RVU productivity still dominates quality and service metrics by driving base salary, perhaps reflecting the continued prevalence of a fee-for-service payment environment. This is, however, at odds with new value-based purchasing goals, and may change as payment models continue to evolve. Indeed, several organizations reported that they plan to significantly increase performance-based pay for physicians in the near future.

Several conditions are necessary for organizations to move a greater proportion of payment into performance and away from volume. Researchers must continue to explore validated metrics that meaningfully impact patient outcomes. Organizations should encourage physician buy-in by giving them input into the metrics upon which they will be evaluated. And finally, to foster greater experimentation early on, payers should ensure it is in the financial interest of providers to explore novel reimbursement models and enter risk-based contracts.

There is likely no universally effective physician compensation model suitable for all organizations, and each system will need to incent physicians with its unique culture, goals, patient population, and financial situation in mind. But provider organizations may be missing an opportunity by linking too little compensation to too many metrics. Large changes in physician behavior and healthcare delivery—increasingly important in the post-reform era—may require larger amounts of at-risk compensation. Further research on physician compensation models and their effect on quality outcomes and costs is needed. Payers are moving toward paying provider organizations on quality and costs; but organizations themselves should do more to examine how they can better align financial incentives for frontline providers with those of the larger organization. By exploring payment models with more pay tied to performance, and less to productivity, provider organizations may be able to free physicians of traditional constraints and empower them to be not just aligned agents, but change agents.

The views herein represent the opinions of the authors and not necessarily policy or views of the Department of Health and Human Services, Centers for Medicare & Medicaid Services.

1 Aon Hewitt Salary Increase Survey. 〈〉; 2014.

2 M. Gaynor, M. Pauly
Compensation and productive efficiency in partnerships: evidence from medical groups practice
J Politic Econ, 98 (1990), pp. 544–573

3 D.A. Conrad, A. Sales, S.Y. Liang, et al.
The impact of financial incentives on physician productivity in medical groups
Health Serv Res, 37 (2002), pp. 885–906

4 F. Mostashari, D. Sanghavi, M. McClellan
Health reform and physician-led accountable care: the paradox of primary care physician leadership
J. Am Med Assoc (2014), pp. 1855–1856

5 D.F. Torchiana, D.G. Colton, S.K. Rao, S.K. Lenz, G.S. Meyer, TG. Ferris
Massachusetts General Physicians Organization׳s quality incentive program produces encouraging results
Health Aff, 32 (2013), pp. 1748–1756


Why So Many New Tech Companies Are Getting into Health Care

This article was first published in the Harvard Business Review.

Note: In addition to Bob Kocher, this post is authored by Bryan Roberts, also an investor at venture capital firm, Venrock.

A flood of new health care IT companies has been pouring into the U.S. health care market. The cause of this torrent: the recognition that as market and regulatory forces alter incentives in health care, IT companies will play a powerful role in combating the overemployment and declining productivity that has plagued this industry and in helping providers improve the quality of care.

The dam broke in September 2007, when Athenahealth went public, the price of its shares jumping by 97% on the first day. Since then, the company’s value has risen to $5 billion. Athenahealth proved to entrepreneurs, software engineers, and investors that the health care sector is fertile ground for creating large technology-services companies that use a subscription-based business model to offer software as a service (SaaS).

Despite its size and growth rate, the health care sector was long considered an impenetrable, or at least an unattractive, target for IT innovation — the entrepreneurial equivalent of Siberia. Athenahealth broke the ice by proving that it could sell SaaS efficiently to small physician businesses, get doctors to accept off-premises software, and achieve the ratios of customer-acquisition costs to long-term value that other sectors already enjoy.

