McKesson-HBOC scandal requires crisis-quick corporate and sales force response

Donald E.L. Johnson

The McKessonHBOC scandal is putting hospitals on notice to take a closer look at their suppliers and the people who are calling on them.

The company fired five of its top executives, including the CEO, and lost some 50% of its stock market value after it was disclosed that the sales and marketing staff at recently acquired HBOC had been cooking the books for several years.

The story made the front page of The Wall Street Journal and got a good play in Modern Healthcare.

In short, HBOC, the leading supplier of information systems to hospitals and other providers, had been booking sales at the slightest indication of customer interest and with all kinds of contingencies.

Like, take a year to think about our offer.

As a result, McKesson, which, it develops, did only a partial due diligence before closing on its weird acquisition of HBOC, has had to write down previous years’ earnings by millions of dollars. Ironically, McKesson had a similarly spectacular financial scandal back in the late 1930s.

Imagine the feelings of a McKesson or HBOC sales person who has to explain this mess to customers and prospects. What would you have your sales staff do, and what would you do to support them?

The corporate response to customers

Without having talked to either firm, here are some ideas about how they can manage this huge crisis in customer relations and public relations:

– Announce the mess and clean house. – Do an overnight survey to find out what customers are thinking. – Use the poll to prepare a corporate response. – Meet with sales and marketing staff to discuss the problem and solicit ideas. – Have sales staff make appointments to discuss the situation within one or two weeks. – Bar staff from discussing problem with clients until they are trained. – Within two or three days, train sales staff to deal with questions. Promise more training. – Write personal letters to CEOs, chief information officers, chief financial officers and materials managers over the signatures of McKesson and HBOC CEOs. – Promise to keep them informed and do so. – Make your CEO and other top executives available to all members of the media. McKessonHBOC seems to have started out right. It announced problems as it found them, and it cleaned house as soon as it became clear that there appeared to be evidence that HBOC misled its shareholders and McKesson.

A close reading of the front page story in The Wall Street Journal suggests that McKessonHBOC’s new management not only talked to the paper’s reporters, but also made others available. Or, at least, it didn’t block the paper’s investigation.

Result: Surviving McKesson management came off as the outraged victims, not as the co-conspirators.

Sales force must face the music

While corporate is getting its act together, the field sales forces of both McKesson and HBOC must prepare to face the music. McKesson’s sales people have less to answer for than HBOC’s, because they weren’t in the same company as HBOC when the alleged frauds took place. But, undoubtably, they are being asked, “What’s been going on?”

HBOC’s sales force, on the other hand, allegedly was the instrument of dishonest sales and marketing executives. The Wall Street Journal says the sales reps were told to backdate contracts to enhance earnings for the previous quarter. And they were ordered to make contingency sales. Some of their reps did what they were told.

Would you ever hire a former HBOC sales rep or executive?

Fair or not, a lot of people never will. They don’t want sales people known for their arrogance and tainted by the scandal anywhere near their customers. That is the price those sales people will pay for allegedly accepting huge bonuses or other incentives to help close sales that, as far as the customers were concerned, were never made or closed. The scandal was exposed by the responses of purported customers to inquiries by McKessonHBOC’s auditors and then by forensic auditors. When asked whether they had purchased software by HBOC, as indicated by the company’s records, they replied in the negative.

So, now HBOC sales people, and to a lesser extent, McKesson’s sales people, have to decide how they will deal with the scandal. They can volunteer comments or wait for customers to bring the subject up. What would you have your sales people do? What will you have your sales people do?

What McKesson sales people might say

Since McKesson’s sales people responsible for representing the company to hospitals are mostly bystanders in this saga, they probably can get away with not bringing the subject up. If a materials manager or other hospital executive mentions the situation, a sales person could say:

“I’m glad you brought that up. You know, nobody was more surprised or disheartened about that situation than my associates and me. It runs contrary to everything we’ve been taught to do. Customer trust is so important, and we are determined to do everything we can to maintain your confidence in our integrity. I’m glad to say, frankly, that you know as much about the problems over at HBOC as I do, and maybe more. If you have specific questions, I’ll be glad to try to get some answers for you.”

What HBOC sales peope say to their customers

HBOC sales people, however, have another Harley to ride. And they had better have a lot of answers for their clients. Here’s what they might say:

“Mary, I asked to see you today because, as you know, some important people at HBOC did some stupid things, and we need to talk about it. Fortunately, as far as I know, you and your institution were not affected by it. Isn’t that right?

“Anyway, let me spell it out for you as clearly as I can. And I’ll leave some of these white papers here for you to share with your staff and colleagues after we leave.

“First, we want to make sure that you understand what happened, because the last thing we want is a bunch of rumors floating around. There are certain things I can’t say for legal reasons, but here is what is on the public record.

“Second, I want you to know that new people are in charge. They are making major changes, and they are going to make things better for our customers and our employees.

“Third, I know that some of our customers haven’t liked the way they were treated under previous management. If you have such concerns, we need to talk about it so I can do something about it. I am authorized to make sure that you are happy with HBOC.”

Key is quick crisis management

That’s just one possible scenario or script. What’s important is that when a company’s name is blackened in the eyes of its customers and prospects, it needs to move quickly to save its reputation .

