HP Discover 2012 Case Study: McKesson Redirects IT to Become a Services Provider To Offer Business Solutions
HP Discover 2012 Case Study: McKesson Redirects IT toBecome a Services Provider To Offer Business SolutionsTranscript of a BrieﬁngDirect podcast from HP Discover 2012 on how health-care giantMcKesson has revamped its IT approach and instituted a cultural shift toward services.Listen to the podcast. Find it on iTunes/iPod. Sponsor: HPDana Gardner: Hello, and welcome to the next edition of the HP Discover Performancepodcast series. Im Dana Gardner, Principal Analyst at Interarbor Solutions, your co-host and moderator for this ongoing discussing of IT innovation and how its making an impact on people’s life. Once again, were focusing on how IT leaders are improving performance of their services to deliver better experiences and payoffs for businesses and end users alike. This time, we’re coming to you directly from the HP Discover 2012 Conference in Las Vegas. [Disclosure: HP is a sponsor of BrieﬁngsDirect podcasts.]We’re here the week of June 4 to explore some award-winning case studies from leadingenterprises. We’ll see how a series of innovative solutions and an IT transformation approach tobetter support business goals and performance is beneﬁting these companies, their internal users,and their global customers.Our next innovation case study interview highlights how pharmaceuticals distributor andhealthcare information technology services provider McKesson has transformed the very notionof IT. We will see how a shift in culture and an emphasis on being a services provider hasallowed McKesson to not only deliver better results, but elevate the role of IT into the strategicfabric of the company.To learn more about how McKesson has recast the role of IT and remade its impact in a positiveway, were joined by Andy Smith, Vice President of Applications Hosting Services at McKesson.Welcome, Andy.Andy Smith: Thank you, Dana. I really appreciate you inviting me and I am glad to be able toshare my experiences with others.Gardner: Let me start with this notion of IT transformation. We hear a lot about that. I wonder ifyou have any major drivers that you identiﬁed, as you were leading up to this, that allowed youto convince others that this was worth doing.
Smith: What we did, and this started several years ago, was to focus on what our competitionwas doing, not the competition to McKesson but the competition to IT. In other words, who was the outsourcer or who were the other data-center providers. From that, we were able to focus on our cost, quality, and availability and come up with a set of metrics that covered it all, so that we could know the areas we needed to transform and the areas where we were okay. Gardner: So, in a sense, you had to redeﬁne yourself as a services provider, because thats who you saw as your competition? Smith: Exactly, and thats who our customers are talking to -- our competition.When they came to us for a service, they had already talked to third-party providers. And so werealized very quickly that our competition was the outside world, so we had to model ourselvesto be more like them and less like an internal IT department.Gardner: That, of course, cuts across not only technology, but culture and the whole idea ofbeing accountable and to whom. So lets start at that higher level. How did you begin to deﬁnewhat the new culture for IT should be?Balanced scorecardSmith: We started out with a balanced scorecard. It really came down to whether the employeesand the customers were satisﬁed. Did we do what we said – were we accountable -- and were the ﬁnancials right? So when we started setting up that balance scorecard, that on its own started to change the culture. Suddenly, customer satisfaction mattered, and suddenly, system availability mattered, because the customer cared, and we had to keep the employees trained, so that they were satisﬁed. Over time, that really changed the culture, because were looking at all four parts of the scorecard to make sure were moving forward.Gardner: I suppose its essential, when youre a services provider rather than a technologyproducts producer and deployer, that you understand what are the right metrics to measure. So isit a different set of metrics from IT to a service provider role of IT?Smith: It really is, because when we were just an internal IT department, we spent more timesaying, "The customer gave us an order, we hit the checkbox and ﬁnished that order, were done."We were always asking, "Did we do it, and did we do it on time?"Thats not really what the customer was looking for. The customer was looking for. "Did youdeliver what I needed, which may be different than what I asked for. Did you deliver it at a good
