How Enterprises Like McKesson Digitize Procurement and Automate Spend Management to Slash Waste

Transcript of a discussion on how leading enterprises are digitizing procurement and automating spend management to reduce inefficiencies, cut manual tasks, and streamline the entire source-to-pay process.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: SAP Ariba.

Dana Gardner: Hi, this is Dana Gardner, Principal Analyst at Interarbor Solutions, and you’re listening to BriefingsDirect. Our next intelligent enterprise innovations discussion explores new ways that leading enterprises like McKesson Corp. are digitizing procurement and automating spend management.

Gardner

We'll now examine how new intelligence technologies and automation methods help global companies reduce inefficiencies, cut manual tasks, and streamline the entire source-to-pay process.

To learn more about the role and impact of automation in business-to-business (B2B) finance, I’m pleased welcome Michael Tokarz, Senior Director of Source to Pay Processes and Systems at McKesson, based in Alpharetta, Georgia.

Tokarz: Thank you.

Gardner: There’s never been a better time to bring efficiency and intelligence to end-to-end, source-to-pay processes. What is it about the latest technologies and processes that provides a step-change improvement?

Tokarz: Our internal customers are asking us to move faster and engage deeper in our supplier conversations. By procuring intelligently, we are able to shift where resources are allocated so that we can better support our internal costumers.

Gardner: Is there a sense of urgency here? If you don't do this, and others do, is there a competitive disadvantage?

Tokarz: There's a strategic advantage to first-movers. It allows you to set the standard within an industry and provide greater feedback and value to your internal customers.

Gardner: There are some major trends driving this. As far as new automation and the use of artificial intelligence (AI), why are they so important?

The AI advantage 

Tokarz

Tokarz: AI is important for a couple of reasons. Number one, we want to process transactions as cost-effectively as we possibly can. Leveraging a “bot” to do that, versus a human, is strategically advantageous to us. It allows us to write protocols that process automatically without any human touch, which, in turn is extremely valuable to the organization.

AI also allows workers to change their value-quotient within the organization. You can go from someone doing manual processes to working at a much higher level for the organization. They now work on things that are change-driven and that bring much more value, which is really important to the organization.

Gardner: What do you mean by bots? Is that the same as robotic process automation (RPA), or they overlapping? What’s the relationship?

Tokarz: I consider them the same technology, RPA and bots. It’s essentially a computer algorithm that’s written to help process transactions that meet a certain set of circumstances.

Gardner: E-sourcing technology is also a big trend and an enabler these days. Why is it important to you, particularly across your supplier base?

Tokarz: E-sourcing helps us drive conversations internally in the organization. It forces the businesses to pause. Everyone's always in a hurry, and when they're in a hurry they want to get something published for the organization and out on the street. Having the e-sourcing tool forces people to think about what they really need from the marketplace and to structure it in a format so that they can actually go faster.

E-Sourcing, while you have to do a little bit of work on the front end, you enable the speed of the transaction on the back end because you have everything aligned from all of the suppliers in one central place, so that you can easily compare and make solid business decisions.

Gardner: Another important thing for large organizations like McKesson is the ability to extend and scale globally. Rather than region-by-region there is standardization. Why is that important?

Tokarz: First and foremost, getting to one technology across the board allows us to have a global standard. And what does a global standard mean? It doesn't mean that we're going to do the same things the same way in every country. But it gives us a common platform to build our processes on.

It gives us a way to unify our organization so that we can have more informed conversations within the organization. It becomes really important when you begin managing global relationships with large suppliers.

Gardner: Tell us about McKesson and your role within vendor operations and management.

Tokarz: McKesson is a global provider of healthcare solutions -- from pharmaceuticals to medical supplies to services. We’re mainly in the United States, Canada, and Europe.

I’m responsible for indirect sourcing here in the United States, but I also oversee the global implementations of solutions in Ireland, Europe, and Canada in the near future. Currently in the United States, we process about $1.6 billion in direct transactions. That’s more than 60,000 transactions on our SAP Ariba system. We also leverage other vendor management solutions to help us process our services transactions.

Gardner: A lot of people like you are interested in becoming touchless – of leveraging automation, streamlining processes, and using data to apply analytics and create virtuous adoption cycles. How might others benefit from your example of using bots and why that works well for you?

