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Charlie McCall Guilty

November 23, 2009
by vciotti
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Charlie McCall, former chairman of McKesson, was found guilty last Thursday in a retrial 10 years after HBOC cooked its books to get a huge price for its stock in its merger with McKesson. The saga was an even sadder one for employees and stockholders, who saw their shares plummet 50% when the scandal was first announced in 1999. HBOC inflated its revenue by hiding side letters it signed with clients that gave them the right to opt out of contracts, and other schemes to artificially inflate revenue to satisfy the greedy gods of Wall Street. McKesson paid out $900M to settle resulting stockholder suits a few years back, probably hoping the story would go away. Now, it's back with a vengeance, as Charlie joins Jay Gilbertson, CFO, and Al Bergonzi, COO, in being convicted. There is a sliver lining in this cloud, however. How many times have you heard the old saw that health care is so far behind other industries in commercial advances? If only we had automated records like the airline industry, we'd have far better customer service, etc. Sound familiar?
Well, in the HBOC scandal, health care beat other industries by two full years: remember Enron? In 2001, Skilling and company went down, and brought lots of employees in a book-cooking scheme that made HBOC's paltry few hundred million dollars look puny. Even took down Arthur Andersen, the ne plus ultra of auditing/consulting firms. So, in cooking the books, health care beat out all other industries by 2 full years!
What's really sad is how so many vendors have taken advantage of the resulting Srabanes-Oxley legislation (SOX). Originally intended to put CEO's necks on the line for booking revenue too aggressively, many vendors use SOX as an excuse to refuse to grant any warranties, remedies or financial penalties in their contracts today. Seems they want the right to book every nickel of an agreement the day it is signed, with no risk of the revenues not being earned. But what if the system isn't delivered, or has serious bugs, or is poorly implemented by recent college graduates the vendor hired to keep salary costs down? TOUGH! That's the hospital's problem...
It's as if a hospital booked the entire $10K revenue for an appendectomy the day a patient showed up in the ER with abdominal pains. And then made the patient sign a consent form that they agreed to pay for the full appendectomy even if it was just indigestion... Vendors should learn form poor Charlie and start booking their revenue the old-fashioned way: when they earn it! And CIOs need to stand up to corporate mega-lawyers who fast-talk the SOX shtick. If they really are your "partner," they should share in the risk of an implementation and book revenue when they accomplish something besides getting a contract signed.
As Santayana said: "He who forgets the past is condemned to repeat it."



Excellent Post Vince - I couldn't agree more that vendors need to have more skin in the game. I have been negotiating software contracts from both the vendor and customer side for close to 10 years now. What follows puts a bad spin on vendors, but is a true representation of the outcomes driven by quarterly and yearly sales quotas.

As a vendor, we would do (just about) anything (within, and often right up to, the bounds of legality and morality) to land the first deal. Once that first deal was landed, we had significantly less at stake. Sure, there were long-term relationship and follow-on up-sell and cross-sell opportunities, but once in the door, especially with an expensive offering, customers are incented to throw good money after bad "to make it work". This pattern usually happened until new management or new economic pressures forced the customer to a bad implementation. Of course, many of our implementations were very successful, but we didn't sweat the marginal ones too much.

We did sweat every new revenue opportunity though, because those dollars in any given quarter would help us towards our quota, and, in a sense, every new deal was a new customer. The value of the dollars to us as a vendor was the same either way.

As a customer, knowing how vendors think, I have continually pushed vendors to put more skin into the game. I have structured many deals such that vendors do not receive all of their dollars up front. I have phased deals where subsequent expenditures are explicitly dependent on the success of current implementations. I have asked vendors to make significant up front investments in terms of consulting or free software such that their ROI is largely dependent on future purchases, thereby incenting the vendor to help me be successful today.

One novel method that I have yet to get a vendor to bite on is a profit sharing contract. Many vendors will justify the expense of licensing and implementation on the basis of projected operational or efficiency savings, occassionally through increased revenue. I have yet to find the magic formula which has the vendor foot the license and implementation costs on the front-end in return for an open-ended profit sharing model on the back-end.

Risk should sit with the vendor, not the customer. However, since the vendor is selling a solution to a customer's pressing problem, the vendor always has the upper hand. Even in a market with multiple vendors selling similar solutions, the customer's pain point forces them to take action and even competing vendors can work this customer weakness to their vendor advantage.

There ya go again, lashing out at those poor vendors.
Try this analogy, when I buy that $75k car when does the dealer book the rev? and when does /did the auto mfg book the rev?
The dealer- when I drive it home (even though three months latter I find out it is a lemon, and brought it back to be fixed four times).
And the mfg - when he shipped it to the dealer ...months before anyone found out it was a lemon.
So are software vendors really any different?
Moral - caveat emptor!

And concerning those SOX isssues, that's only for public companies who cow-toow to Wall Street. Now if I am a private company (such as Epic, Meditech, etc) and I do not like your contract terms ...I'll just tell you to take a flying leap!

As my mother used to say, there are at least two sides to every story...

Vince, Thanks for raising this important topic. And, Marc, thanks for your insights on how incentives drive behaviors, including the unbalanced, pathological ones.

A few reactions:

- "automated records like the airline industry"

Last time I talked to a desk agent at an airport, they were using a 30 year old, keyboard/terminal mode interface that required them to do extensive typing to deal with my needs to move to an earlier or later flight. The airline industry has stuck to very old technology. (See my blog post on Southwest Airlines - when they do automate, they've made some things worse.)

- It takes two to Tango.

I've certainly seen the "love you / hate you" bipolar behaviors that Marc describes. But I've also seen a large minority of clients who, for understandable reasons, fail to staff their HCIT project and then bemoan the vendor's (clearly secondary) contribution to the hospital's failed project. As many have observed, this is likely to get much worse under ARRA/HITECH.

- SOX.

Sox has brought a lot of discipline to contracts, including the increasing the discipline leading to elimination of side agreements. Borrowing from Vince's appendectomy analogy, when abdominal pain should be treated with an appendectomy by evidence-based best practices, should a patient refuse payment if the service is delivered but the appendix comes back normal? My only point is this - SOX has lead to more discipline on terms regarding exactly what each party will be expected to do for the major foreseeable outcomes. I think Marc's advice above is valid and stands up by itself.

In summary, I agree with the tone of this entire thread, that both customers and vendors need to clearly define and monitor performance, strive to truly understand each other's needs, and pay for execution of the agreed upon performance. All of this is pretty much impossible without professional project management, both at customers and vendors.