As Athenahealth accomplished its goals, several larger forces have dramatically widened the scope of opportunity in the sector:

  • The Great Recession led to a loss of 8.8 million U.S. jobs and big declines in demand throughout the economy (including health care services) — yet health care employment grew by 7.2%. That reality increased awareness that a decline in labor productivity was driving much of the excessive spending in health care.
  • The American Recovery and Reinvestment Act of 2009 included the Health Information Technology for Economic and Clinical Health (HITECH) Act, a $25.9 billion program to give doctors and hospitals incentives to adopt electronic health records. EHR adoption has now grown to nearly 80% of office-based physicians and 60% of hospitals, fueling many successful software start-ups, such as ZocDoc, Health Catalyst, and Practice Fusion.
  • The Affordable Care Act (ACA) requires that an enormous amount of data on cost and quality be made freely available. In addition, digital health applications, mobile phones, and wearable sensors, as well as breakthroughs in genomics, are creating truly big data sets in health care. These data contribute to greater market efficiency, more consumer-oriented products and services, and clinical care that is evidence-based and personalized.
  • The ACA has led to a proliferation of risk-based (rather than fee-for-service) payment models. For example, providers inaccountable care organizations are rewarded for generating annual savings, and providers who use bundled payments get a fixed budget for an end-to-end course of treatment. Effectively responding to these changing economic incentives will increase reliance on software that helps providers manage population risk, understand costs and trends, and engage patients.

These macro-level developments set the stage for other SaaS companies to follow Athenahealth’s lead in enormously improving labor productivity and quality of care.

Within the next decade, software tools will eliminate thousands, perhaps millions, of jobs in hospitals, insurance companies, insurance brokerages, and human resources departments. Not the jobs of people who actually provide care — but those of administrative middlemen, whose dead weight contributes to economic loss. Here are five examples:

  1. Digital insurance markets, combined with ACA-enacted regulatory changes such as guaranteed issue and community rating, make it possible to price and sell health plans to anyone immediately. These developments will decimate the armies of brokers who act as intermediaries between customers and insurance services.
  1. Price transparency, digital insurance products, and tools such as reference pricing make it possible to generate an exact price and instantly collect payment for a health care service. As a result, revenue cycle managers in hospitals and claims adjudicators in insurance companies will be displaced.
  1. The inevitable shift to the cloud will render obsolete the costly, insecure data centers that most doctors and hospitals are now building, staffing, and running.
  1. Adopting self-serve mobile applications will eliminate the forms, faxes, and excess staffing at many call centers, thereby improving satisfaction for everyone in the process.
  1. Centralized clearinghouses that share information across organizations and state lines will eventually replace the byzantine, paper-based process of credentialing doctors, tracking continuing medical education, and keeping licenses up-to-date. That means smaller staffs in hospitals’ medical affairs divisions, health plans, medical boards, and state and local health departments.

Given that wages account for 56% of all health care spending, improvements in labor productivity could generate enormous value. Simply reducing administrative costs could yield an estimated $250 billion in savings per year.

As compelling as the prospective labor efficiencies are, the benefits of SaaS extend beyond direct labor costs. Easier access to data on physician quality, specialization, and adherence to evidence-based care will better match patients with doctors who provide high-quality, efficient services, thereby averting health complications for their patients. Moreover, software can help bring relevant clinical guidelines and personalized risk scores to patients and clinicians as they improve care plans, engage in shared decision making, and avoid duplicative services. Such efficiencies will, in turn, enhance how patients perceive and experience the care they receive. SaaS companies can trumpet all of these advantages, not just the employment savings they yield.

To seize on the new opportunities in the health care sector, SaaS companies can take these steps:

  • Attack economic inefficiencies in order to generate immediate, tangible customer return on investment. Witness howCastlight Health’s transparency tools are generating annual savings for employers and employees. And be clear about the source of the ROI, given that in most cases the revenue comes from another health care stakeholder who may be able to undermine the business.
  • Focus on building in network effects so that improvements made by one user enhance the product’s value for current and future users, just as Athenahealth does when it rapidly disseminates changes in payment rules at one provider to all other providers. Most SaaS businesses in health care IT cannot protect their intellectual property; so it is important to continually augment the value of the product to achieve scale.
  • Use software-enabled service models, rather than pure SaaS. For example, Grand Rounds’ software not only recommends an expert doctor for a patient but also collects, organizes, digitizes, and summarizes the patient’s records — and then books the appointment for the patient. In effect, the software makes it easier for patients to adhere to high-quality, cost-effective care, thereby enhancing the overall ROI for the product.

