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September 27, 1999

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Drug Companies Use IT To Cure What Ails Them

Pharmaceuticals

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anaged care, tighter Medicare budgets, and intensive global competition all add up to one thing for purveyors of drugs and medical equipment: Reduce operating costs or face a profit-margin squeeze. IT is the means by which these companies intend to meet their goals. Nearly all drug and medical-supply companies have turned to enterprise resource planning packages, E-commerce systems, and consolidation of network and systems infrastructure to drive costs out of their business processes. They're also using information services to help their customers improve their own cost-efficiencies-creating additional value for users and building stronger market relationships.

"Medicare reform and changes in reimbursement are having a major effect on our industry," says Richard Gius, VP of IT at Allegiance Healthcare Corp., which merged with Cardinal Health Inc. in February to create a $21 billion health-care products and services conglomerate.

As an example of how Allegiance helps its institutional customers cut costs, the company has created standardized medical kits for specific procedures, such as hip replacements or childbirth. By packaging everything needed in a ready-made kit, Allegiance eliminates the costs that hospitals incur if they constantly have to order, assemble, and prepare the necessary equipment themselves.

According to Gius, IT plays a critical role in enabling Allegiance to bring these kits to market. Imaging technology is used to design the kits and support the manufacturing process-which often involves customization. "Different hospitals may want slightly different components in their kits, or want them laid out a little differently," he says. "Imaging helps us make sure the people assembling the kits meet the specifications of our customers." IT is also instrumental in managing the entire process of ordering, managing inventory for, and delivering such a mass-customized product.

To further assist customers in getting their costs under control, Allegiance has acquired several health-care management consulting firms that let it deliver a broad set of professional services. As a result, Gius has had to broaden Allegiance's technology portfolio further with what he calls classic management consulting tools, such as mail-based collaboration and data analysis. "It's another very IT-dependent business."

"What's happening in our industry is fairly simple," says Lee Marston, senior VP and CIO at Owens & Minor Inc. in Richmond, Va. "It's cost containment."

But Internet technologies are also playing a large part in the new business model. Marston's company, a $3 billion medical products distributor, is particularly aggressive in providing customers with IT services that help them manage their supply chain. Owens & Minor customers can go online and securely view their purchasing histories going back several years. Such data can be enormously useful as health-care service providers grow through acquisition.

"All of a sudden, you have five or 10 hospitals that used to do their purchasing independently operating under the same umbrella," Marston says. "By helping them see what they're buying across the entire organization, we help them become smarter purchasers of our supplies."

Online data access also lets Owens & Minor guide its customers to more profitable, standardized product lines, and IT service provides a significant competitive advantage in the otherwise commodified world of product distribution. "We're no longer perceived as just a box mover," Marston says. "We're evolving into an important industry infomediary." Owens & Minor will start acting much like an application service provider, delivering data warehousing solutions to its customers over the Net. "The hospitals' material management people love it. Instead of fighting to get this technology into their own organizations, we can come along and do the same thing for them at very little cost," Marston says.

Of course, in addition to helping customers buy smarter, drug and equipment manufacturers are taking steps to reduce their own costs. Typically, this includes consolidating plants and centralizing supply-chain management via an ERP implementation. "Every pharmaceutical company is looking at improving its supply chain, but no two companies are approaching it the same way," says Bruce Faden, VP and CIO at American Home Products Corp. in Madison, N.J. The $13.5 billion health-care productscompany wanted to consolidate and centralize operations, including its product portfolio. American Home Products decided to go with J.D. Edwards internationally and SAP domestically as ERP vendors.

Becton, Dickinson and Co., a $3 billion supplier of medical equipment and diagnostic systems, has taken a more radical approach to ERP deployment, folding a global SAP rollout into a larger infrastructure-and-applications transformation project, called Genesis. The $200 million project included SAP, Lotus Notes, and Documentum's enterprise document management system. Becton Dickinson's project also included the globally standardized IP networking needed to supportcommunications across the company's worldwide business units. "Once you have standard desktops, standard E-mail, standard data definitions, and so on, your entrepreneurial capabilities are unleashed because managers no longer have to worry about that whole Tower of Babel scenario that keeps you from being able to make well-informed decisions," says Arthur Levin, Becton Dickinson's VP of IT and CIO.

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