Dan Farber: Randy thanks for joining me.
Randy Spratt: Dan it's a pleasure to be here.
Dan Farber: Now Mckesson is an old company, since 1833 it's been in business, 88 billion dollars in revenue, twenty two and a half thousand people. And in a health care industry which is really troubled in a lot of ways and certainly needs a lot of innovation. What can you tell me about McKesson, in terms of how IT is helping to innovate in the health care industry?
Randy Spratt: When you've been around 173 years, you've seen a few things and over those years McKesson has managed to find themselves everywhere health care is. So, asking this question about the innovation in health care is a very complicated question, it touches payers, it touches pharmacies, it touches physicians, it touches hospitals, it touches patients, and suppliers and manufacturers. But, to give you a sense of where we're having some of our largest impact, I'd steer you to two areas. One is around the supply chain, where very large proportions of the cost of healthcare are found today. As we as employers, as patients, as interested consumers as we try to drive those costs down, the margins become razor thin, and the ability to stay in those markets and compete in those markets requires very, very strong technologies to push large scale of pharmaceuticals and large scales of medical supplies.
Dan Farber: I don't want to get into the price of pharmaceuticals because that's a whole other topic, but what specifically from a technology point are you doing to innovate in the supply chain? Are there protocols, standards, services that you've applied to take cost out of delivering?
Randy Spratt: You bet. First of all, we've moved a very large amount of our supply chain purchasing to online internet-based ordering. It's the Amazon dot.com, if you will, of healthcare. And yet our volumes are significantly larger than even Amazon's. We'll do a billion and half dollars of pharmaceuticals every month through our online capabilities. You also see a tremendous amount of regulation to try to keep that supply chain safe, make sure that counterfeit drugs aren't entering the supply chain, so many states are implementing e-pedigree laws to demonstrate that the supply chain is safe from end to end. We're innovating in that space with RFID technologies to make sure that you can reliably track a manufactured lot through every single handler all the way to the end consumer.
Dan Farber: Now I know that McKesson invests huge amounts in product development and research, and is there money set aside to invest in IT research and development?
Randy Spratt: There isn't a specific amount set aside for IT, but we're fortunate to have a very favorable capital position. So, if we have a need to invest in IT that will drive a benefit to the company and we can make a reasonable case for that then the money's always there.
Dan Farber: What are some of the areas you're looking at where you think it can provide some incremental benefit or really a huge disruptive benefit in terms of your cost model or in terms of delivering the products and services you need to your constituents?
Randy Spratt: We've got a number of initiatives going on right now. We're well into a complete virtualization project.
Dan Farber: Virtualization of your data centers, your storage, computer your network?
Randy Spratt: Right now it's CPU virtualization and beginning strategies around storage virtualization. We have a considerable amount of capital going into collaboration tools and end-user experience tools to improve the ability of our employees to work wherever and whenever. That includes mobile tools as well. We've got a pretty good size investment going on right now around the network convergence for example, and we're driving quite a bit of automation around data center management to take some of the cost out of administration of servers and administration of end user devices.
Dan Farber: Now there are many technologies that could come under the umbrella of innovation, and I wanted to ask you to get your opinion on some of them. Starting with open source, and how do you think of open source?
Randy Spratt: I think that open source is a marvelous innovation in and of itself. We take great advantage of open source tools, both in our infrastructure and in the products that we resell. It has taken a significant amount of cost out of both. In our product world that allows us to sell capabilities to customers at lower costs than our competitors, and internally obviously it does the same. There's still some unanswered questions about where this will all go, as we see Oracle and Microsoft entering the market, the open source market and embracing it more fully. But still in all, competition's welcome, it probably will help not hurt.
Dan Farber: So it's not exactly free software, but it does force everybody to look at their cost models quite differently.
Randy Spratt: It does. It's doing to those elements that open source covers today. It well fundamentally it's commoditizing it, and it's bringing a huge labor force onto assuring the quality of that software that otherwise couldn't be had. So I think it's a win for the industry.
Dan Farber: And how about Web 2.0? I'm not exactly sure how to define it, but I know it came after Web 1.0, which was the web we had where it was about putting up websites, and now it's more about things like collaboration, social networking, Ajax interfaces; is that something that as a CIO at a large corporation that you think about at all?
Randy Spratt: I think if you're a CIO at a large global corporation today, and it isn't at least on your strategy and planning radar, that you may want to wake up and smell the coffee. We are keenly interested in the velocity and the outcome of deployment of Web 2.0 in the United States especially, mostly because it offers the promise of drastically lower network operating costs, and at the same time allows us to individually address an unlimited number of devices, when you think about what that means in health care it means that you could be covered in sensors with your bed, in your shoes, in your room and every one of those devices individually addressable and individually able to deliver its information to a care-giver without any network intervention or infrastructure other than carrying messages. So in the product world, in our infrastructure world, it's going to have a gigantic impact.