Bots increase business 

Tokarz: The first thing we did was leverage SAP Ariba Guided Buying. We also then reformatted our internal website to put Guided Buying forefront for all of our end users. We actually tag it for novice users because Guided Buying works similar to a tablet interface. It gives you smart icons that you can tap to begin and make decisions for your organization. It now drives purchasing behavior.

The next thing we did is push as much buying through catalogs and indirect spend that we possibly could. We've implemented enough catalogs in the United States that we now have 80 percent of our transactions fully automated through catalogs. It provides people really nice visual cues and point-and-click accessibility. Some of my end users tell me they can find what they need within three minutes, and then they can go about their day, which is really powerful. Instead of focusing on buying or purchasing, it allows them to do their jobs, their specialty, which brings more value to the organization.

We use the RPA and bot technology to take the entire organization to the next level. We're always striving to get to 90 touchless transactions. If we are at 80 percent, that means an additional 50 percent reduction in the touch transactions that we're currently processing, which is very significant.

The last thing we've done is taken it to the next level. We use the RPA and bot technology to take the entire organization to the next level. We’re always striving to get to 90 percent touchless transactions. If we are at 80 percent, that means an additional 50 percent reduction in the touch transactions that we’re currently processing, which is very significant.

That has allowed me to refocus some of my efforts with my business process outsourcing (BPO) providers where they’re not having to touch the transactions. I can have them instead focus on acquisitions, integrations, and doing different work that might have been at a cost increase. This all saves me money from an operations standpoint.

Gardner: And we all know how important user experience is -- and also adoption. Sometimes you can bring a horse to water and they don’t necessarily drink.

So it seems to me that there is a double-benefit here. If you have a good interface like Guided Buying, using that as a front end, that can improve user satisfaction and therefore adoption. But by also using bots and automation, you are taking away the rote, manual processes and thereby making life more exciting. Tell us about any cultural and human capital management benefits.

Smarts, speed, and singular focus 

Tokarz: It allows my procurement team to focus differently. Before they were focused on the transactions in the queue and how fast to get them processed, all to keep the internal customers happy. Now I have a bot that processes that three times a day, it looks at the queue, and so we don’t have to worry about those any more. The team is only watching the bot to make sure it isn’t kicking out any errors.

From an acquisition integration standpoint, when I need to add suppliers to the network I don’t have to go for a change request to my management team and request more money. I can operate within the original budget with my BPO providers. If there's another 300 suppliers that I need added to the network, for example, I can process them more effectively and efficiently.

Gardner: What have been some challenges with establishing the e-sourcing technology? What have you had to overcome to make e-sourcing more prevalent and to get as digital as possible?

Tokarz: Anytime I begin working on a project, I focus not only on the technology component, but also the process, organization, and policy components. I try to focus on all of them.

So first, we hired someone to manage the e-sourcing via an e-sourcing administrator role. It becomes really important. We have a single point of contact. Everyone knows where to go within the organization to make things happen as people learn the technology, and what the technology is actually capable of. Instead of having to train 50 people, I have one expert that can help guide them through the process.

From a policy standpoint, we've also taken the policies and dictated that. People are supposed to be leveraging the technology. We all know that not all policies are adhered to, but it sets the right framework for discussion internally. We can now go to a category manager and access the right technology to do the jobs better, faster, cheaper.

As a result, you have a more intriguing job versus doing administrative work, which ultimately leads to more value to the organization. They're acting more as a business consultant to our internal customers to drive value -- not just about price but on how to create value using innovations, new technology, and new solutions in the marketplace.

To me, it’s not just about the technology -- it’s about developing the ecosystem of the organization.

Gardner: Is there anything about Guided Buying and the added intelligence that helps with e-sourcing – of getting the right information to the right person in the right format at the right time?

Seamless satisfaction for employee

Tokarz: The beautiful thing about Guided Buying is it’s seamless. People don't know how the application works and that they are using SAP Ariba. It’s interesting. They see Guided Buying and they don't realize it's basically a looking glass into the architecture that is SAP Ariba behind the scenes.

