Medical Distribution Hall of Fame
Edition: February 2002 - Vol 10 Number 02
Karl Bays: Big Man, Big Ideas
He was a people person, a man devoted to his customers and employees. A big man who embraced life, Karl Bays was always on the move. He became CEO of American Hospital Supply (now Allegiance Healthcare) at the age of 37, and introduced some revolutionary concepts during his 17 years there, such as corporate agreements and automated purchasing. And he had a big idea - to create one company that would be distributor, manufacturer and health care provider. But his idea died under the weight of Wall Street realities, and Bays himself died four years later, at the age of 55.
Born in 1933 in rural Kentucky, Bays went to Eastern Kentucky University in Richmond, on a football scholarship. He was offered a position with the Chicago football team, the Cardinals, but upon graduation, chose instead to join the Marines. Two years later, he pursued his master's degree in business administration at Indiana University in Indianapolis.
''I first met Karl when he was carrying a bag [for American] in Kentucky,'' recalls Gene Burton, former vice president of materials management for Hospital Corporation of America (HCA) and now CEO of Gene Burton & Associates, an equipment planning firm in Franklin, TN. ''It was obvious he was destined for bigger and better things. Every time you saw him, he had moved up the ladder.''
Perfect Fit for American
American was founded in 1922 by Foster McGaw. From the start, it was a company with a strong focus on sales and the customer. Recalls Brien Laing, who joined the company in 1949 and ultimately became corporate officer for distribution, McGaw always stressed that it was the customer who generated the bottom line - no one else.
''He used to say that before we hired people, we should ask ourselves, 'Is he the type of person we would take home to our family for dinner on Sunday? If our answer was no, we wouldn't hire him.''
One of Bays' first major accomplishment in upper management at American was building the company's international presence, recalls John Crotty, a former corporate vice president at American, who reported directly to Bays for 15 years. ''He could have run big operating groups in the United States, but he chose international. Because of that, he distinguished himself from some of the other group vice presidents.'' Bays established the company's presence in Europe and the Far East. In 1971, at the age of 37, he was selected to be CEO of the company.
''He was an excellent communicator and an excellent motivator,'' recalls Crotty. ''People would run through walls for him. And he was very customer-oriented.'' Even as CEO, he spent the majority of his time with customers, he says. ''Because of that, he had a very good sense of where the market was and where it was going.''
''If he told you he'd do something, it was as good as done,'' recalls Burton. ''We had a very good working relationship. I told him what I thought, and he told me what he thought.'' Burton had Bays' direct phone number and could call him at any time. ''He had been to my home, and I had been to his. We looked after what was best for both companies.''
''He loved people, he loved his customers, and everybody loved him,'' recalls Laing. ''He used to say that we should always put the customer at the head of our organization chart. He was the one who people sought out at conventions. He was a personable guy. You always learned something from talking to him.''
Close to the Customer
It was that desire to serve the customer that drove Bays to take some bold steps with the company, to the benefit of the customer and American. For example, at one point, a prominent consulting firm had advised the company to close some of its distribution centers to cut costs. ''We didn't like that input,'' recalls Laing. ''So what we did was, we went to places like Memphis and opened up a distribution center there, and [sales volume] grew 100 percent. So we went to Buffalo, and grew 95 percent there. That's all we needed to do. I don't remember how many centers we ended up with. But we always wanted to be close to the customer.''
Recognizing that customers didn't want to deal with multiple people representing multiple divisions within American, Bays devised the corporate program, and put it under the direction of Bob Simmons. Now fairly commonplace among big companies, the program called for American to reward customers with rebates based on their purchases from all its divisions. To make things easier for the customer, the company put corporate executives in the field to represent the entire company. Individual hospitals as well as group purchasing organizations, such as HCA, signed on.
Bays also recognized how American could use information technology to make it easier for its customers to buy its products. Under his direction, the company developed the TelAmerican system (which later evolved into ASAP). Customers were given IBM punch cards with products, quantities and prices already punched in; they could transmit them whenever they wanted. ''It was easy and customer-oriented,'' says Laing. And it tied customers close to the company.