Dan Farber: So RFID, as a part of that whole issue of this next generation of the internet, and having everything with its basically own URL that's passing information back and forth. So from that point of view, are you developing tools, such as analytics, that allow you take that data and do something, given all the companies that you work with, to aggregate that data and try to extract some meaning from it?
Randy Spratt: We have some extensive data warehousing business intelligence capabilities, largely around our pharmaceutical business because of the huge scale that that business operates. But in terms of aggregating the kind of information that we'll be able to acquire and use in a Web 2.0 world, that's years away. We're in early planning stages of how we will approach that today.
Dan Farber: Now often when I talk to a CIO and I mention social networking they think MySpace or Facebook, does it have any application in your company?
Randy Spratt: Well, MySpace is an example of social networking outside of work, but if you think about it, e-mail is a very inefficient, but very predominant social networking…
Dan Farber: Very well said inefficient, predominant...
Randy Spratt: Yes, if you look at the types of messages that are exchanged in e-mail, they are as likely to be social as they are business in any workplace. So I think that to try and pretend that social networking isn't a part of the workforce's basic needs is to completely ignore the nature of human beings. As we move into more and more situations where we're allowing people to work at home, and they lose the day to day, face to face interaction, we also see through surveys that they tend to become more dissatisfied with that job after a year or so because of the lack of social contact. The ones who stay in the job find ways to replace it with electronic social networking. So to that end, as I said, we're investing in collaboration tools, and bandwidth to be able to support video networking, and network tools within our infrastructure that will allow people to communication more freely.
Dan Farber: I'd like to ask you about a larger industry trend, which is software as service, on-demand, utility computing, I'm not sure the term - they may all mean a little bit something different, but fundamentally that you're outsourcing your infrastructure, you're applications are being delivered from the cloud to your company. Is that something you're investing it, how do you think that's going to play out?
Randy Spratt: We are. We're actually building to that in many of our product suites. We're moving a number of applications, many of them physician-facing applications, from environments that were traditionally installed in the setting of care, to environments where the software is sold as a service. And they're paying for their access to the software, they're not paying for the licenses to the software. That's proving to be of significant interest especially to the small physician offices that don't have the ability to manage a reasonable IT infrastructure. We also see that same trend in some of the enterprise applications that we use. We're beginning to experiment with it in certain areas such as sales force automation.
Dan Farber: And how do you think about outsourcing in general. Are there certain parts of the business that you have that you have to keep internally and what might those be compared to what you're willing to send out to an outsource provider?
Randy Spratt: Well if you think about it, there isn't very much that a corporate IT function, an infrastructure function does that technically couldn't be outsourced. So the question becomes what's the business relevance of an IT dept. And that relevance fundamentally comes from an intimacy with the business. A strong linkage to the business's strategy. A knowledge, expertise and awareness in what the businesses need to succeed and how IT can help drive that. And that's a core competency that's inherent to the business and can't possibly be given up. At the other end of the spectrum there are surely commodity activities that if they can be digitized they're going to arbitraged to the lowest priced provider. That in-between world where they often intersect is a little stickier, and I think fundamentally that comes down to how you organize and the incentives the business goals that you drive your shop to.
Dan Farber: And finally I'd like to ask you for some recommendations in terms of how you build a culture in which innovation is at a core, as opposed to, I think many IT shops are more focused on "well we have to cut costs, cut costs, lower costs" and while that's important, it becomes kind of the obsession, as opposed to really thinking about perhaps you might be able to innovate your way to lower costs as opposed to just "cut."
Randy Spratt: Sure, it's very easy to succeed, when success means don't screw up and stay under budget. And, if those are your operating metrics, you're operating principals, you're going to calcify and as each year's goals become more and more difficult, you find yourself in the situation you just described where the only way I have to keep succeeding is to keep cutting costs. But that's not IT's primary mission, IT's primary mission is enable the business, it's to allow the business as a whole to become more competitive, to allow the business as a whole to be able to take share away from our competitors and do that more efficiently than they can. So, the key to innovation is to maintain a close tie with our businesses and their strategies and assign a part of the organization to plan cooperatively side-by-side as service partners with those businesses. And drive those innovations together. They understand what their customers need, they understand their business drivers and their cost models, and we understand what information technology can do and what it can bring to the table. The better we're able to formulate that direction together, the better we can then operate at the economies of scale that you would expect from a corporate IT department. Because we can take those same learnings from each business unit, collect them together through a very successful governance process, and allow those businesses to see each other's innovations, to see other's IT spend, and leverage that as each business succeeds in their own area. So if you're succeeding around a business warehousing initiative, and we invest in that, another business can leverage that and adopt it on their own. I think our value comes from the initial innovation, then multiplying that innovation out to the other business units within McKesson.
Dan Farber: Randy thanks very much for speaking with me.
Randy Spratt: It's my pleasure Dan.
Dan Farber: I've been speaking with Randy Spratt, who is the CIO of McKesson Corp. For CIO sessions, I'm Dan Farber. Thanks for watching.