It took Athenahealth a decade, from 1997 to 2007, to go public on the strength of its SaaS model. It took Castlight Healthonly six years, from 2008 to 2014, to do the same. Now an array of highly valued healthcare SaaS companies, each worth more than $100 million, is emerging. They include Zenefits, Grand Rounds, Doctor on Demand, Omada Health, Health Catalyst, Doximity, and Evolent Health. Indeed, Zenefits is one of the fastest-growing SaaS companies ever, regardless of industry, surpassing $500 million in enterprise value in its first year.

The success of SaaS companies in health care is thanks, in part, to an influx of leaders from other sectors. They bring with them teams of technical talent that deliver consumer and enterprise software faster, better, and more cheaply than many legacy health care IT companies can do. Witness ZocDoc, founded by first-time entrepreneurs from McKinsey; Grand Rounds, founded by Owen Tripp, who cofounded; Zenefits, founded by Parker Conrad, who cofounded SigFig; and Doctor on Demand, founded by Adam Jackson, who cofounded Driverside (just to name a few). This type of cross-pollination is an essential ingredient of innovative change.

The barriers between health care IT companies and IT in other industries are clearly coming down, and we expect the number of sector disruptions and billion-dollar companies to swell. As each innovation wave generates more data, disruption-cycle times will shorten, thereby forcing all players in the health care ecosystem to address inefficiency as they compete on quality and value creation. Those who fail to act will be washed away by the tide that lifts all other boats to greater productivity.


The Artist’s Share

There is a commonality in the Hachette/Amazon and Spotify/Pandora/Recording Artist debates and it looks something like this:

  • By not paying enough royalties to the licensor (book publisher, record label), authors and artists are being starved.
  • We are told this is critically bad for authors and artists who can no longer earn a living.
  • Thus, creators won’t create, and art and culture ultimately suffer.

None of us want there to be fewer books or songs in the world. But frequently lost in this debate is a discussion of the presence, or perhaps obsolescence of the middleman and the amount of revenue they keep. Spotify, Pandora, Amazon and the other licensees of ebooks and music are ultimately just retailers. Their job is to acquire and retain customers, and sell them as much music and books as they can. They license their content from book publishers and record labels. The terms of the license are set unilaterally by the publishers or the label as they have exclusive authority over the titles they represent. The publishers and the labels form agreements with their authors and artists. These agreements dictate how much of the money received from retailers gets paid out to the creators. Spotify, Pandora, and Amazon have no control over the terms of the relationships between the creator and the middleman publisher or label.

For every dollar spent on books or music, we know how much retailers keep. In the case of Spotify, more than 70% of every dollar they collect gets paid to record label and music publisher middlemen. In the case of Amazon, we see from their gross margins that they pay out about 70% – 80% of every dollar they collect to the book publishers. Pandora pays out about 55% – 60% of the revenue it receives. Apple, the world’s largest retailer of music, pays out 70%. Most retailers of media, through both analog and digital eras, squeak by on about 30% gross margins and pay about 70% to the middleman. (Apple, in their AppStore, keeps 30% of app revenue and pays 70% to developers.) The argument is often made that “these retailers build their businesses on the backs of the creators and should keep a relatively small share.”

Fair enough. Except how much of the money collected by the book publishers and record labels makes it back to the actual authors and artists—the creators without whom there would be no art? And in a changing digital landscape, are the analog legacies of these payments appropriate for the digital world?

