Steve Player interviews Jim Bierman, SVP & CFO, Owens & Minor
Owens & Minor, an $8 billion distributor serving 4,000 health care providers, is helping its customers to energize their supply chains one link at a time.
Steve Player: What would be a typical customer ... a single hospital or clinic, a chain?
Jim Bierman: We touch all of them. If you segmented our revenue stream, you'd find that the IDNs (integrated delivery networks) tend to be the larger users of our services. An example would be the Johns Hopkins Hospital and Health System. And, if you look at U.S. News & World Report's Best Hospitals list, you see that we serve 14 of the top 21 hospital systems in the U.S., as well as a handful of large physician practices and ambulatory surgical centers -- those kinds of providers.
In the medical distribution/manufacturing space, there are a handful of competitors. One of the ways in which we differentiate ourselves is that we are the only pure-play distributor on the national scale, and the largest.
SP: How do you compete with other companies that are attached to a manufacturer? Do manufacturers use pricing to obscure distribution services that you provide?
JB: In our industry, pricing for products and services is generally set under group purchasing organization contracts on behalf of the hospitals. There's no question that price is a critical factor when you make a decision on selecting a distributor. But this is only one of several important factors that come into play. If the product, particularly in health care, isn't delivered at the right location and at the right time, which is no small accomplishment unto itself, then a decrease in price doesn't compensate for the risks associated with either of these two situations occurring. So we pride ourselves on the service we deliver. We get the right product to the right location, at the right time, and at the right price, and that service aspect is pretty critical. We're price-competitive, but we're service-oriented.
SP: What are the key metrics that are important to understand in describing the company?
JB: Being in business as long as we have been, there are any number of metrics and data points that are captured and reported. It's really easy to add a data point; it's really difficult to remove one. One of the observations I had in joining the organization was that there was an abundance of data but a paucity of analysis. We've tried to step back and ask, "What inferences can we draw from the data that's provided?" And to that point, we've taken a page out of Jack Welch's book where he notes that there are three things you should measure: customer satisfaction, employee satisfaction, and cash flow. Whenever there's a question about whether or not we should add metrics, I revert to that quote; I've used it often in my presentations.
I think that we do a good job in those three areas. It's very important to us to understand how our teammates rate their satisfaction and how they're doing in the organization, so we measure that. In addition, we're a service-based business, and we understand that our lifeblood is our customers, so we have incentive programs tied to customer satisfaction, and we measure that annually. And when in doubt about a financial metric, you can't go wrong by going to the fundamentals of finance, which are to measure the cash flow implications of an investment, of a relationship, of a decision.
SP: How long have you been at Owens & Minor?
JB: Just over two and a half years.
SP: Give us a little bit of background on your career. I understand that you started in the public accounting world with Andersen?
JB: I did. I started with Arthur Andersen in 1976 in the Philadelphia office. I was with the firm 22 years, during 10 of which I was a partner. Ultimately, the firm transferred me to the Carolinas to head up the banking practice. I served in that role until 1998, when I left to join Quintiles Transnational, Inc.
SP: You went there to lead mergers and acquisitions?
JB: I did. It was kind of an unusual career path, having been a partner on the audit and accounting side, but Quintiles was looking for someone with transactional experience. I'd had a lot of clients that were highly acquisitive; I'd served the banking industry during a period of its consolidation. Quintiles liked that background and took a chance with me running mergers and acquisitions. It proved to be highly successful, and ultimately they asked me to be their chief financial officer.
SP: How long were you with them?
JB: I was with Quintiles for 6 years and led the effort with a management team to take the company private. It was a highly successful experience.
SP: What was it about Owens & Minor that brought you in?
JB: Owens & Minor reached out to me to come in as CFO. Interestingly, my initial reaction was no. I'd had a great experience at Quintiles and had enjoyed being chief financial officer, but I was ready to move on to something else. Owens & Minor said, "Well, come on up and talk to us -- we're a little different," and I did so, and they are. I have enjoyed getting back into being a CFO. Culture was the big play at Owens & Minor. Having grown up at Arthur Andersen, where culture was paramount, I was looking for an environment where culture mattered to a large degree.
The culture here at Owens & Minor is unique. It starts with referring to our employees as "teammates," and this attitude is represented throughout the organization. I quickly became a disciple of the principles that are espoused here.
SP: When you stepped into this role as the CFO, what was your philosophy of finance and the kind of job that you wanted to create?
JB: There's no one right answer for the role that finance needs to play in an organization; you need to adapt. I learned this in my years at Arthur Andersen. The role of finance at Quintiles, for instance, was necessarily different than the role of finance at Owens & Minor. The way I have positioned finance here is that it serves as a catalyst for change. Finance also needs to be strategically focused and aligned.
