McKesson recently made a big splash when the company announced it was reorganizing its Horizon and Paragon product lines with major emphasis on the latter. In the same breath, the company stated it would invest $1 billion over the next two years in research and development of IT products as part of an initiative called Better Health 2020. In this interview, David Souerwine, president of McKesson Provider Technologies, takes us behind the curtain by discussing the goals of the new strategy, what factored into the decision to shift away from Horizon, the advantage he feels that McKesson now offers its customers, and the challenges involved in managing customer perceptions.
- Customer concerns
- Helping hospitals lower costs
- Lessons from Horizon Enterprise Resource Manager
- Souerwine’s approach
- Making the decision for change
- On leadership
We believe, and we are going to have to prove it out customer by customer, that we’ve got a 33% or so total cost of ownership advantage over Horizon, and also over Cerner and Epic. We believe there’s a big financial benefit for a customer to stay with McKesson over time.
When the version of the product first came back, it wasn’t good. And in retrospect, I think if we had made a decision four or five years ago to scrap the early development and start all over, we would have been miles ahead.
All of our customers now have a single person they can go to who won’t necessarily have all the answers, but at least it’s a single point that can triage what the customer needs. It’s better than in the past when we had each division standing on its own and a centralized sales group.
There are a lot of people talking about the need for singular repositories—whether or not that ever happens in a true sense, there certainly got to be a need to draw our data together for an individual patient.
We believe that this option ultimately will be what they’re going to need as part of their overall technology solution. We can offer analytics population management, care coordination, payer services—there is no other HIS company that can offer those solutions.
Guerra: I emailed one of your CIO customers who’s a reader of mine and asked if they have any specific questions for you. And in the response, the individual mentioned something you’ve talked about more than a few times, which is that they need to significantly decrease their expenses. I thought that was interesting because you are running a business, and businesses are based on increasing revenues and profits and your customers want to pay less. That’s a tough place to be in. How do you manage that?
Souerwine: We knew before we made this announcement that there’s a lot of concern in the market in general. Hospitals are running on very thin margins in total. They’ve got risk shifting toward them, their reimbursement levels are falling, and their demand for cost, if anything, is going up. So they’re on a tough spot. I think they’ve got to look across their entire business, and sometimes it’s hard for hospital to think of themselves as a business, but a lot of them are huge with tens of thousands of employees and a lot of revenue and a huge amount of expense.
So the way I think companies like McKesson come at that is to try to offer as many different capabilities as possible so that the ownership of their entire technology footprint becomes less over time. And with integration across multiple capabilities from the same company, they actually get to integration easier in the case of a switch from Horizon to Paragon. Paragon does not charge for upgrades, which is a large source of both cost and time for our Horizon customers today. It’s been a very intensive upgrade path and will continue to be as we work through Meaningful Use. On the Paragon side, the customer is able to download and upgrade into their test environment, and when they’re satisfied with it, they move it into production. It’s not really an invasive process. So that’s one big area of savings, and there are also just less people that surround the support of a Paragon system than there is with Horizon. Part of that is just the nature of the complexity that Horizon has. The minute you have an Oracle database inside your facility, you need a DBA. On the Microsoft side, you don’t.
So there are big differences. We believe, and we are going to have to prove it out customer by customer, that we’ve got a 33% or so total cost of ownership advantage over Horizon, and also over Cerner and Epic. We believe there’s a big financial benefit for a customer to stay with McKesson over time, to migrate to Paragon, and when they compare to the competition, if they’re happy with the feature function, which we think they will be with Paragon, they’ll enjoy full integration and all these other advantages that McKesson can bring, which we don’t believe other competitors can and just a lot of financial benefits for them going forward.
Guerra: So you maintain your profitability because if they move to Paragon, they pay less and it costs you less to support it, and I assume you’re also looking for growth from increasing the total number of customers.
Guerra: Okay. The specific question the CIO sent to me to ask you was, ‘Given McKesson’s experience with Horizon Enterprise Resource Manager, what is McKesson going to do differently to ensure it can execute the development of Paragon to meet the needs of its Horizon customers?’ Anything specific there?
Souerwine: Yeah. So that’s obviously a tough answer for me. I would tell you that we would have gotten there with the quality product on HERM. So first of all, let me admit that we were behind on that product. It’s been on development for seven years, which so far is three to four years longer than we planned when we started the projects. So there definitely were issues with the early development. I would tell you the biggest issue is that we made a decision to off-shore development. We didn’t have proper guardrails around how that off-shoring was done. When the version of the product first came back, it wasn’t good. And in retrospect, I think if we had made a decision four or five years ago to scrap the early development and start all over, we would have been miles ahead.
Instead we took the code that came back because on the basis and have been rewriting it as fast as we can in an upgraded form and architecture that had actually made a lot of progress. When we looked at what the market now needs, two things had shifted: one, we don’t believe anyone whether it’s a stand-alone ERM opportunity. So when the project started, there was a view that maybe we’d get maybe 600 or 700 customers, some of which would be stand-alone ERMs. The market’s really switched to one integrated financial and clinical capability.