In music, the deals between record labels and artists has two types of royalty structures: a) a percent of revenue paid to the artists for recorded music that is sold (a CD, a digital download) and b) a different percentage for music that is licensed (for use in a film, or perhaps a digital streaming service). Different artists have different deals, and massive superstars can demand better terms, but on average, revenue sharing for music sales are in the 15% – 18% range. That is, the artist receives only 15-18% of the wholesale payments the record label receives from sales. In real dollars, for a $1 download, Apple keeps $0.30, pays $0.70 to the label and the label pays $0.10 – $0.13 to the artist. That is a shockingly low amount and helps explain why artists often feel bitter about digital music sales. If retailers only keep 30%, why do the record labels keep more than 80% of the money they receive?

Traditionally, they claimed they served an invaluable role in the creation of music. They advanced money to the artists to live, they paid for studio time, they guided the recording process and helped select material, they manufactured the records and CDs, they shipped them in their trucks to their distribution facilities and then to the retailers. They also paid for music videos and marketing activities. If the labels needed 80% share to cover all of these costs, that might make some sense. Except in record deals, the artist is actually billed for most of these costs and has to repay them (“recoup”) by allowing the record label to withhold royalties until their advance and many of these costs are recouped. Interestingly, the overwhelming majority of these activities are not needed in the digital age (trucks, manufacturing) or cost a whole lot less to perform (electronic distribution).

In the digital world, many artists have successfully argued that digital services are being licensed by labels and thus the licensed royalty amount should apply. Again, this is negotiable, but generally is about a 50%/50% split. That is, half of the royalties collected by the labels get paid out to the artists, subject to deductions and recouping of costs. In the previous iTunes download example, the artist would receive about $0.35 for every $0.99 download sold.

In book publishing, for eBooks, many book publishers pay out about 25% of royalties they receive directly to the author and pay out about 5% – 15% of the retail price (or about 25% – 30% of the amount the publisher receives) for physical book sales.

In their most recent financial statements, Warner Music Group indicates that they are paying out to artists about 52% of the revenue they collect, far less than Apple, Amazon and Spotify pay to record labels and book publishers. In the case of book publisher John Wiley & Sons, they pay out to authors only about 29% of the revenue they collect, keeping 71% for themselves.

If retailers “build their business on the backs of the creators,” so too do the record labels and book publishers. Are they entitled to the majority of profits of every sale? Are they even any good at the marketing skills required to excel in the digital age? With audience proving grounds like Kickstarter and IndieGogo, how much creative direction and marketing does an artist need in this new world? It’s time not just to revisit the very purpose of these legacy middlemen, but also to re-examine the amount of money they take for their services.





Dollar Shave Club and the Modern Brands

Dollar Shave Club just celebrated its second birthday. In two short years, this modern men’s lifestyle company has captured about 9% of the U.S. men’s razor cartridge market, according to BGP Group. (This is a measure of market share by units.) It’s a remarkable feat for a young company in a very short amount of time and it shows how dramatically industries can be transformed by new entrants who reimagine a market an entirely different way than how incumbents think.

In the case of consumer packaged goods, most are manufactured by CPG behemoths who rely chiefly on two aging mechanisms for building consumer awareness: broadcast marketing and physical retail shelf-space. Dollar Shave Club, and similar modern lifestyle brands like Warby Parker and Bonobos, view these dependencies as a disadvantage and have turned the model on its head. Broadcast marketing, in the age of social media, looks as out of touch to digital natives as President George H. W. Bush looked to us when he was surprised by a supermarket price scanner . Now, brands are built by having direct conversations with your customers, not shouting at them, engaging them to provide real time feedback on your products and services and enlisting them to vouch for their satisfaction with your brand. Brands are now built by your customers, not announced to them. And because of this, product discovery is shifting away from physical shelves into the social streams we all follow. If your brand does not occupy meaningful share in the minds of your customers, it won’t move through the streams and allow influencers to introduce you to new customers.