That helps with transparency for them to understand what they are buying and get to it as quickly as possible. It allows them to process a transaction via a really nice, simple checkout screen. Everyone knows what it costs, and it just routes seamlessly across the organization.

Gardner: So what do you get when you do e-sourcing right? Are there any metrics or impacts that you can point to such as savings, efficiencies, employee satisfaction?

The biggest impact is employee satisfaction. Instead of having a category manager working in Microsoft Outlook, sending e-mails to 30 different suppliers on a particular event, they have a simple dashboard where they can combine all of the answers and push all of that information out seamlessly across all the participants.

Tokarz: The biggest impact is employee satisfaction. Instead of having a category manager working in Microsoft Outlook, sending e-mails to 30 different suppliers on a particular event, they have a simple dashboard where they can combine all of the answers, or questions, and develop all of the answers and push all of that information out seamlessly across all the participants. Instead of working administratively, they’re working strategically with internal customers. They are asking the hard questions about how to solve business problems at hand and creating value for the organization.

Gardner: Let's dig deeper into the need for extensibility for globalization. To me this includes seeking a balance between the best of centralized and the best of distributed. You can take advantage of regional particulars, but also leverage and exploit the repeatability and standard methods of centralization.

What have you been doing in procurement using SAP Ariba that helps get to that balance?

Global insights grow success 

Tokarz: We’re in the process of rolling out SAP Ariba globally. We have different regions, and they all have different requirements. What we've learned is that our EMEA region wants to do some things differently than we were doing them. It forces us to answer the question, “Why were we doing things the way we were doing them, and should we be changing? Are their insights valuable?”

We learned that their insights are valuable, whether it be the partners that they are working with, from an integration standpoint, or the people on the ground. They have valuable insights. We’re beginning to work with our Canadian colleagues as well, and they've done a tremendous amount of work around change management. We want to capitalize on that, and we want to leverage it. We want to learn so that we can be better here in the United States at how we implement our systems.

Gardner: Let’s look to the future. What would you like to see improved, not only in terms of the technology but the way the procurement is going? Do you see more AI, ML, and bots progressing in terms of their contribution to your success?

Tokarz: The bots’ technology is really interesting, and I think it's going to change pretty dramatically the way we work. It’s going to take a lot of the manual work that we do in processing transactions and it's going to alleviate that.

And it’s not just about the transactions. You can leverage the bot technology or RPA technology to do manual work and then just have people do the audit. You're eliminating three to five hours’ worth of work so that the workers can go focus their time on higher value-add.

For my organization, I’d like us to extend the utilization of the solutions that we currently own. I think we can do a better job of rolling out the technology broadly across the organization and leverage key features to make our business more powerful.

Gardner: We have been hearing quite a bit from SAP Ariba and SAP at-large about integrating more business applications and data sets to find process efficiencies across different types of spend and getting a better view of total spend. Does that fit into your future vision?

Tokarz: Yes, it does. Data is really important. It's a huge initiative at McKesson. We have teams that are specifically focused on data and integrating the data so that we can have meaningful information to make more broad decisions. They can be made not by, “Hey, I think I have the right knowledge.” Instead insights are based on the concrete details that guide you to making smart business decisions.

Gardner: I’m afraid we’ll have to leave it there. You have been listening to a sponsored BriefingsDirect discussion on new ways that companies gain improved visibility, analytics, and predictive responses across their supply-chain activities.

And we have learned how new tools and methods are coming together to help organizations be more intelligent by using such new technology as bots to improve not only the outcome from procurement activities -- but the satisfaction of those doing the procurement.

So a big thank you to our guest, Michael Tokarz, Senior Director of Source to Pay Processes and Systems at McKesson in Alpharetta, Georgia. Thank you so much, Michael.

Tokarz: Thank you.

Gardner: And a big thank you to our audience for joining this BriefingsDirect intelligent enterprise innovation discussion. I’m Dana Gardner, Principal Analyst at Interarbor Solutions, your host throughout the series of SAP Ariba-sponsored BriefingsDirect interviews. Thanks again for listening -- and do come back next time.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: SAP Ariba.

Transcript of a discussion on how leading enterprises are digitizing procurement and automating spend management to reduce inefficiencies, cut manual tasks, and streamline the entire source-to-pay process. Copyright Interarbor Solutions, LLC, 2005-2019. All rights reserved.

