Slide1: Delivering the Difference Owens & Minor Turning Lead Into Gold: Achieving IT Excellence while Outsourcing David R. Guzman Senior Vice President & Chief Information Officer December 9, 2003


Agenda: Agenda Owens & Minor’s Business Business Strategy Award Winning Technology Outsourcing Best Practices and Lessons Learned Questions & Answers


Slide3: 122 Years of Healthcare Service


Slide4: Healthcare Distribution Leader Fortune 500 Company Founded in Richmond $4+ billion national distributor of medical products 45 distribution centers serve 6,000 customers 200,000 product lines 2,100 manufacturing partners Recognized for Trust, Integrity, Customer Service and Award Winning Technology Solutions


Slide5: The Company at a Glance Our Customers Are Top-Tier Johns Hopkins Baylor Health Care System Sutter Health UCLA Medical Center Massachusetts General U. of Michigan Medical Ctr. Brigham & Women’s Stanford University U. of Pennsylvania (HUP) Memorial Hermann, TX U. of Maryland Yale New Haven Jefferson Health System, PA INOVA, Fairfax VA Fourteen of the nation’s top twenty hospitals in the annual “Best Hospitals Honor Roll,” published by US News & World Report, are Owens & Minor customers.


Slide6: The Company at a Glance Our Manufacturers Are Best in Class Johnson & Johnson Cardinal Becton Dickinson Abbott Labs 3M C R Bard Kimberly Clark Tyco


Our Technology Is at the Core of Our Business Model: Our Technology Is at the Core of Our Business Model Wisdom - Internet Based Data Mining OM Direct – Customer Service Portal CostTrack - Activity Based Management SurgiTrack - Integrated Procedure Management PANDAC - Asset Management State of the Art Forecasting & Replenishment Systems State of the Art Distribution Systems, Velocity Slotting, etc. Wireless Point Of Use Systems Clinically focused supply chain solutions The Company at a Glance


Our Award-Winning Technology: Our Award-Winning Technology The Data Warehouse Institute Data Best Practice Award Winner Leadership Award in Data Warehousing Informatica “Insight” Award Business Objects: Excellence Award Winner Award Winner InformationWeek #1 of top 500 technology innovators in 2001 & 2003; #11 in 2002; #15 in 2000; #61 1999; #146 in 1998; #1 in Healthcare last 5 years ComputerWorld Don Stoller, David Guzman named Top 100 Premier IT Leaders David Guzman named top ten “Best in Class” among Top 100 Premier IT Leaders Goldman Sachs #1 in Customer Service three years in a row Harvard Business School, etc. 2 Harvard Business school case studies, annual class on O&M White paper by every major consulting firm Ph.D. by Wharton “Blueprint for an efficient healthcare supply chain” Business Week WebSmart 50 in 2003


Focus on the customer: Focus on the customer


Wisdom: Wisdom Owens & Minor’s award-winning Web-based decision support tool helps customers track and analyze timely information about their supply chain purchases. View reports by organization or system-wide for smart business decisions: Product Standardization; Contract Compliance; Consolidated Information. Wisdom II, Wisdom III and “pocket wisdom” Migration to Teradata More than one third of Owens and Minor’s business flows through Wisdom today…and rapidly growing – Wisdom II, III, Mobile Wisdom and beyond…


CostTrack: CostTrack Owens & Minor’s industry-leading activity-based management process. CostTrack separates your product & process costs to reveal the COST-DRIVERS behind supply chain activities. The information allows you to STREAMLINE operations and REDUCE PROCESS COSTS. Existing Redundancies Flow highlights opportunities. CostTrack recognized in 2 Harvard Business School Case Studies and other independent sources as “The Blueprint for an Efficient Healthcare Supply Chain”; currently 32% of our business on CostTrack


OM Direct: OM Direct e-commerce tool that provides customers a reliable way to place orders, track orders and find product information via the Internet. Customized product formularies support your standardization and contract compliance initiatives. Select from 200,000 med/surg supplies at contract pricing versus catalog pricing. OM Direct accounts for 92% of Owens & Minor’s sales of $4B. We are converting EDI to XML on Both Customer & Supplier Side at a rapid rate.


PANDAC® Asset Management: PANDAC® Asset Management Owens & Minor’s wound closure asset management program for suture and endomechanical products. We evaluate your current inventory investment at no cost to you. Together we implement PANDAC® for immediate savings (guaranteed 5%). You receive ongoing reports to help you gain even greater benefit from PANDAC® PANDAC® has accounted for millions of dollars in guaranteed savings to our customers – expanding to other assets


SurgiTrack: SurgiTrack Owens & Minor’s integrated procedural delivery program that delivers all of your procedural components, customized by surgeon preference, to the point-of-use. All you do is place a single order. Better inventory control. Reduced labor costs. Owens & Minor is working on direct interfaces to clinical systems to revolutionize integration to hospitals