One common theme of my philosophy is that finance should be the conscience of the organization. This isn't to be taken that finance should always be saying no -- I don't mean that -- but, as the conscience of the organization, finance in some situations should be questioning whether or not we should be making a certain expenditure or investment. In other situations, in the role of the conscience, finance should be asking the question, "Are we spending enough?" This delineates the role that finance should always take, questioning the path and the decisions being made.
SP: What did you have to do to begin to move the organization in the direction you wanted? Did you reorganize finance?
JB: We did reorganize finance; one of the challenges presented to me by members of our board of directors was to restructure the finance team, to bring in new talent, elevate talent that existed to new positions, and train and develop the finance team. We're well along the way to accomplishing all of that. One of the things that attracted me to the organization at this stage of my career was the prospect of leaving the legacy of a finance team that would serve this company as the next generation. To leave the legacy of a team of individuals who work well together -- to me, this would be a very satisfying end result.
Specific skill sets that we were looking at were to broaden the perspective of many of the leaders within finance, so we brought in people in from outside who had seen and done different things, but without losing the institutional knowledge and corporate culture that existed here. Blending these has certainly been a critical challenge.
SP: You mentioned strategic alignment. What are you doing differently there?
JB: The best illustration of this was that, when I joined the organization, Owens & Minor had invested in a direct-to-consumer business, a relatively small diabetic supply business located in Florida. Its operations were struggling, but this aside, the business had neither the scale nor the size to be impactful to the company, and it appeared to be lacking synergistic overlap with the core business. Coming into the organization afresh, I was able to challenge the thinking by asking, "How does this fit strategically? And if it is strategic, how are we to obtain the overlap or synergies, the benefits that we had originally anticipated in making the investment?" The organization was moving down this path, but we would serve as a catalyst to move things along, such that earlier this year we divested ourselves of this business. We received over $75 million in cash, which was used to invest in an acquisition we did for our core business.
SP: My first introduction to the company was through some innovative concepts of your predecessors in communicating the benefits of your supply chain management system using CostTrackSM. I also saw recently that Owens & Minor is featured in a new Harvard Business School case study about teaming with one of your customers, Virginia Mason Medical Center, one of the premier health-care companies in the country. How do these kinds of activities help the company grow?
JB: The value we bring to our customers is our ability to reduce supply chain costs for them; it's a bit of a misnomer to look at just your distribution costs. The more evolved entities look at their entire supply chain costs, and this approach -- the CostTrack approach, providing cost analysis using activity-based costing -- has tended to help. The customers that are more advanced react accordingly, and they are able to reduce overall supply-chain costs, which benefits both parties.
An interesting example of this arose last year when fuel prices were increasing. If you looked at just the delivery aspect of the distribution model, there were significant activities that customers were incurring that would impact cost; for example, things as simple as receiving three shipments a day of product, which could get reduced to one shipment a day. We delivered the same amount of product in a bigger truck once, rather than three times, and the effect was to reduce delivery cost.
SP: The Virginia Mason example I particularly like, because it shows finance getting close to the customer and taking a total cost management approach. A lot of people view purchasing negotiations as squeezing the supplier, whereas you're looking for a better way of taking out costs.
JB: Yes, Virginia Mason is a great example, where we have one of our premier financial cost experts, Michael Stefanic, who has developed a long-standing relationship with the customer and is able to work with them to reduce the total supply chain cost. It's absolutely the perfect example of working with a customer in a win-win situation.
SP: It's a little bit unusual. You're talking about a finance guy who is actually out meeting with a customer. I thought that we kept those guys in a green-shaded room in the back and didn't let them see the public!
JB: I was fortunate that in my 22 years with Arthur Andersen I was used to dealing with clients, and particularly the clients' finance teams. What we find in the health-care industry is that often the teams that manage the hospital's supply chain report up through the CFO of the hospital. So it's not unusual for me to have a conversation with an ultimate decision-maker in the hospital, a CFO or someone who reports to a CFO, if I can help to facilitate the relationship. Both of these are examples of how finance can help to make the business more successful.
SP: I think you saw a recent Business Finance article that "declared the budget dead" [cover story, May/June 2009]. What was the reaction to that article here at Owens & Minor?
JB: I circulated it to the leadership of our finance team, and it generated a level of discussion. Yes, I think that there are principles that are presented in the article that philosophically I agree wholeheartedly with. I think there are some challenges that remain, and the article certainly helps to illustrate that. So, yes, we have embraced some of the fundamental principles, but we have not adopted it in total.
SP: What are you doing in the area of forecasting?
JB: It seemed to me when I came into the organization that there were two things that were pretty critical and that we needed to put into place. One was a longer-term road map of where we were heading, so we developed a five-year strategic financial forecast. This helps to validate the investments you make with that time horizon and gives you some perspective on the achievability of the path that you happen to be on.