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HP-Fueled Application Delivery Transformation Pays Ongoing Dividends for McKesson

Transcript of a BriefingsDirect podcast on healthcare giant McKesson's continuing multi-year, pan-IT journey toward service management transformation.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: HP.

Dana Gardner: Hello, and welcome to the next edition of the HP Discover Performance Podcast Series. I'm Dana Gardner, Principal Analyst at Interarbor Solutions, your moderator for this ongoing discussion of IT innovation and how it’s making an impact on people’s lives.

Gardner

Once again, we're focusing on how IT leaders are improving their services' performance to deliver better experiences and payoffs for businesses and end users alike, and this time we're coming to you directly from the HP Discover 2013 Conference in Las Vegas.

We’re here the week of June 10 to explore some award-winning case studies from leading enterprises. Our next innovation case study interview highlights how McKesson Corp. accomplished a multi-year, pan-IT management transformation.

We’ll see how McKesson's performance journey, from 2005 to the present, has enabled it to better leverage an agile, hybrid cloud model.

To learn more about how McKesson gained a standardized services orientation to gain agility in deploying its applications, please join me now in welcoming Andy Smith, Vice President of Applications Hosting Services at McKesson. Welcome, Andy. [Disclosure: HP is a sponsor of BriefingsDirect podcasts.]

Andy Smith: Thank you, Dana. Glad to be here.

Gardner: It's good to have you back. It's hard to believe it's been a full year since we last spoke. I was very interested in how McKesson had been progressing and maturing its applications delivery capabilities back then. What's new? What's different? What's changed in the last year?

Smith: Probably one of the things that have changed in the last year is that our performance metrics have continued to improve. We're continuing to see a drop in the number of outages from the standardization and automation. The reliability of the systems has increased, the utilization of the systems has increased, and our system admin ratios have increased. So everything, all the key performance indicators (KPIs) are going in the right direction.

That allowed us to make the next shift, which was to focus on how can we do better at providing capabilities to our customers. How do we do it faster and better through provisioning, because now it's taking less time to do the support side of it.

Gardner: It's really interesting to me that a big part of all this is the provisioning aspect going from fewer manual processes and multiple points of touch to more self-provisioning. How has that worked out? Have the people stepped up to the plate on that, and do they seem to want to take more initiative in terms of how applications are developed and deployed?

Smith: It's been very well received. We've been in production now roughly two-and-a-half months. Rather than delivering requests via business requests to add some compute capacity in an average of six months, we’re down to less than four days. I think we can get it down to less than 10 minutes by the time we hit the end of summer.

Well received

So, it's been well received. It's been a challenge to get people to think differently about their processes internal to IT that would allow us to do the automation, but it's been very well received.

Gardner: Just for the edification of our listeners, tell us a bit about McKesson. You’re not just a small mom-and-pop shop.

Smith: No, I think we’re Fortune 14 now, with more than $122 billion in revenue and more than 43,500 employees. We focus specifically on healthcare, how to ensure that whatever is needed by  healthcare organizations is there when they need it.

Smith

That might be software systems that we write for providers. That could be claims processing that we do for providers. But, the biggest chunk of our business is supply chain, ensuring that the supplies, whether they be medical, surgical, or pharmaceutical, are in the hospital's and providers' hands as soon as they need them.

If a line of business needs to make an improvement in order to capture a need of a customer, with the old way of doing business, it would take me six months to get the computer on the floor. Then they could start their development. Now, you're down to less than a week and days. So they can start their development six months earlier, which really helps us be in a position to capture that new market faster. In turn, this also helps McKesson customers deliver critical healthcare solutions more rapidly to meet today's emerging healthcare needs and enable better health.

Gardner: And there are also some other factors in the market. There's even more talk now about cloud than last year, it's hard to believe, focusing on hybrid capabilities, where you can pick and choose how to deploy your apps. Then, there's the mobile factor. Is the compression of time something that you’re still feeling, perhaps more so now with mobile, or is that now a part of your applications’ speed initiatives?

