The Ardan [Operator] Angle

A discussion on value creation with Truven founder Ernie Ludy

A tectonic shift towards value is giving rise to a new economy in healthcare, says Ardan Executive Partner Ernie Ludy, and business intelligence is evolving towards enterprise intelligence to accelerate the shift.

At its founding, Ernie Ludy, founder and Chief Executive Officer of Truven-Medstat, asked a group of 26 angels to invest $5,000 each and take a bet on building the first business intelligence (BI) platform in healthcare. Three years later, the company conducted its IPO (NASDAQ: MDST), and over the next 11 years grew its customer base to more than 1,400 enterprise customers across five businesses industrywide. Pioneering the first SaaS / ARR business model in healthcare, the company achieved 44 continuous quarters of revenue and earnings growth, and an 11-year CAGR of 50% — returning 216x to his angel investors, and earning “Top Performing Growth Company” honors from BusinessWeek, Forbes, and Fortune magazines. By way of three acquisitions, including the first $1B+ exit in the healthcare software-data industry, the business is currently one of the core assets of IBM Watson Health. Among the most accomplished founders and CEO’s in the healthcare software industry, Ernie joined us as an Executive Partner this year. In this commentary, adapted from an interview with Ardan’s Drew Boston, we asked him to share some of his entrepreneurial background and his views on growth prospects for next-generation BI and healthcare enterprise software.

Drew Boston: Before talking about next-generation Enterprise Intelligence, would you tell us about the decision to start Truven-Medstat and what led you to launch the first BI platform in healthcare?

Ernie Ludy: Thinking back on launching the business, there were four key factors that drove my decision to raise capital and start the company. First, thanks to a World Health Organization research fellowship, I pursued graduate studies in sociology and advanced data analytics where I learned to explore healthcare as a complex system, and develop scientific and technical know-how around building databases, metrics and models, with a special focus on the systemic and social drivers of care delivery, outcomes and cost performance.

Second, my early research career with a major health insurance firm provided the ideal setting for building a complex systems model for insured healthcare, and clarifying the value-chain relationships among sponsors, payers, providers and patients. The model also exposed the industry’s cost-plus business model and how it drives inflation as it neutralizes market forces to improve quality or costs. Third, major IT advances in database architecture and storage, online telecommunications, and interactive graphical user interfaces, made it possible to build a first-generation BI platform for curating and analyzing large volumes of insurance claims and enrollment data, in a decision-support environment designed for non-technical users. Finally, and most important, a ready market was emerging among major US corporations who were looking for data and analysis solutions to stabilize double-digit inflation in their employee health insurance costs, and reduce their competitive cost disadvantage in emerging global markets. These four factors of technical know-how, domain experience, emerging IT and a ready market, converged to offset several major startup risks, and tilted the odds in favor of successfully launching the business — so I did!

Drew Boston: What was the secret sauce for achieving 44 continuous quarters of revenue and earnings growth, an 11-year CAGR of 50%, and the extraordinary exit value for your angels and public investors?

Ernie Ludy: The major ingredients of our secret sauce included two new business models which we pioneered for growing the company: a SaaS model for growing customer value and recurring revenue; and a Sustainable Enterprise Value (SEV) model for growing market leadership, operating results and shareholder value. We adopted the SaaS model for recurring revenue at the outset of the venture, which had the effect of structuring our business as an on-line service, focusing our technology and service teams on creating early and significant value for customers by reducing the growth rate in health benefit costs by 30 to 40% in three years. SaaS accelerated our business growth and tied it directly to customer success, establishing our brand and achieving early market traction. It supported our premium pricing and led to high rates of customer retention and multi-year contract renewals in excess of 90%. Longer term, SaaS strengthened our customer-centric culture and competitive strategy, and created predictable revenue, margin and earnings growth along with steady and reliable cash flows. In short, SaaS worked extremely well for our business both as a startup and as an early public growth company. We adopted our Sustainable Enterprise Value model in concert with our goal to grow the business from $20M to $100M in ARR. Our thinking was that the business would grow faster if it was ‘easy to grow’; and that depended on making the right strategic and operating investments, building out our infrastructure, and strengthening all aspects of our execution platform. SEV was specifically designed to align our competitive strategy and operating plans with our investments to accelerate growth, resilience and adaptive capacity. And it worked. The result was much faster organic and inorganic growth, early and dominant market positions in 5 major healthcare sectors, and accelerated revenue, margin and earnings growth, all of which drove expanded valuation multiples and extraordinary enterprise value — and an exciting exit for investors.