The second thing that happened is we looked at the scope and specification for HERM-3, which was going to be the commercial version of that product, and compared it to what exists in other places across the company. So we have Legacy systems, we have HERM as the development product, we have Paragon as an existing revenue cycle product, and we have revenue cycle capability that you can purchase as individual modules from our RelayHealth Financial and Connectivity businesses. We have all of these different revenue cycle capabilities. Some of the decision was around how do we just rationalize all this? What’s the best endpoint for the customer? And at the end when we were faced with continuing to rewrite a lot of HERM and we found out how capable Paragon is today, we believe we could get the customers to endpoint that they want on an integrated platform of lower total cost of ownership more quickly through that switch. That’s part one of the answer.
Part two is if you look across McKesson technologies, there are dozens of great examples of software development that’s gone very well on schedule. Paragon is one of those companies has that track record. Our medical imaging business, which has a hardware component to it, but that software, our pharmacy automation business, which is run on a common software backbone, our performance management business, our analytics businesses, our RelayHealth businesses, our payer businesses—these are all groups that have developed software very successfully on time and according to specs that were communicated to the market. So I would tell you that I think HERM was a decision with a lot of complexities around it that was more than just ability to develop software. The software was being developed. The ultimate decision came down again to focus of investment and how we thought we could meet customers’ needs in the quickest way possible.
Guerra: So you started in your current position in April 2010 and you were previously President of McKesson Automation, correct?
Guerra: So you came in and it sounds like from some of the things you said that you have a good technical understanding of databases and integration and things like that. You had the company-wide view coming from another part of McKesson, so you had some things on your belt. Did you have to learn the dynamics of the hospital systems in terms of things like knowing that they don’t want a standalone clinical application for the acute side—they want an integrated system? Is that something that took you a few months to figure out or to understand?
Souerwine: Yeah, I think any time you change positions, your perspective changes. I was on the MPT Executive Committee, so I was aware of a lot of the things that were going on across MPT. When you’re then put into a role where all of a sudden you’re in charge, it changes how you view some of it and your decision-making. There is no question that I came in to this role at a period when MPT was facing some challenges, and a lot of them were around Horizon Clinicals. Our customers know that our early introductions of Horizon Clinicals 10 and Horizon Clinicals 10.1 were messy. We had missed commitments to our customers for a period of time and those early upgrades onto the 10 platform were really difficult. They were hard on us, but they were horrible for our customers. We kept slipping dates and it was difficult.
So I’ve tried to do a lot of different things—tried to align the businesses and the functions under them to better serve the needs of our customers. I think the alignments that we made at the end of our last fiscal year have turned out to be beneficial. One of the biggest changes there was we got our sales organizations and customer success, which is the name of we use for our account management groups, aligned with our businesses, and all of our customers now have a single person that we call an account executive that they can go to who won’t necessarily have all the answers, but at least it’s a single point that can triage what the customer needs. It’s better than in the past when we had each division standing on its own and a centralized sales group. It was really hard for the customers to navigate where to go for help.
So we’ve got better alignment of businesses. We think we have fixed and are continuing to improve the account management alignment, and then this year has been about how we can address some of those large, strategic context questions what around do we do with revenue cycle, what do we do with clinical, and should we invest more in Paragon. So just so everybody knows, this wasn’t just me sitting in my office. We actually hired a nationally recognized consulting firm who came for a four-month engagement with us and we gave them free reign to look at Paragon system and compare it to what’s on the market, just to make sure that we had an arm’s length view of its capability and where we thought we could take it. And that’s obviously the result of that, because this was the decision we made.
So I think anybody coming into these different assignments learns everyday. I would tell you I had a pretty good view that there was a need for integration and that integration was going to tramp feature function. I think the dilemma was how do we work our way through the situation we were in with two fully functional systems on different platforms, and how do we begin to converge that work so that we get the best product and capabilities possible into the customer base.
Guerra: Is there a moment you recall—maybe a customer’s story or maybe the result of this consulting engagement—at which it coalesced for you and you said, ‘We have to do something major here.’
Souerwine: I think I reached a point sometime in the last year where I realized that short of an entire rewrite, which I don’t think we have the time for, meaning we couldn’t get to the market quick enough doing a complete rewrite, but short of an entire rewrite, we were not going to get the Horizon customers into our position where they had a truly integrated database. And then secondly, even if we could get them to that point because of the architecture of the Oracle database and some of the complexity of those systems that have been built, the total cost of ownership going forward was going to probably exceed what the market’s appetite was to be able to pay. I think that’s a question of how are these companies, including us, going to make money in an environment where customers want to pay less—this is going to be an issue for the entire industry. We’re trying to stay ahead of it and put people on a product that’s fully capable and cheaper for them to maintain. It’s also much less expensive for us to develop on an integrated Microsoft platform.