Smith: It's not part of my speed initiatives right now, but we are recognizing that we have to build that next generation of application. Part of that is the mobility piece of it, because we have to separate the physical application, the software-as-a-service (SaaS) application from the display device that the customer is going to use. It might be an Android, an iPhone,  or something else, a tablet.

We really have to separate that mobile portion from it, because that display device could be almost anything.

So we're recognizing the fact that for next-generation of product, we really have to separate that mobile portion from it, because that display device could be almost anything.

Gardner: So there are more complexity factors always coming into the picture. Let's go back to this services orientation and standardization. What were some of the difficulties that you had. What were the hurdles in terms of trying to get standardized and creating that operating procedure that people could rally behind, self provision, and automate? What's for those people that are just starting on this journey? What might they expect?

Smith: The first piece is just a change in culture. We believe we were customer-centric providers of services. What that really translated to was that we were customer-centric customized providers of services. So every request was a custom request. That resulted in slow delivery, but it also resulted in non-standardized solutions.

One of the most difficult things was getting the architects and engineers to think differently and to understand that standardization would actually be better for the customer. We could get it to them faster, more consistently, and more reliably, and on the back end, provide the support much more cheaply to get that mind shift.

But we were successful. I think everybody still likes to customize, but we haven't had to do that.

The right culture

Gardner: We’re here at HP Discover, and you’ve won an award. Congratulations, incidentally. How have the HP products and services come together to help you not only tackle these technical issues, but to foster the right culture?

Smith: When we talked last year, we had a lot of the support tools in place from HP -- operations orchestration, server automation, monitoring tools -- but we were using them to do support better. What we're able to do from the provisioning side is leverage that capability and leverage those existing tools.

All we had to do is purchase one additional tool which is a Cloud Service Automation (CSA) that sits on top of our existing tools. So it was a very minor investment, and we were able to leverage all the support tools to do the provisioning side of the business. It was very practical for us and relatively quick.

Gardner: Of course, a big emphasis here at HP Discover is HP Converged Cloud and talking about these different hybrid models. How has the automation provisioning services orientation, and standardization put you in a place to be able to avail yourselves of some of these hybrid models and the efficiencies and speed that come with that? How do they tie together -- what you’ve done with applications now and what you can perhaps do with cloud?

From a technology standpoint, we know we can do it. We’ve done it in the labs.

Smith: We’ll be the first to admit that providing the services internally is not necessarily always the best. We may not be the cheapest and we may not be the most capable. By getting better at how we do provisioning and how we do our own internal cloud frees up resources, and those resources now can start thinking about how we work with an external provider.

That's a lot of concern for us right now, because there is that risk factor. Do you put your intellectual property (IP) out there? Do you put your patients’ medical records out there? How do you protect it? And so there are a lot of business rules and contracting issues that we have to get through.

From a technology standpoint, we know we can do it. We’ve done it in the labs. We’ve provisioned out to third-party providers. It all works from a technology standpoint with the tools we have. Now we have to get through the business issues.

Gardner: It's interesting that you are seeing this relationship between applications and the transformation you've made to make your applications delivery more agile and the deployment opportunities you have with cloud and hybrid cloud models. HP has its fingers in both sides of that equation -- the apps and then also the cloud.

Is there a certain advantage that you see working with HP that will perhaps allow you to pull those together for your benefit?

Smith: I think so, because a lot of companies, HP included, are on the same journey. You’ve got some legacy that you have to keep. You’ve got some legacy that you need to improve on. But you also need to be ready to build that next-generation application.

On the same journey

It's fortunate, in some ways, that HP is on the same journey. We partner on a lot of these things. When we brought CSA in, it was one of the earlier releases, and now we’ve partnered with them through the Customer Advisory Boards (CABs) and other methods. They continue to enhance this to meet our needs, but also to meet their needs.

Gardner: With CSA,  are you on the latest version of that?

Smith: We might be down one point release, we’re at 3 point something, so we are maybe one back. But we brought it in as 1.0, then 2.0, and now we’ve moved into 3, and it's continued to improve.

Gardner: Now that you've been on this journey from 2005, where do you see yourselves in a couple of years? How does this tie together? What are your new goals and requirements that you're setting for yourselves and are interested in achieving?

Smith: Because we’re in healthcare, very similar to banking, we've hit a point where we don't believe we can afford to be down anymore.

