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.

1. HP Discover 2012 Case Study: McKesson Redirects IT to
Become a Services Provider To Offer 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/iPod. 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 here the week of June 4 to explore some award-winning case studies from leading
enterprises. We’ll see how a series of innovative solutions and an IT transformation approach to
better 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 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.

2. 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?"
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

3. 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.

4. 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.
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.

5. 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 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.

6. 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?
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.

7. 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/iPod. 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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