price? Did you deliver it at a good quality." So it did switch from being measuring the ins and theouts of an order taker, to whether we are delivering the solution at the right price.Gardner: As weve seen in a number of companies, when they’ve gone to more measurementusing metrics, key performance indicators (KPIs), and working towards service-level agreements(SLAs), sometimes that can become daunting. Sometimes, there is too much, and you lose trackof your goal. Is there a way that you work towards a triage or a management approach for thosemetrics, those KPIs, that allowed you to stay focused on these customer issues?Smith: What we really focused in on were the real drivers. A lot of the measures are moretrailing indicators. Even money tended to be a trailing indicator.So we went into whats really driving our quality, whats really driving our cost. We got down tofour or ﬁve that we are the ones that mattered. "Is the system up and running. Are changescausing outages. Are data protection services reliable. Are our events being handled quickly andalmost like a ﬁrst call resolution. Are they being resolved by the ﬁrst person that gets the event?"The focus was prevent the outage and shorten up the mean time to restore, because in the end, allof that will drop the cost. It worked, but it was focusing on a handful, rather than dozens.Gardner: Is it fair to say that doing this well is, in fact, also a cost-saver? Is there a built-inmechanism for efﬁciency, when you start focusing on that service provider role, that brokeringrole?Pulling down costSmith: It truly did bring down our cost within McKesson. Ill probably be off by several million,but each year we pull down our cost several million dollars. So every year my budget getssmaller, but every year my quality gets higher, my employee satisfaction gets higher, and mycustomer satisfaction gets higher.It can really get both. You dont have to sacriﬁce quality to reduce cost. The trick was saying thatI no longer needed a person to do this commodity factory work. I could use a machine to do that,which freed up the worker from being a reactive commodity person to being a proactive value-add person. It allowed the employee to be more valuable, because they werent doing the busywork anymore. So it really did work.Gardner: For those in our audience who might not be familiar with McKesson, tell us a little bitmore about the company. Speciﬁcally, tell us about the scale of your IT organization to put thosemillions of dollars into some perspective in the total equation?Smith: McKesson IT is roughly 1,000 employees. The company is roughly 45,000 employees.So percentage-wise, were not that big. My personal budget to run the IT infrastructure is about a$100 million a year.
So pulling out a few million dollars a year may be only a few percent, but its still a prettysigniﬁcant endeavor. Weve managed to pull that cost out, both through the typical things likemaintenance contracts and improved equipment, but also by not having to grow the full-timeemployee (FTE) base. I havent had to let any FTEs go, but what weve discovered was that, aswe did these things, I needed fewer employees.As employees resigned, I didnt have to replace them. My staff base has been shrinking, but Ihavent had anybody lose a job. So thats been also very reassuring for the employees, becausethey kept waiting for that big shoe to drop, waiting for us to say, "Were going to outsource you,"but weve never had to do it.Gardner: I guess when you compete against the outsourcers better, then you are going to retainthose jobs and keep that skill set going. There is a cliché that youre able to take people fromﬁreﬁghting and put them into innovation. Is there a truth to that in what youve done?Smith: That really is truth. It took time, and we’re not done, but to get people to stop thinkingabout the technology and start thinking about the business solution is a slow transition, becauseits a real mind-shift. In a lot of ways, these employees see the reactive work as the bread andbutter work that puts the paycheck on the table. That lets them be a ﬁreﬁghter and a hero, and ifyou take that away, the motivators are different.It takes time to get people comfortable with the fact that your brain is worth a lot more doingvalue-add work than it was just doing the ﬁreﬁghting. Were still going through that cultural shift.In some ways, its easier for the older employees, because if you go back a few decades, IT wasthat. It was programmer analyst, system analyst, and business analyst. For me, "analyst"disappeared from all my job titles.In the last couple of decades, for some reason, we erased analyst, and now youre just aprogrammer or an operator. In my mind, were bringing the analyst back, which for the olderemployees, is easy, because they used to do it. For the younger employees, weve got to teachthem how to be consultants. Weve got to teach them how to be analyst. In some cases, its atotally different, scary place to go, because you actually have to come out of the back ofﬁce andtalk to somebody, and theyre not used to that.Cultural shiftGardner: Maybe there are methodologies that work here that you could discuss, services-oriented architecture (SOA) comes to mind and also ITIL. Have you been using ITIL approachesand SOA to help make those transitions? Is there a technology track is a cultural shift?Smith: Yes, we went down the ITIL road, because we were manual before. Everybody was doingit with tribal knowledge. The way I did it today might be different than the way Id do ittomorrow, because its all manual, and its all in peoples heads.