Instead of talking about three nines, four nines, or five nines, we're starting to talk about, how we ensure the machines are never down, even for planned maintenance. That's taking a different kind of infrastructure, but that’s also taking a different kind of application that can tolerate machines being taken offline, but continue to run.

That's where our eye is, trying to figure out how to change the environment to be constantly on.

That's where our eye is, trying to figure out how to change the environment to be constantly on.

Gardner: To have those levels of performance, you can't just look at the infrastructure or the apps. It needs to be all of those things, and the apps from beginning to end, in terms of their lifecycle.

Smith: Exactly. If the application isn't smart enough to tolerate a piece of machine going down, then you have to redesign the application architecture. Our applications are going to have to scale out horizontally across the equipment as the peaks and valleys of the customer demands change through the day or through the week.

The current architecture doesn't scale horizontally. It scales up and down. So you end up with a really big box that’s not needed some times of the day. It would be better if we could spread the load out horizontally.

Gardner: So just to close out, we have to think about applications now in the context of where they are deployed, in a cloud spectrum or continuum of hybrid types of models. We also have to think about them being delivered out to a variety of different endpoints.

Different end points

What do you think you’ll need to be doing differently from an application-development, deployment, and standardization perspective in order to accomplish both that ability to deploy anywhere and be high performance, as well as also be out on a variety of different end points?

Smith: The reality is that part of our journey over the last several years has been to consolidate the environment, consolidate the data centers, and consolidate and virtualize the servers. That's been great from a customer cost standpoint and standardization standpoint.

But now, when you're starting to deliver that SaaS mobile kind of application, speed of response to the customer, the keystroke, the screen refresh, are really important. You can't do that from a central data center. You've got to be able to push some of the applications and data out to regional locations. We’re not going to build those regional locations. It's just not practical.

That's where we see bringing in these hybrid clouds. We’ll host the primary app, let's say, back in our corporate data center, but then the mobile piece, the customer experience piece, is going to be have to be hosted in data centers that are scattered throughout the country and are much physically much closer to where the customer is.

You’re going to really have to be watching the endpoints so you can see that customer experience.

Gardner: Of course, that’s going to require a different level of performance monitoring and management.

Smith: Exactly, because then you really have to monitor the application, not just the server at the back end. You’ve got to be watching that performance to know whether you have a local ISP that’s come down, if you have got a local cloud that’s come down. You’re going to really have to be watching the endpoints so you can see that customer experience. So it is a different kind of application monitoring.

Gardner: Well, we look forward to speaking with you again, Andy, in a year or two to see how that’s progressing. But I am afraid we’ll have to leave it there for today. We’ve been learning about how McKesson accomplished a multi-year, pan-IT Management Transformation and we’ve seen how McKesson’s performance journey has enabled it to create an agile hybrid cloud model.

And so join me now please in thanking our guest, Andy Smith, Vice President of Applications Hosting Services at McKesson. Thank you, Andy.

Smith: Thank you, Dana.

Gardner: And I’d like to thank our audience too for joining us for this special HP Discover Performance Podcast coming to you from the HP Discover 2013 Conference in Las Vegas.

I'm Dana Gardner, Principal Analyst at Interarbor Solutions, your host for this ongoing series of HP sponsored discussions.

Thanks again for listening, and come back next time.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: HP

Transcript of a BriefingsDirect podcast on healthcare giant McKesson's continuing multi-year, pan-IT journey toward service management transformation. Copyright Interarbor Solutions, LLC, 2005-2013. All rights reserved.

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HP Discover Performance Podcast: McKesson Redirects IT to Become a Services Provider That Delivers Fuller Business Solutions

Transcript of a BriefingDirect podcast from HP Discover 2012 on how health-care giant McKesson has revamped it's IT approach and instituted a cultural shift toward services.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: HP.

  
Dana Gardner: Hello, and welcome to the next edition of the HP Discover Performance podcast series. I'm Dana Gardner, Principal Analyst at Interarbor Solutions, your co-host and moderator for this ongoing discussing of IT innovation and how it's making an impact on people’s life.