Social marketing done correctly requires far less marketing spend in aggregate than broadcast marketing. This means brands built with the economic firepower of $100M+ traditional marketing campaigns end up pricing their products higher to cover their required marketing spend. This is why you see the modern brands able to offer their products at lower prices than the incumbents, creating a value gap in the minds of customers.

Traditional CPG has built big walls around physical retail distribution. They have leverage over the decisions physical retailers make as to which products to stock on shelves. But modern brands are born on the internet and sell directly to their customers, initially bypassing physical retailers, sometimes forever. They get to know their customers, they speak with them, they use social data to understand their influence and their habits. In short, they are hyper-informed as to who their customers are and what they want, and they have an easier time finding new ones. With so much of commerce moving online (14% of US holiday season sales were online in December 2013), customers prefer the convenience of direct-to-you product delivery and the low-friction of mobile commerce. Traditional CPG, like other industries who sell through complex multi-layer distribution, must allow for healthy distribution and retail markups and don’t get to know their customers. They are slower to learn when preferences shift or to react to the moves of competitors.

All of these differences add up to advantages for the modern brands built on the internet — price advantages, information advantages and most importantly, higher customer loyalty. Dollar Shave Club has received envious net promoter scores and, for the subscription part of the business, has extraordinarily low churn rates. About half of all of their new customers are added organically and not through paid marketing. Their products cost less and provide more value than the legacy brands. Legacy brands often cannot respond to these threats effectively. They can’t undercut their own retail partners on price, they can’t sell directly in any real volume, and most importantly, they don’t hold an authentic place in customers’ minds, so they tend not to have a strong place in the social streams. Their customers are not their partners.

Once established firmly online, modern brands do move offline. But you are seeing them do so in inventive ways. They tend not to just sell their products into legacy physical retail, they work to re-invent physical retail with their own branded presence (Apple Stores are the high water mark here, and Warby Parker has made some important innovations too). They do often expand to traditional ad formats like TV and radio, but they do it in a highly quantified and targeted way, with a holistic view of a customer across every channel and touch-point, able to see the online influence of a customer who hears a radio ad in Dallas and how many social connections of that person ended up visiting the mobile site of the brand itself.

Dollar Shave Club, like some of the modern brands in their cohort, has grand ambitions to build a multi-billion dollar lifestyle brand, in partnership with its customers. They have expanded into content such as podcasts and the hysterical “Bathroom Minutes” as a way to be even more present in their customers’ lives. They are launching many more products over the coming months to offer great value across many product categories to their customers (often in response to customers begging them to do so). Their growth is accelerating and they see a clear path to capturing double-digital market share in each of the product categories they enter. With more than one million paying subscribers and a fresh $50 million of new capital, they have grand designs on building a better bathroom. I am honored to be along for the ride and to have a front row seat.


A Very Cool Thing I Learned About My Dad

Every so often a family member does something significant that makes you really proud. That happened to me this week when I learned about the full details of the role my Dad played in trying to prevent regulatory failure by the New York Federal Reserve in a pretty astonishing story that was uncovered by Pulitzer Prize-winning reporter Jake Bernstein at ProPublica and This American Life and covered subsequently by Michael Lewis on Bloomberg and by the Washington Post.

The story involves a former employee of the New York Federal Reserve named Carmen Segarra who was fired for refusing to back down from her conclusion that Goldman Sachs fell short of regulatory requirements for dealing with certain conflicts of interest. Sensing that she was working in an overly deferential regulatory system that would reject her conclusions, she secretly recorded meetings that supported her case.

The most notable smoking gun quotes were from a Goldman employee who said that “once clients are wealthy enough, certain consumer laws don’t apply to them” and from a fellow Fed regulator who responded to Segarra’s surprise at this statement by saying “you didn’t hear that.”