We did go into ITIL version 3 and push it very hard to give that consistency, because theconsistency really mattered. Then, we could really measure the quality. We could be ensured thatno matter who did it or when it was done, it was done the same way, and that reliability mattereda lot.We also got away from custom technology, and we got to where everything is going to be acertain type of machine. Its going to look the same. All the tools are going to be fully integratedand no longer be best-of-breed point solutions. Driving that standardization made a bigdifference. You don’t have to remember that machine on the left you reboot it this way, and thatmachine on the right you reboot it a different way. You don’t have to remember anymore,because theyre all the same.We made the equipment and tools standard and more of a commodity so that the people didn’thave to be that anymore. The people could be thought leaders. All those things really did work todrive out the cost and increase the quality, but its a lot of different pieces. You cant do it withjust one golden arrow. You have to hit it from every angle.We had to change the technology, the people, and the processes. We had to increase thetransparency to say we’re doing a good job or we’re doing a bad job. It was just, "Exposeeverything you’re doing."Thats scary at ﬁrst, but in the end, we found out we really are competing with the competitorsand we can continue to do it, and do it better. We understand healthcare, we understandMcKesson, and we’re an internal group, so we don’t have a proﬁt margin. All those thingscombined can make us a better IT solution than a third party could be.Gardner: And as you entered that standardization process, did that services orientation become avalue point for you? Did private cloud or an even a hybrid model start to become interesting?How far have you progressed in that “cloud direction”?Smith: The services orientation helped a lot. We’re on the IT side, so we started out with ourservice as Unix, our service as data, our service as Windows. Getting us focused on that helpedus remember what the service really was. We’re now stepping back even one step farther andsaying that that no longer matters.What really matters is the business solution you’re trying to solve. We’re stepping even fartherback, saying that the service is order to cash, or the service is payroll, or the service is whatever.We’re stepping back farther, so we can look at the service from the standpoint of the customer.What does the customer want? The customer doesn’t want Unix. The customer wants order tocash. The customer doesn’t want Windows. The customer wants payroll.
Thinking about cloudStepping back has now allowed us to start thinking about that cloud. All the equipmentunderneath is commoditized, and so I can now sit back and say that the customer wants thisbusiness solution and ask who is the best person to give me the components underneath?Some of them, for security reasons, we’re going to do on our internal cloud. Some of them,because of no security issues, we’re going to have a broker with an external provider, becausethey may be better, cheaper, or faster, and they may have that ability to burst up and burst down,if we’re doing R&D kind of work.So its brought us back to thinking like a business person. What does the business need and whois the best provider? It might not be me, but we’ll make that decision and broker it out. This yearwere probably going to pull off our internal cloud and our external cloud and really have ahybrid solution, which we’ve been talking about for a couple of years. I think it will reallyhappen this year.Gardner: We’re here at HP Discover and HP COO Bill Veghte was on the stage a little whileago. One of the things that he said that caught my attention was that we’re producing the appservices and the Web services that are the expression of business processes.I thought that was a good way to put it, because in the past, business processes had to conform tothe applications. Now, we’re able to take the applications in the hybrid delivery model andextend them to form what the business processes demand. Is that also sort of a shift thats comealong with your going more towards a service brokering capability?Smith: It is a shift thats going on, and its interesting, because I don’t think part of this ismatured. If you’re dealing with the big package products whether its the Oracles or the SAPs,those people are dictating almost a custom solution in order to keep themselves alive. But thatsprobably 20 percent of my business, when I think about servers and applications.The other 80 percent is really unique business services that our customers need to improvehealthcare, to reduce the cost in healthcare, and those are really unique to McKesson. What I amﬁnding, when I look at those types of business services, they are the real bread-and-butter thatmakes our world different.Having the hybrid capability does let me put together the pieces to optimize what the businessneed is, but it is the 80-20. For the 80 percent I can do it. For the other 20 percent, those vendorsare probably going to lock me into a custom solution, but thats okay.Gardner: Well great. I am afraid we’re about out of time. We’ve been discussing withMcKesson, how they’ve recast the role and impact of IT. I want to thank our guest, Andy Smith,Vice President of Applications Hosting Services at McKesson. Thanks so much, Andy.Smith: Thank you very much, Dana.
Gardner: And I also want to thank our audience for joining us for this special HP DiscoverPerformance podcast coming to you from the HP Discover 2012 Conference in Las Vegas.Im Dana Gardner, Principal Analyst at Interarbor Solutions, your host for this ongoing series ofHP sponsored discussions. Thanks again for listening, and come back next time.Listen to the podcast. Find it on iTunes/iPod. Sponsor: HPTranscript of a BrieﬁngDirect podcast from HP Discover 2012 on how health-care giantMcKesson has revamped its IT approach and instituted a cultural shift toward services.Copyright Interarbor Solutions, LLC, 2005-2012. All rights reserved.You may also be interested in: • Investing Well in IT With Emphasis on KPIs Separates Business Leaders from Business Laggards, Survey Results Show • Expert Chat with HP on How Better Understanding Security Makes it an Enabler, Rather than Inhibitor, of Cloud Adoption • Expert Chat with HP on How IT Can Enable Cloud While Maintaining Control and Governance • Expert Chat on How HP Ecosystem Provides Holistic Support for VMware Virtualized IT Environments