''We took the industry by storm,'' says Laing. ''Then we moved it along to computers and tied our distribution centers together, our customers together with us, and our suppliers together. This what the kind of thing Karl was involved in - good people, good systems, quality products, prompt delivery. There was no other hocus pocus.''
Born to Manage
Bays was one of few who know from a very early age that they want to manage something, says Crotty. ''He used a simple formula, no matter at what level he was: Set objectives, plan, organize, motivate and control.'' Even today, 12 years after Bays' death, the words roll out of Crotty's mouth.
''The other thing that was interesting and in some ways unique about him was that he had a great sense for focusing on the key issues. He always used to preach 'ruthless priorities.' In his office, his desk was perfectly clean. Usually he was concentrating on one, maybe two, critical things at any point in time.''
Bays' enthusiasm for people extended to the way he managed American's own employees. ''Whenever he went into the cafeteria, he would go over to a table with three or four people, particularly people he'd never met,'' says Laing. More often than not, they'd be warehouse people or office staff, not executives. ''Wherever Karl went, people wanted to be around him.''
Following in McGaw's tradition, Bays believed in bringing in good people and letting them show their stuff. The joke around American was, ''We're bringing in people so young they need their mother's permission,'' says Laing. But they were given the opportunity to succeed, and if they did, they were well-compensated, says Laing.
Laing also points to an important part of the American culture, which Bays preserved and promoted: ''I was a hockey player, Karl was a football player, Frank Ehmann [another American executive] was an All-American in basketball. We went after athletes because they had the desire to win.''
A Big Plan Failed
Bays harbored a dream for his company: to create a health care giant encompassing not only distribution and manufacturing, but patient care as well. So in 1985, he put a bid to buy HCA. It was a huge gamble, because it risked raising the ire of American's non-HCA customers. Indeed, when the deal was announced, several hospital companies and associations announced they would stop buying from American.
''I think Karl was thinking the right thing,'' says Laing. ''We were thinking of another dimension for the company.''
But once the bid was made, American was in play. Nearby Baxter Travenol, under the direction of Vernon Loucks, made a more attractive offer for American, and ultimately prevailed. The new Baxter Healthcare, boasted Loucks, could provide 70 percent of what a hospital needed.
Bays pledged his support to the new company, and stayed at Baxter for about a year. He left to head up Whitman Corp., a Chicago-based conglomerate focused on consumer goods. He died of a heart attack on Nov. 6, 1989.
''He was truly exceptional in his intelligence, his vigor and his love of life,'' wrote Baxter CEO Vernon Loucks in a memo to Baxter's employees and directors the day after Bays died.
''American's net sales were $500 million in the year Karl took over,'' wrote Loucks. ''Within 15 years, they were $3.5 billion. During that time, Karl gave American new strategic life. He made the company essential to the needs of health-care providers across the country and around the world.''
Ron Stephenson: He Helped an Industry Grow Up
He taught the industry how to read a balance sheet,'' says John Lee of NDC, referring to Indiana University Professor of Marketing Ron Stephenson: And even though Stephenson didn't actually ask for the assignment, he took it up with enthusiasm. In the course of doing so, he helped an industry grow up.
Stephenson began his career as a management trainee for Federated Department Stores in Columbus, OH. He took a leave of absence to pursue a master's degree in business administration from Ohio State University. While there, he fell in with professors, such as Bill Davidson, who had built successful careers studying distribution. Stephenson admired what they were doing, and began spending more and more time with them. In fact, he decided to abandon his nascent career in retailing and get his Ph.D. from Ohio State, which, he says, had the best wholesale distribution program in the country. Upon getting the degree, he went to Indiana to teach marketing.
Executive Program for Distributors
Soon after he got there, the Medical Surgical Manufacturers Association (later called HIMA and now, AdvaMed) asked Indiana Professor Albert Haring to develop an MSMA-sponsored executive education program for distributors. Haring agreed to do it, and asked Stephenson for help. By that time, both had developed expertise in wholesaling, and were working on projects with the National Association of Wholesalers (NAW). Because Haring was near retirement, Stephenson soon took responsibility for the program.