Once again, we're 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 exploring some award-winning case studies from leading enterprises to see how an IT transformation approach better supports business goals. And we'll see how IT performance improvements benefit these companies, their internal users, and their global customers.

Our next innovation case study interview highlights how pharmaceuticals distributor and healthcare information technology services provider McKesson has transformed the very notion of IT. We will see how a shift in culture and an emphasis on being a services provider has allowed McKesson to not only deliver better results, but elevate the role of IT into the strategic fabric of the company.

To learn more about how McKesson has recast the role of IT and remade its impact in a positive way, we're 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 to share my experiences with others.

Gardner: Let me start with this notion of IT transformation. We hear a lot about that. I wonder if you have any major drivers that you identified, as you were leading up to this, that allowed you to convince others that this was worth doing.

Smith: What we did, and this started several years ago, was to focus on what our competition was 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 that's who you saw as your competition?

Smith: Exactly, and that's 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 we realized very quickly that our competition was the outside world, so we had to model ourselves to 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 of being accountable and to whom. So let's start at that higher level. How did you begin to define what the new culture for IT should be?

Balanced scorecard

Smith: We started out with a balanced scorecard. It really came down to whether the employees and 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 we're looking at all four parts of the scorecard to make sure we're moving forward.

Gardner: I suppose it's essential, when you're a services provider rather than a technology products producer and deployer, that you understand what are the right metrics to measure. So is it 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 time saying, "The customer gave us an order, we hit the checkbox and finished that order, we're done." We were always asking, "Did we do it, and did we do it on time?"

What we really focused in on were the real drivers. A lot of the measures are more trailing indicators. Even money tended to be a trailing indicator.

That's not really what the customer was looking for. The customer was looking for. "Did you deliver 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 the outs of an order taker, to whether we are delivering the solution at the right price.

Gardner: As we've seen in a number of companies, when they’ve gone to more measurement using 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 track of your goal. Is there a way that you work towards a triage or a management approach for those metrics, 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 more trailing indicators. Even money tended to be a trailing indicator.

So we went into what's really driving our quality, what's really driving our cost. We got down to four or five that we are the ones that mattered. "Is the system up and running. Are changes causing outages. Are data protection services reliable. Are our events being handled quickly and almost 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, all of 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-in mechanism for efficiency, when you start focusing on that service provider role, that brokering role?

Pulling down cost

Smith: It truly did bring down our cost within McKesson. I'll probably be off by several million, but each year we pull down our cost several million dollars. So every year my budget gets smaller, but every year my quality gets higher, my employee satisfaction gets higher, and my customer satisfaction gets higher.

It can really get both. You don't have to sacrifice quality to reduce cost. The trick was saying that I 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 weren't doing the busy work anymore. So it really did work.

Gardner: For those in our audience who might not be familiar with McKesson, tell us a little bit more about the company. Specifically, tell us about the scale of your IT organization to put those millions 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, we're 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 it's still a pretty significant endeavor. We've managed to pull that cost out, both through the typical things like maintenance contracts and improved equipment, but also by not having to grow the full-time employee (FTE) base. I haven't had to let any FTEs go, but what we've discovered was that, as we did these things, I needed fewer employees.

To get people to stop thinking about the technology and start thinking about the business solution is a slow transition, because it's a real mind-shift.

As employees resigned, I didn't have to replace them. My staff base has been shrinking, but I haven't had anybody lose a job. So that's been also very reassuring for the employees, because they kept waiting for that big shoe to drop, waiting for us to say, "We're going to outsource you," but we've never had to do it.

Gardner: I guess when you compete against the outsourcers better, then you are going to retain those jobs and keep that skill set going. There is a cliché that you're able to take people from firefighting and put them into innovation. Is there a truth to that in what you've done?

Smith: That really is truth. It took time, and we’re not done, but to get people to stop thinking about the technology and start thinking about the business solution is a slow transition, because it's a real mind-shift. In a lot of ways, these employees see the reactive work as the bread and butter work that puts the paycheck on the table. That lets them be a firefighter and a hero, and if you 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 doing value-add work than it was just doing the firefighting. We're still going through that cultural shift. In some ways, it's easier for the older employees, because if you go back a few decades, IT was that. 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 you're just a programmer or an operator. In my mind, we're bringing the analyst back, which for the older employees, is easy, because they used to do it. For the younger employees, we've got to teach them how to be consultants. We've got to teach them how to be analyst. In some cases, it's a totally different, scary place to go, because you actually have to come out of the back office and talk to somebody, and they're not used to that.