We also put in place a five-quarter rolling forecast so that we continue to think in terms of the fact that business doesn't occur only on a calendar-year basis and is not locked into a routine budget cycle, and that we need to be thinking in terms of continuous adjustment and improvement.
SP: And you update quarterly?
JB: The next quarter is on a monthly basis, after that it's quarterly.
SP: Are incentives tied to budgets?
JB: Yes, this is probably the aspect that would be the most difficult to change. Owens & Minor has traditionally had a strong correlation between the incentive plan and budget.
SP: When you think back over the past two and a half years, has the development progressed as expected or have there been any surprises?
JB: One of the benefits (and difficulties) of being in business for 127 years is that over time every idea has been proposed and considered, and maybe the execution wasn't quite right or the timing was not quite right for an idea. But I find it amusing that oftentimes the objection to change is "Well, we tried that before and it didn't work!" But we've worked through that, and I hear it a lot less now than when I started.
SP: What advice would you have for people in finance who would love to be change agents but just don't know how to get started?
JB: One of the keys to success is to find opportunities or individuals that can help you to effect a small amount of change that you can promote vigorously throughout the organization. It's pretty critical that the first couple of initiatives should be highly successful. Within any organization there are always some people who tend to be early adopters. When you join an organization, you should try to find those individuals and pick the project or the topic that has the highest degree of success, because nothing breeds success like success. When there's skepticism as to whether a project has validity, it helps if you have a couple of projects that you can point to where you've been successful in getting the organization to adopt your suggestions or changes.
I worried a lot less about what the initiative was, initially, than I did about the critical aspect of the probability of it succeeding so that we could promote it as a base for the more in-depth projects that we would initiate going forward.
SP: So it's a question not only of scoring a quick win but also of making sure that it's one that you can advertise. Win and impact! Once you have a track record, you can build from there.
SP: Are there any early wins that stand out?
JB: It was important to me to establish what the baseline was -- where I was as I came into the organization. So we did an extensive internal customer satisfaction survey; we surveyed over a hundred of our internal customers to ask their perception of finance, and then we surveyed every member of the finance team, asking about their perception of how their customers would evaluate them.
On the question of whether or not we were exceeding expectations, there was a 25-basis-point gap between what our finance teammates thought their customers would say, and what they actually said. Under any scenario, that gap was too large. I came back to the finance team with these results and said, "We have to do something about this."
SP: That's a wake-up call!
JB: It got finance's attention. We restructured some aspects so that we became more focused and closer to the customer. Internal customer service became a critical aspect of our day-to-day activity.
SP: This, to me, is a good idea for somebody who has just taken on a job -- a useful exercise to conduct in the first hundred days. It's really helpful to know where everybody thinks they are.
JB: Yes, it was eye-opening. And, I could make organizational changes without a nonfinance group second-guessing what I was doing. This really sets a basis for trying to change things.
There were a handful of principles that were pretty critical in changing finance in the eyes of the organization that needed to be articulated early on as a vision, and they're relatively simple to understand. First, finance needed to move to be scalable. By this, I mean that we had a people-based system here, and we needed to move to a process-based system so that we weren't as people-dependent as we were.
Second was our ability to be anticipatory. And for this I borrowed an experience from First Union National Bank, which merged into Wachovia in 2001. They challenged their people to move from being reactive to being preemptive. I've embraced and amplified this concept. Traditionally, people say that they want to go from being reactive to being proactive. We not only want to be proactive in finance, we want to be preemptive -- the difference being that not only have you identified a problem, but you solved it before it became a problem. I think that this mind-set is significant.
My third and final principle was that we needed to be responsible not just for reporting the data, but also for analyzing it. We needed to be more analytical. It isn't satisfactory to just tell you how you did; we needed to be able to tell you why you did what you did. This is a challenge and the next major step organizationally. We needed to embrace and develop those skills.
SP: If you look back over your career, what individual lessons would you share for someone just starting out in finance?
JB: You need to always remember that business is people, and it's your ability to communicate and relate to people that really determines how effective you are in the marketplace. You come at the business with a skill set of financial training or business acumen, but you are only as effective as your ability to relate to people using that perspective.
As I reflect on my number of years in business and the significant leaders whom I have looked to as having had an impact on me, I realize how much I have learned from them. My advice is that you need to be astute and to watch and learn from people when you have the opportunity to do so.
SP: You mentioned leaving a legacy. How far have you got, and what's ahead?
JB: We're really close to having the right players in the positions, and we're there in terms of having the organizational structure for these positions. The next thing is to make sure that we bring these people together as a workable team, and I'm beginning to see aspects of it this that encourage me a great deal.
There are two goals I am working toward: One is that I look forward to the day when I can walk into a room of my direct reports and I can recognize the fact that I'm the least knowledgeable person in that room. And the second is that in a meeting of my direct reports, I don't even need to be there and business moves smoothly forward. I am pleased to say that I think that we're moving forward in both of these areas.