''Our task was to take CEOs, senior managers and owners of distribution firms and polish their skills,'' he says. At that time, the industry consisted of a lot of owner/managers, many of whom had been star sales reps who had decided to start their own companies, says Stephenson. It didn't take Haring and him long to figure out that while these execs understood markets and customers, they were financially unsophisticated. It was clear that the training program had to help these executives learn how to manage margins, etc.
''I was a marketing professor, so I had to learn what was important to them,'' he says. ''I had to condense it and help them focus on the things they really needed to focus on. We tried to help them develop enough financial sophistication so that they could fine-tune their businesses from a profitability standpoint, and avoid getting into trouble by making decisions that would be tough to deal with from a financial point of view.''
To do that, Stephenson and Haring needed good, solid information about the industry. At the time, the American Surgical Trade Association (ASTA, now HIDA) was engaging an outside accounting firm to conduct a financial survey of its members. ''We looked at it and said we could do it better and cheaper,'' he says. So they made a presentation to ASTA, got the contract and began conducting the surveys around 1970. Stephenson continued to do the survey every year until two years ago, when he passed the torch to his colleague, Professor Bill Cron, formerly of Southern Methodist University in Dallas, now with Texas Christian University in Fort Worth.
The relationship between Stephenson and ASTA grew. He began conducting seminars for the association's members, and did consulting work for some of them. ''As I began to become something of an expert with distributors, I got involved with manufacturers on how best to work with distributors,'' he says. In 1978, he conducted the first manufacturers' seminar, a venue in which manufacturers meet distributors and learn how best to work with them. The programs still run today.
Industry Ties Deepen
Stephenson's ties with the industry grew deeper still as he served on the board of directors of F.D. Titus & Sons, City of Industry, CA, (now part of McKesson Medical Surgical) and Colonial Hospital Supply (now part of Allegiance Healthcare) in Chicago.
''He was one of the best board members I've ever seen,'' says DeWight Titus. ''He was knowledgeable about the industry and was very challenging. His points were always well taken.''
Adds Mike O'Connor, formerly of Colonial and now head of the Colonial Group, Crystal Lake, IL, ''Ron always had an absolute clear view of the market.'' He helped guide Colonial Founder John McGuire Sr. and its President Ben Welch with a variety of key issues, such as compensation, pricing and new markets, says O'Connor. ''He had a lot of real-world experience coupled with academics.''
In the 1980s, Stephenson expanded the financial survey to include home health care companies. He served on the board of a company called Conva-Care, an Indiana-based firm specializing in oxygen (which was later sold to Lincare). Today, he serves on the board of The Brewer Company, Menomonee Falls, WI, a manufacturer of medical furniture.
''Having had the opportunity to become intimate with the industry and several firms in it has enabled me to be a much better teacher,'' says Stephenson.
''He is an academic who can also function in the real world,'' adds Titus. ''He probably had more influence on the industry than any other single person, because he was involved in so many different areas. He was the information bridge between manufacturers and distributors, on how each functioned and how they could work together.''
A Critical Time
Stephenson was just what the industry needed at a critical time in its development, says Bill Cron, who met Stephenson when Cron was working on his Ph.D. at Indiana in the late 1970s. The two worked on a seminal article that rubbed against the grain of much contemporary thinking. In it, they concluded that companies that give their sales reps a lot of pricing flexibility sooner or later find their profitability shrinking.
Cron credits Stephenson with raising the financial bar for all distributors. When Stephenson began to work with ASTA and its members, accounts receivable days outstanding were in the 70s, says Cron. ''There was no good reason for it. People just didn't realize what it was costing them.'' But Stephenson made them aware of the costs, he says. ''It was like a rising tide.'' Before long, everyone in the business started cutting their A/R days outstanding. ''If you took just that alone and started to measure the financial impact Ron has had on the industry, it would be immense,'' he says.
Stephenson also helped distributors understand how sales training could help them improve their businesses. ''There was almost a religious feeling then about throwing [salespeople] out there and letting them sink or swim,'' says Cron. That's all the training that many of the former reps who started their own distribution companies had ever gotten. ''But as their businesses became larger and more sophisticated, there was a limit to what individual salespeople could do.''