The background for this story is that in 2009, the head of the New York Federal Reserve asked my father, David Beim, a Professor at Columbia Business School, to write an internal report on how the Fed could have missed all the incredibly risky behavior at investment banks that helped cause the 2008 financial crisis.

After dozens of interviews, he came to a conclusion that surprised him. He expected to find a failure of financial analysis, but what he found instead was a cultural failure. The NY Fed had become overly risk averse, and its employees kept their heads down, prioritized peaceful coexistence over challenging conversations and allowed institutional consensus to weaken their findings.

His report suggested a path forward, including recommendations to find more independently-minded employees and to create a culture that would enable them to speak freely, come to uncomfortable conclusions and let the truth bubble up. The Fed sought to take his advice after receiving the report and went on a hiring spree to find more outspoken people like Carmen Segarra, although as suggested by subsequent events, many cultural problems remained.

The report had been kept secret until it was released in legal proceedings relating to Carmen Segarra’s departure from the Fed. Now it is out in the open for all to read. It is, as Michael Lewis says, an extraordinary document.

What impressed me was not only that my Dad hit upon one of the core uncomfortable truths that helped create the financial crisis, but that he did so in a thoughtful, unafraid manner and refused to bend even when the Fed tried to get him to modify his report so they wouldn’t look so bad. Pressured by senior Fed officials to remove a quotation from someone he had interviewed that “regulatory capture” set in very quickly after new employees joined, he refused to do so. This was a core failure of a core institution in the U.S. financial system, and he did not want to let politics interfere with the truth.

Courage, thoughtfulness, honesty and unwavering integrity are things I’ve always admired in my Dad. If the majority of financial managers and regulators on Wall Street were made of similar material, I honestly don’t think we would have had a financial crisis in the first place.

(My Dad recently joined Twitter. You can find him @dobeim.)  #BeimReport


Cyber crime wins, CEOs lose

In a world of escalating cyber crime, heads are on the chopping block and its getting bloody. “Uneasy lies the head that wears a crown” is more true than ever for business leaders and CEOs. When Target retail suffered one of the largest cyber security breaches on record—resulting in 40+ million credit cards compromised—the Target CEO was fired after 35 years with the company. The Home Depot breach appears to be on track to have even higher losses (2,200+ stores with 56 million credit cards compromised). Outcries on social media are exerting public pressure to fire the mega retailer’s CEO and CISO (Chief Information Security Officer). Meanwhile, JP Morgan Chase acknowledged that its quarter of a billion dollar IT security spend for FY2014 was insufficient to protect the firm from a recent cyber breach.


What do all these recent headlines have in common? Large US-based companies with millions of customers’ credit cards on file are being successfully breached by cyber criminals. And the companies’ leaders have plenty to lose including their own jobs.

The consensus view among IT security professionals is that every organization has been compromised or breached to some extent, whether they know it now or discover it later. It’s the new reality. Here is a list of the top 10 “publicly known” security breaches in retail with # of customers affected by credit card theft:

Retailer Date # of impacted accounts Case description
TJX companies Jan 2007 90 million Partial compromise of payment processing systems
The Home Depot Apr 2014 56 million Point of Sales system compromise across 2,200+ stores
CVS Caremark Jun 2005 50 million Security flaw in loyalty card service exposes sensitive purchase data
Target Nov 2013 40 & 70 million Two breaches of 40M credit cards and 70M customers financial data
Barnes & Noble Aug 2008 40 million Specific retail stores were compromised to obtain credit card info
Sony Computer May 2011 25 million Stolen customer account information from an outdated database
Zappos (Amazon) Jan 2012 24 million Customer name, email, address, last four digits of credit card number
Deviantart Dec 2010 13 million Entire database of customer accounts hacked and stolen
Dangdang (China) Dec 2011 12 million E-Commerce customer account information compromised
BJ’s Wholesale Mar 2004 8 million Hackers charged fraudulent transactions against specific customers account

The above list of breaches is staggering, and this is only a narrow subset of breaches focused on POS within the retail vertical that have been publicly disclosed. If we extend the view to other industries and include data and intellectual property (IP) theft, the number of customers with breaches increases by an order of magnitude.