Sometimes, nothing can be done to recover the respect a company previously had. In such cases, the companies change their names, get new management and even are sold or closed. Only time will tell whether HBOC will ever recover from this scandal. Its products are so widely used in and are so important to hospitals, that they can’t be replaced easily or inexpensively.

That McKessonHBOC stock took such a hit after the scandal was announced indicates that investors think the company’s most valuable intangible assets its brands and customer bases have been undermined. Indeed, McKesson may have to spin off HBOC in a leveraged buyout by the software company’s top executives. r

Around the INdustry

LaserSight Inc., Winter Park, Fla., has announced an alliance with Becton Dickinson Ophthalmic Systems, Sarasota, Fla., to develop, manufacture, and distribute keratome blades for refractive surgery.

The joint venture is also intended to expand the LaserSight product line through the manufacture of cannulas, custom kits for refractive surgery, and other laser vision correction-related accessories.

LaserSight will access Becton Dickinson’s sales and distribution capabilities around the world to accelerate the launch of its products.

LaserSight CEO Michael Farris said the alliance with Becton Dickinson strengthens his company’s position to compete with other broad line companies and further establish brand name recognition.

The company currently sells its products in more than 30 countries. LaserSight’s refractive scanning laser system has a pending pre-market approval application with the FDA and is not yet commercially available in the U.S.

VIDAR[umlaut] Systems Corp., Herndon, Va., has signed a

value-added reseller agreement with META Solutions, Inc., Linthicum, Md., to include its products with META’s customer solutions for teleradiology and picture archiving-capture-sending (PACS).

The addition of VIDAR film digitizers is said to

significantly expand META’s offerings and market reach and provide a broader range of solutions.

META CEO Kenneth Jones said the addition of VIDAR products allows his company to offer applications ranging from simple teleradiology to full-scale, enterprise-wide distributed image management. VIDAR says it has delivered more than 20,000 scanners in its 15 years of operation.

GE Medical Systems, Milwaukee, says its acquisition of Applicare Medical Imaging is a confirmation of its commitment to the $1.2 billion global market for systems that archive and transmit electronic medical images and information. Analysts, says GE, estimate that the market for the systems is growing at approximately 20% annually.

Applicare, based in Zeist, The Netherlands, designs and produces a range of PC/NT-based systems for picture archiving-capture-sending (PACS) and teleradiology. Terms of the transaction were not released.

GE Medical Systems’ president and CEO Jeffrey R. Immelt said the acquisition will facilitate remote diagnosis via the Internet, speed health care delivery, and reduce quality problems associated with lost or damaged paper and film files in the hospital.

As part of the transaction, GE will continue an

Applicare contract to supply components to IBM as part of a large PACS project that the U.S. government agreed to prior to the acquisition. Applicare will continue to supply PACS components through its OEM channels.

Applicare’s installed base includes more than 3,000 systems in 30 countries.

HemaSure, Inc., Marlborough, Mass., has been told by the U.S. Court of Appeals for the Federal Circuit that its LeukoNet blood filtration product does not infringe on Pall Corp.’s, patent. The decision reverses an earlier district court decision and held that judgment of noninfringement be entered in favor of HemaSure. Pall, Greenvale, N.Y., originally brought suit against HemaSure in February, 1996. In October, 1997, the U.S. District Court for the Eastern District of New York entered judgment in favor of HemaSure, and Pall did not appeal that ruling. At that time, the District Court also entered a judgment that HemaSure infringed Pall’s patent, but that ruling has been reversed by the Court of Appeals decision.

Bayer Corp., Tarrytown, N.Y., and Physician Sales & Service, Inc., Jacksonville, Fla., have reached agreement on a patent suit brought in March, 1998, alleging that PSS infringed on Bayer’s MULTISTIX[umlaut] line of reagent test strips and, specifically, on two key assays on the strip, specific gravity and leukocytes.

In the settlement, PSS acknowledged that Bayer’s leukocyte patents were infringed. The agreement followed testing of the strips, manufactured by Yeong Dong

Pharmaceutical Corp. of South Korea, that determined that the strips contain a reagent indistinguishable from the reagent claimed by Bayer patents.

PSS was formally enjoined by Federal District Court in Jacksonville from selling the infringing strips.

Maxxim Medical, Inc., Clearwater, Fla., will be acquired by a management group led by Kenneth W. Davidson, the company’s chairman, CEO and president, with equity financing provided by investment funds managed by Fox Paine & Co., LLC, San Francisco.

Under terms of the agreement, defined as a merger agreement to acquire the company in a recapitalization transaction, Maxxim shareholders will receive $26 per share, representing a premium of approximately 30%.

Somanetics Corp., Troy, Mich., has been issued a patent covering part of the technology used in its INVOS[umlaut] cerebral oximeter. The patent augments the company’s existing patent position and brings its number of issued patents to 15.

Bruce Barrett, Somanetics president and CEO, said the patent starts a new cycle of protection for the company’s technology. The INVOS oximeter is the only FDA-cleared and commercially available patient monitoring system that noninvasively and continuously monitors changes in the regional oxygen saturation of blood in the adult brain during surgery and other critical care periods.

Health Imaging Division of Eastman Kodak Co., Rochester, N.Y., has signed a three-year, worldwide agreement with GE Medical Systems under which GE will sell and distribute Kodak equipment used in the medical imaging market, including laser imagers and processors.

COPYRIGHT 1999 J.B. Lippincott Company

COPYRIGHT 2000 Gale Group

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