Although some in the industry resisted Stephenson's message about the need to get their financial houses in shape, McGuire's backing helped Stephenson gain credibility and respect. But it wasn't just McGuire's influence that got people listening, says Cron.
''I'm still impressed that when it comes to health care, there are very few times Ron talks with any apparent uncertainty,'' says Cron. ''It takes that kind of conviction to move people who might otherwise not move. If they detect any uncertainty at all, they will go back to doing things the way they always did.''
Adds Elizabeth Hilla, director of HIDA's Educational Foundation, ''Ron has educated a whole generation of distributors and manufacturers.'' He has shown distributors how to run their businesses, and he has shown manufacturers how to work with distributors, she says. ''If you want to talk about someone who has influenced the industry, there's your man.''
Bright Opportunities for Small Companies
Despite - or perhaps because of - the consolidation that has occurred in distribution, small companies have many opportunities today, says Stephenson. ''There are still a large number of very successful small companies out there. Don't underestimate them.''
Such companies can distinguish themselves with superior customer service, says Stephenson. ''The bigger you get, the harder it is to take care of your customers on a hands-on basis,'' he says. And many doctors and clinics still need some hand-holding. ''They want to call you on Tuesday and say, 'I want the gray one that we always buy,''' he says.
It's true that small companies deal in a more complex environment than did their counterparts in the 1970s and 1980s, he adds. Group purchasing and information technology have changed the industry. Still, their managers face the same issues as their predecessors, such as: How do you make money, and how do you understand business from a financial point of view?
Although Stephenson expressed gratitude to many in the industry for helping him in his career, he says he owes his largest debt to McGuire of Colonial. An enthusiastic contributor to ASTA, McGuire served as the organization's chairman in 1978, and opened many doors for Stephenson there.
''He was the best executive I ever met,'' says Stephenson. ''He had incredible people skills, and wanted to create opportunities for professionals to perform at a high level.''
Stephenson recalls how at one sales meeting, McGuire prepared poster-size charts for each one of the company's 75 salespeople, replete with sales levels, penetration of accounts, etc. Early in the morning, he taped the charts all around the room, starting with that of the highest performer and ending with the lowest. When the time came, McGuire referred to the charts as he talked about every salesperson, one by one.
''[McGuire] was always extremely positive,'' says Stephenson. For the underperformers, he'd say something like ''Jim is new, just getting started, and these are the challenges he's facing,'' he says. ''Meanwhile, Jim's thinking, 'I'll never be on this side of the room again.''' Likewise, McGuire would talk about the top performers, who all the time would be thinking to themselves, ''I sure don't want to be on the other side of the room next year.''
''It was the most exciting, most motivational thing I've ever seen,'' says Stephenson. ''Almost nobody else could have pulled that off. You have to be an insightful, positive person.'' And McGuire was.
So is Stephenson.
Pat Kelly: Visionary, Fighter
It's difficult to talk about Pat Kelly without using at least one of these four words: visionary, communicator, educator, fighter. Kelly combined all four traits to create the country's first national physician distributor, Physician Sales and Service.
Kelly, an orphan, was a fighter from the early days, when he was growing up at the Virginia Home for Boys in Richmond. In his 1998 book Faster Company, he recalled being ''a little red-faced Irish kid a good 20 or 30 pounds lighter than the next-smallest resident of the Home.'' As such, he got picked on quite a bit.
''At some point - I'm not sure when - I
realized I had to fight back,'' he wrote. ''Fists weren't much use against kids so much bigger. So, I made a decision. Anytime a kid picked a fight with me, I'd grab him. I'd wrap my arms around him as best I could. Then I would sink my teeth into whatever part of his body was handiest. And keep them there.
''-Pretty soon word got around: You can beat that kid up, but he'll make you pay. Those bites hurt. And bite by bite, they stopped beating me up.''
Later, Kelly joined the Marines and learned some lessons that he applied to PSS: Give young people an opportunity to take responsibility, and take chances on people.