Across our technology businesses, by the way, there’s probably 70% of our capability today that’s Microsoft-based. It’s going to increase as our percentage. So we’re also just trying to conform all of our capabilities across one architecture, which will make integration between systems a lot easier going forward as well. There are a lot of people talking about the need for singular repositories—whether or not that ever happens in a true sense, there certainly has got to be a need to draw our data together for an individual patient. And the more similar your databases and architectures are, the easier it’s going to be to do that across settings of care.
Guerra: How deep does your technical knowledge go? Can you talk the talk with a CIO or do you know enough to get by, so to speak?
Souerwine: I doubt I’d get too deep with the CIO. I have a Master’s Degree in IT that’s very old. I started as a programmer but I’ve essentially been a GM of companies since 1985. I’ve been mostly on the medical device side, so I came out of Bausch & Lomb, which is optical products, and then joined McKesson in 2002, which is more pure software. But I’ve been mostly in medical devices selling to various types of physicians and hospitals for most of my career, but more on the general management and business side than on the technical side.
Guerra: So once you made the decision of what you want to do and the path you want to take, you have to sell that internally to your managers and bosses at McKesson. Can you tell me anything about that process and what you had to do? I’m sure everybody looked at it and said, ‘Wow, I don’t know. It’s kind of big deal, Dave.’
Souerwine: The way I approached it was we developed a series of strategic questions that we knew needed to be answered, and then set up a large number of independent work streams, each of which had a governance structure around it so that it was being managed well and getting full input to it. We then took all the data that came out of those work streams and coalesced it into options, and that did get pretty well discussed up and down the corporation, including a review with our board of directors. So it was well known what it was we were going to do.
We actually came to the point, as you can imagine since we implemented this, but we believe this is the best option for the market. We had our customers in a really difficult position with the Horizon product portfolio and we’re going to continue to support the product fully, so we don’t want people to feel like they’re forced to switch. That said, we believe that this option ultimately will be what they’re going to need as part of their overall technology solution. We can offer analytics population management, care coordination, payer services—there is no other HIS company that can offer those solutions. And because we’re trying to now trying to build all the stuff on Microsoft technology, we also believe we’re going to get them to better endpoints and more integration quickly.
Guerra: Are there any leadership principles that you hold that can be seen in what you’ve done over the last year-and-a-half? I like to talk to people about leadership—obviously a huge amount of leadership skills are necessary to execute what you’ve done even to this point and then to see it through. Any underlying principles you can talk about?
Souerwine: The one I talk about at employee meetings all the time is the orientation, which I try to get everybody to think about: customer first, McKesson second, their team third, and themselves last. And so if they approach problems like that and have a sense of urgency about what they’re doing, I think you can get to these correct endpoints. So I’ve tried to bring that to the organization, and I would tell you another large thing that we’ve been trying to do over the past couple of years is to get much less siloed and increase the number of conversations across businesses so that we’re able to make modified decisions which put us into better position to both execute and then scale.
So in the extreme, you can improve process across business units that takes money out of the operation. It gives you more to invest back into the customer, really meaning product development and how you’re servicing them. So we’ve been trying to make a lot of precious changes to the way we’re doing implementations, upgrades, and support. We’re starting to bring that stuff together across all of our business units, which hopefully the customers will see the benefit of.
Unfortunately, customer perception usually lags changes by a year or 18 months. It just takes a long time, but we try to stay close to the companies in this field that follow it very closely, like Gartner and KLAS. We have regular dialogues with them. We actually did a briefing with them about these changes right before they were announced, and I would tell you the general reaction and reception is that it’s the right thing to be doing and of course now it’s up to us to execute it, but we believe we’re headed down the right path.
Guerra: That’s great, Dave. Is there anything else at this point that you want to add?
Souerwine: The only thing I guess I’d reinforce is that we’re first of all, trying to make sure that our Horizon customers have a choice. I know a lot of them feel like all of a sudden their world’s changed. I would tell anybody that called me that what they need to do in the next month is no different than the view they had three months ago and six months ago. There’s not a rug that’s being pulled out from under them. In general, they’re heavily engaged in trying to get the ICD 10 and the Meaningful Use requirements, and they should probably just continue down that path. With that said, we’ve given them the choice of doing that or migrating to a system that we’re convinced has lower total cost of ownership, really good integration, and is very capable in terms of feature function today.
And secondly, the broader context of how McKesson is best positioned to help organizations succeed now and in the long term, hence the term Better Health 2020, where we think we got a really good view as to what’s going to be needed to health reform and accountable care and be able to deliver that to customers from one source which will ultimately benefit their financial and clinical endpoint success.
Guerra: Dave, this was a wonderful interview. I want to thank you very much for your candor and your honesty, and I think it all certainly serve you well in your communication with your customers. So I want to thank you very much for your time today.
Souerwine: Okay, thanks Anthony.
Guerra: Have a great day.