Slide15: Nursing Lab, Rad Other Surgery Patient Supply Record Point of Care Point of Admin Point of Dispense Bill of Materials Patient Schedules & Forecasts Requisition Purchases/ Receipts/ Invoices Clinically Driven Supply Forecasts Clinical Utilization & Outcomes Product Info, Guidelines & Content Demand & Availability Integrated Supply Chain Benefits: Reduced inventory across chain Utilization linked to outcomes Demand & utilization visibility across chain Right price w/o discrepancies Efficient labor & logistics across chain Better patient outcomes & quality Right Patient & Outcome Right Product & Quantity Right Place & Time Right Source & Price Suppliers ERP


Linking Clinical Data to Wisdom: Linking Clinical Data to Wisdom Cerner’s Clinical Supply Data Repository Supply Outcomes TM decision support database Links supply usage to patient/clinical data Improved information Identify cost of care – at episode level Link supply usage with outcomes data (revisions, length of stay, infection rates, etc) Identify variation by clinician and procedure Client’s Value Proposition Support product standardization Improve utilization Improve patient safety and outcomes Reduce costs


Surgery Forecasting: Surgery Forecasting Link Cerner’s SurgiNet TM Surgery Information System to O&M SurgiTrack Synchronize Preference Card Information Provide future demand determined by a client’s scheduling process Provide actual consumption activity Feed into O&M Manugistics to use in forecasting algorithms Link to ERP system for purchasing/receiving Client’s Value Proposition Reduced on-hand inventory levels Lower cost logistics and case preparation Improved fill rates and service levels


Slide18: Offsite Warehouse Transportation Receiving Storeroom Purchasing/ Procurement Accounts Payable CFO’s Office Specialty Areas (Cath Lab; Radiology) Par Areas (Nursing Floors) Operating Room Touchpoints in the Hospital – Owens & Minor Today


Slide19: OM SolutionsSM Core Business 3PL Services


Slide20: $12B Supplies from Distributors $24B Supplies Incl. Direct Sales $85B All Medical Products $170B Total Delivered Materials Cost Expanding Opportunity Source: Company estimates


What Exactly is Outsourcing?: What Exactly is Outsourcing? Transfer ownership of a business process to a supplier The buyer exchanges the ability to dictate how the process will be performed for the ability to define the desired results and hold the supplier accountable for them The concept of process ownership is the single most misunderstood concept in outsourcing. It is a mistake for the buyer to outsource a process and still attempt to dictate the process Although micro-management is not advisable, a totally free hand is not the answer either. A member of the senior management team has to be responsible for the success of the outsourcing relationship.


Leverage – The crucial component: Leverage – The crucial component Without leverage, outsourcing makes no sense Leverage provides the fulcrum for value in all outsourcing relationships. The key to success is to understand the source of leverage in the relationship Economy of scale is a powerful source of value Expertise is a powerful source of value Access is a powerful source of value (quality people, e.g.) Buyers must have a clear idea of how the supplier will generate leverage – avoid the “Cheshire Cat” syndrome A good “pre-nuptial” agreement needs to be constructed at the outset, while the parties still love each other


Pre-nuptial agreement: Pre-nuptial agreement Clearly define the scope of the agreement Agree on an appropriate price – driven by market Market Competitive Clause Relatively short term contract/long term relationship Align motivation and objectives Provide a suitable means for measuring performance Do not handcuff supplier – turn over process control Retain control over architecture/business alignment Provide for flexibility as requirements change Change Management Process/Strategic Planning Process Make sure business issues are addressed Make sure business behavior is addressed – do not abdicate Ensure cultural fit


Initial Process Investments: Initial Process Investments Infrastructure, Processes, People Quality, Testing, Redundancy, Disaster Recovery, Security, Flexibility, Scalability, Performance, Availability, etc. – improvements should be expected but may require initial investment – Potentially, a huge source of contention 1st year should be cost neutral, subsequent years should realize cost savings along with quality improvement Metrics: IT cost as a percent of revenue Productivity: revenue per teammate Productivity: % of resources devoted to operations vs. strategic Performance, Availability, Scalability, etc. Make sure metrics align with available market data


Align Motivations & Objectives: Align Motivations & Objectives High labor margins motivate labor intensive solutions, cost efficient margins motivate cost efficient solutions No organization can be allowed to operate without ongoing guidance and performance review…trust has nothing to do with it If it is difficult to measure, it will be difficult to manage, applications development and maintenance is a key example. Different metrics are needed for different processes. You will get what you measure.