Cultural shift

Gardner: 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 approaches and 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 doing it with tribal knowledge. The way I did it today might be different than the way I'd do it tomorrow, because it's all manual, and it's all in people's heads.

We did go into ITIL version 3 and push it very hard to give that consistency, because the consistency really mattered. Then, we could really measure the quality. We could be ensured that no matter who did it or when it was done, it was done the same way, and that reliability mattered a lot.

We also got away from custom technology, and we got to where everything is going to be a certain type of machine. It's going to look the same. All the tools are going to be fully integrated and no longer be best-of-breed point solutions. Driving that standardization made a big difference. You don’t have to remember that machine on the left you reboot it this way, and that machine on the right you reboot it a different way. You don’t have to remember anymore, because they're all the same.

We made the equipment and tools standard and more of a commodity so that the people didn’t have to be that anymore. The people could be thought leaders. All those things really did work to drive out the cost and increase the quality, but it's a lot of different pieces. You can't do it with just one golden arrow. You have to hit it from every angle.

We had to increase the transparency to say we’re doing a good job or we’re doing a bad job.

We had to change the technology, the people, and the processes. We had to increase the transparency to say we’re doing a good job or we’re doing a bad job. It was just, "Expose everything you’re doing."

That's scary at first, but in the end, we found out we really are competing with the competitors and we can continue to do it, and do it better. We understand healthcare, we understand McKesson, and we’re an internal group, so we don’t have a profit margin. All those things combined 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 a value 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 our service as Unix, our service as data, our service as Windows. Getting us focused on that helped us remember what the service really was. We’re now stepping back even one step farther and saying that that no longer matters.

What really matters is the business solution you’re trying to solve. We’re stepping even farther back, 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 to cash. The customer doesn’t want Windows. The customer wants payroll.

Thinking about cloud

Stepping back has now allowed us to start thinking about that cloud. All the equipment underneath is commoditized, and so I can now sit back and say that the customer wants this business 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, because they 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 it's brought us back to thinking like a business person. What does the business need and who is the best provider? It might not be me, but we’ll make that decision and broker it out. This year we're probably going to pull off our internal cloud and our external cloud and really have a hybrid solution, which we’ve been talking about for a couple of years. I think it will really happen this year.

Gardner: We’re here at HP Discover and HP COO Bill Veghte was on the stage a little while ago. One of the things that he said that caught my attention was that we’re producing the app services 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 to the applications. Now, we’re able to take the applications in the hybrid delivery model and extend them to form what the business processes demand. Is that also sort of a shift that's come along with your going more towards a service brokering capability?

The other 80 percent is really unique business services that our customers need to improve healthcare, to reduce the cost in healthcare, and those are really unique to McKesson.

Smith: It is a shift that's going on, and it's interesting, because I don’t think part of this is matured. If you’re dealing with the big package products whether it's the Oracles or the SAPs, those people are dictating almost a custom solution in order to keep themselves alive. But that's probably 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 improve healthcare, to reduce the cost in healthcare, and those are really unique to McKesson. What I am finding, when I look at those types of business services, they are the real bread-and-butter that makes our world different.

Having the hybrid capability does let me put together the pieces to optimize what the business need is, but it is the 80-20. For the 80 percent I can do it. For the other 20 percent, those vendors are probably going to lock me into a custom solution, but that's okay.

Gardner: Well great. I am afraid we’re about out of time. We’ve been discussing with McKesson, 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 Discover Performance podcast coming to you from the HP Discover 2012 Conference in Las Vegas.

I'm Dana Gardner, Principal Analyst at Interarbor Solutions, your host for this ongoing series of HP sponsored discussions. Thanks again for listening, and come back next time.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: HP.

Transcript of a BriefingDirect podcast from HP Discover 2012 on how health-care giant McKesson has revamped it's IT approach and instituted a cultural shift toward services. Copyright Interarbor Solutions, LLC, 2005-2012. All rights reserved.

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