Drew Boston: Let’s shift the discussion to your current view of BI markets in healthcare and what’s ahead. How do you see the next generation of BI platforms evolving over the next decade?

Ernie Ludy: If I may, I’d like to frame my view of BI markets in a larger economic context. Without getting into a litany of statistics on healthcare, GDP and CPI trends, suffice it to say that US healthcare over the last four decades has consumed our personal, business and government income faster than we can create it; and eroded our family, corporate and national net worth faster than we can build it. For a growing number of Americans healthcare is beyond unsustainable or unaffordable — it’s insufferable — and has finally sparked a serious national reaction. Nothing less than a tectonic shift towards value is underway. It’s giving rise to a new economy in healthcare where value hungry markets are ripe for disruption and up for grabs; and where insurance and care delivery supply chains are merging vertically or virtually to create a higher quality and more cost effective, end-to-end value chain. The shift to value is also generating a new knowledge-based, competitive landscape where intelligence is strategic and technology is indispensable. Today every healthcare enterprise is facing the same competitive question: What more can we do to improve value for those we serve based on what we know, how fast we can learn, and how quickly we can connect it to operations? Companies are responding and evolving their BI platforms towards Enterprise Intelligence — EI platforms focused on value, learning and speed. They are re-architecting their BI platforms to automate data-model-workflow cycles on a single platform, closing the gap between what they know and what they do. The goal is to accelerate learning and reduce cycle times from intelligence to operations, driving improvement in care delivery and cost performance fast, on-demand, and enterprise wide.

Drew Boston: Could you say more about EI platforms and how they differ from conventional BI Platforms?

Ernie Ludy: I like to think of EI as the ‘beginnings of a brain’ enabling enterprise intelligence functions to sense, interpret and act in ways to adapt or change the environment and improve performance. At the core of EI is a brain-like technology platform or engine that powers complete intelligence cycles: data-model-workflow cycles, which enable measurement, insight, and execution. EI platforms are also brain-like in their capacity to build deep contextual content and fast connections that accelerate intelligence flows to operations, and stockpile learnings from recurring cycles for distillation into higher order knowledge. Conventional BI platforms have lagged EI platform architecture to power these types of complete intelligence cycles, or to stockpile learning for creating higher order knowledge. This lag has led to a proliferation of separate, single-purpose platforms for integrating and curating data, building and refining AI models, and developing workflow apps for executing actionable insights. In turn this platform fragmentation has structurally delayed the evolution of EI platform architecture designed to integrate these separate intelligence functions into a single data-model-workflow platform, and generate rapid business intelligence on-demand. In a competitive world that’s changing fast, and where speed and intelligence are imperative, conventional BI platforms simply won’t cut it. Evolving BI architecture towards EI platforms is essential in my view, and defines table stakes for being competitive in today’s new healthcare economy.

Drew Boston: As we wrap up, would you share your thoughts on EI as an investment theme in the healthcare enterprise software space — will you be investing in EI?

Ernie Ludy: As the new economy in healthcare builds momentum, I believe EI is a solid bet and will prove to be among the better strategic investment themes for rapid growth and accelerating returns. Why? Three reasons. First, the shift to value is irreversible. Second, EI will be indispensable for competing on value at the scale and speed markets require. Third, like most new platform technologies, EI will likely spawn a new sub-economy of expanding markets and increasing returns. Enterprise software companies who are developing EI solutions to help their customers get on the right side of this tectonic shift, and accelerate change rather than be victims of it, should drive extraordinary enterprise value for their customers and shareholders alike. At Ardan, as you know, we are actively searching for these companies as we speak!

About the Author(s)

Ernie Ludy is an Executive Partner with Ardan

Drew Boston is a Principal and investment professional with Ardan