Pitfalls to avoid: Pitfalls to avoid Price is not a function of cost, price is a function of competition. The market sets the price. Open-book, “cost-plus” pricing vs. fixed pricing vs. hybrid pricing Risk vs. Cost vs. Margin Bundling of unrelated costs A bundled pricing structure always favors the supplier Benchmarking critical


Insist on Flexibility/Benchmarking: Insist on Flexibility/Benchmarking O&M has the right to in-source or use third parties within agreed upon limits O&M may engage an independent third party to conduct a market comparison of price and service levels Benchmarking language needed to specify remedies that result from market comparisons


Off-Shore Alternatives: Off-Shore Alternatives Quality is superior, cost is clearly orders of magnitude better, speed is clearly superior – makes sense to include an off-shore component – irresponsible, not to consider However, Mix important – targeted talent must be under a single process umbrella – single accountability Critical to have a part of the off-shore team shoulder-to-shoulder with in-shore team I would consider keeping every stage of systems development life cycle except for the actual construction and maintenance phases I would keep business requirements, data modeling, architecture and strategic planning in-house…


Background: Background 2 providers of IT Outsourcing: IBM & Perot 1998 Perot contract designed for O&M situation 5 years ago – IT basics are no longer an issue – and we have achieved some award winning IT solutions in the process However, our business is evolving and IT must evolve to meet our business needs Systems are inflexible and difficult to change, most of our IT budget spent on Maintenance and Operations Existing Contract requires structural change and pricing needs to align with market The key goal is to fund fundamental changes in IT architecture and systems, while dramatically reducing costs of running IT


Process: Process Year plus effort – Competitive Process IBM & Perot – multiple scenarios – Our goals could be achieved with 2 partners or with a single partner Meta & Gartner provided Competitive Market Data Process driven by internal financial model O&M Senior Management Team visits to IBM & Perot Recommendation: One partner (Perot) Professional Negotiation By Best in Class Law Firm – Mayer Brown Rowe and Maw World Class Deal Total Team Effort – Finance, Legal, IT


NEGOTIATION : NEGOTIATION Draft Agreement: From Owens & Minor To Perot Face-To-Face Negotiations Began In May, 2002 Overarching Principles and Major Aspects of Desired Architecture Discussed by Both Sides At Outset of Negotiations Lawyers & Business People present for both sides, at all times Negotiations At All Times Friendly and Professional, With Both Sides Discussing Desires and Concerns and Reaching Compromises, As Appropriate


Goals & Objectives: Provide O&M with the maximum leverage of people and technology, by developing a standard technology infrastructure to reduce our operating costs and free up resources to improve our business and modernize our systems. Develop and execute an innovative strategic plan for IT to upgrade the technology, and provide the capacity, speed and reliability to support business growth and expansion. Align pricing with market, Make IT more efficient, fund fundamental change, while significantly reducing costs Goals & Objectives


How did we reduce costs and add value?: Converts from “cost-plus” to “fixed-price” for all base services and a “fixed-rate” model for discretionary services. With greater O&M Flexibility. Perot has significantly reduced margin - Reduces O&M’s overall IT costs – short and long term. Owens & Minor commits to best practices Two vendor environment had costs associated with duplications Perot takes over purchasing and includes 3 year refresh cycle in contract Perot takes on additional accountability for managing and controlling O&M’s IT costs. “Skin in the game” Financial incentives for reducing costs and shifting resources from maintenance/operations to new development, a key goal for Owens & Minor How did we reduce costs and add value?


Discretionary Services: Discretionary Services Provided for a fixed rate Discretionary pool increases each year without an increase in the fixed price O&M may add or remove discretionary FTEs over the baseline with appropriate notice to Perot O&M pays a fixed rate for each additional resource.


Other Key Factors: Other Key Factors Performance—Increases speed and capacity to support business growth. Example: disk capacity increases to 70TB – currently 9TB – new mainframe with 25% more power. Much faster Unix servers. Perot takes on the ownership of technology assets for new hardware and software, as well as the replacement of existing assets as they reach the end of their useful life (or otherwise need to be replaced). With a negotiated refresh cycle of 3 yrs. Reduces O&M’s capital outlays for technology infrastructure assets. Technology asset costs are included in Perot System’s fixed fee. Leverages Perot Systems’ purchasing power and substantial vendor discounts to O&M’s benefit.


Service Levels: Service Levels Each month, vendor fees are put “at risk” for failure to meet service levels. There are two types of Service Levels – Minimum and Expected If Perot fails to meet a minimum service level, O&M receives a credit Expected Service levels are “stretch” goals. The first two misses are of a particular service level are not counter, all others are. If an expected service level is missed, Perot has the chance to earnback the credit by: Maintaining a 12-month average greater than the service level or Not missing the service level for the following six months


Other Protections: Other Protections Annual satisfaction surveys will be used to solicit teammate input and make changes Non-Compete: No Perot employee working for O&M can be moved to a competitor after they leave O&M Key Perot Personnel are committed for a period of time Perot cannot share any O&M proprietary information without O&M consent Guaranteed liability coverage


Our Partners Make us Better: Our Partners Make us Better Perot Systems – Cultural Fit, Community Service, Flexibility, Service Orientation, Superior Performance Owens & Minor retained services CIO Chief Architect Data Modeling Business Process Leaders Customer Service Change Management Strategic Planning Results: Awards, IT costs = 1% of Revenue, Mgt/Field customer satisfaction, quality beyond our means


Slide39: “In the past, the more information you controlled, the more power you had. In the Net Future, the more information and power you share, the more you have.” — Chuck Martin, “Net Future”, McGraw Hill, 1999 A Final Thought