My view is that it’s unfair to assume that all of these companies’ IT security protection was simply full of holes due to negligence or not following best practices. I believe most IT teams did what they could within the confides of their roles within these companies. Despite a measured increase in IT security spending ($76.9B USD annual spend in security products and services by 2015 — Gartner) over the past 10 years, cyber security protection has gotten worse for businesses in almost every measurable category.  The budgets have increased but I would argue cyber security remains relegated to IT departments as one of many challenges they must tackle.

One question that the Target incident raises: When your organization is hacked and customer data compromised, should our response as shareholders be to fire the CEO—even as we acknowledge that almost every organization is compromised to some extent? Should the CEO be looking to fire her CISO and head of IT because it happened on their watch?

Like most complex questions, I think the answer really depends on the situation.

Perhaps Target’s CEO and his cadre of reports were negligent, particularly with subcontracted employees maintaining the store’s HVAC (heating, ventilation and air conditioning) systems. Those employees checked email unknowingly laced with malware and gave up their credentials for managing an internal HVAC system. This action set in motion the initial breach that migrated to Target’s POS (point of sales) systems.

Here is my favorite depiction of the anatomy and workflow of the Target breach (kudos @ChrisPoulin):



This is not easy to understand due to the complex nature of the systems under attack. The stakes are high for cyber security. Business owners are being held accountable when companies lose their customers’ financial data and trust. Firing CEOs is simply a wake-up call.

Risk management needs an overhaul when it comes to incentives. Overall, we have a lots of innovation coming from the Next Gen [fill in the blank] (pick any: anti-X, DLP, endpoint protection, firewall, IDS, IPS, proxies, SIEM, etc) funded heavily by venture capital firms. Examples of a few Venrock investments: CloudFlare provides DDoS protection as a service to even the smallest companies around the world and its recent release of Keyless SSL has the potential to be game-changing for Internet encryption. Shape Security brings a new class of Bot Firewall for web application protection. VeloCloud has created the first Cloud-delivered WAN that includes branch firewall and VPN encryption as a service.  I think it’s critical to continue to fuel these types of security technology innovations.

However, where are the offerings that change business leaders’ fundamental motivations?

In the past, most business leaders viewed cyber breaches as being akin to shark and bear attacks: scary but relatively rare occurrences that happened out in the wild somewhere. Today, cyber attacks are becoming so commonplace that they’re considered more like auto accidents or flooding: events that happen all the time and range from minor to career/life-ending. Few of us would want to build our home in a known flood zone (high risk undertaking). None of us drive our cars without being licensed (third-party assessment) and insured (accident protection). It’s time to extend that same attitude to ‘driving’ a business.

Cyber insurance has remained a fairly niche industry since its inception in 1997. But the past two years has seen a dramatic rise in cyber insurance products and underwriting. This change offers the opportunity to shift cyber risk management decisions to business executives, not just IT departments, with the incentive being to lower premium costs and increase coverage breadth. Having this deeper motivation for financial risk/reward, while simultaneously strengthening IT security, is a useful tool. When applied properly, cyber insurance expenditures and the continuous risk assessment rating to gauge coverage can force cyber security to stay forefront in the mind of CEOs and business leaders.

Bottom line: Whether it’s fair or not, CEOs are being held accountable for cyber incidents. Business owners generally operate at a disadvantage compared to their adversaries. Cyber criminals are highly motivated by a financial risk/reward model that tilts in their favor. To help turn the tide and reverse our losing trend in cyber security, let’s arm the good guys with a better risk/reward model of their own. Cyber security should be a business initiative that CEOs can understand and own, instead of treating as one of many IT challenges. Promoting continuous security improvements motivated by meaningful financial incentives for cyber insurance coverage/pricing is a step in the right direction.

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