A pre-med student, Kelly always harbored an interest in education. In fact, he taught high school biology for one year, and loved it. ''But I couldn't make any money,'' he says. With a baby on the way, he had to get a ''real job.'' (In adult life, he has served as an adjunct professor to such institutions as Harvard, Massachusetts Institute of Technology and the University of Florida).
Didn't Want to Sell
Kelly took his first medical distribution job with General Medical in Atlanta. For 15 months, he learned all phases of the business, and ultimately got a sales territory.
''I didn't want to sell,'' he recalls. ''Having grown up in an orphanage, I didn't have a strong sense of myself.'' But he quickly learned that success in sales means doing what you say you're going to do for the customer.
Kelly left GM to work for Intermedco. The company was in multiple markets, and after being acquired by a British company, its management resolved not to pursue a physician-only strategy. But Kelly saw an opportunity.
From a supply point of view, no one was adequately taking care of physicians, primarily because they were focused on multiple markets, says one of the co-founders of PSS, who preferred not to be named. ''If the naval hospital wanted 100 cases of cotton balls and your physician customer wanted one bag, most distributors would ignore the physician,'' he says. ''So, there was really a need to focus on the needs of the physician, instead of trying to be all things to all people.''
Finally, in 1983, following a dispute with the Intermedco president in Houston about company raises, and frustration with the company's inability to focus on one market, Kelly left the company to start his own.
Prompt Service Was Niche
From the beginning, prompt service was the new company's mantra. ''When we started in 1983, our concept was 24-hour delivery,'' he says. ''In 1990, we changed it to same-day service.'' Kelly was convinced that by providing doctors what they wanted in a timely manner, he could build a profitable company.
Soon after he left, Kelly met with John Sasen, then of Becton Dickinson (and now chief marketing officer of PSS World Medical) over dinner in Amelia Island. The two had collaborated while Kelly was at Intermedco in Houston on a very successful promotional program called ''Fly Free in '83,'' in which reps could earn free trips based on sales. It was the first time that the manufacturer and distributor had worked together to create a promotional program. On the restaurant table, Kelly laid out his plans for PSS, recalls Sasen. ''At that time, his dream was to create a sales-driven, customer-friendly organization that focused on selling instead of order-taking,'' he says.
But the road on which Kelly and his partners embarked would not be an easy one. ''They had no money, and Pat had maxed out his credit cards,'' recalls Sasen.
Manufacturers of branded products were reluctant to upset their existing distributors by selling products to the upstart company. In fact, although he admired Kelly, Sasen himself was handcuffed by an exclusive, multiyear agreement that BD had signed - ironically - with Kelly himself when he was at Intermedco.
''In those days, we basically were buying from other distributors at cost-plus,'' recalls the PSS co-founder. He recalls driving a rental truck to Atlanta and picking products from the shelves of Atlanta Medical, whose owner, Hugh Cooper, sympathized with the young company. ''We gave Hugh a check for half of what we took, and he billed us for the rest. We were so new, the check didn't even our company name on it.''
Recent College Grads Wanted
Lacking branded products or an established customer base, the new company could hardly afford experienced salespeople. ''Pat didn't have two nickels to rub together or any name recognition,'' says Sasen.
Necessity being the mother of invention, Kelly began recruiting college grads who had little or no experience selling medical products - or anything else, for that matter. His predilection for education kicked in, and he set up what became known as PSS University.
''We hired inexperienced people, then aggressively trained them with product knowledge and selling skills,'' says Kelly. In short, he believed that without intensive education, they would be ill-prepared for the battles they would face in the physicians' offices.
''Pat recognized that sales development was the key to success for any company selling products,'' says Sasen. ''He believed that a well-trained salesperson focused on the customer could overcome any obstacle.''
Kelly hammered his new reps on product knowledge, recalls the co-founder, and put together a book of products from A to Z. Then he insisted that new hires spend time working in the warehouse, receiving and delivery, and ride with sales reps and even repairpersons.
''Pat did a masterful job of educating these young people,'' he says. As a result, they weren't afraid to venture forth into their territories. ''People couldn't understand how we could enter a new territory and succeed so quickly,'' he says. It was the education.
Early on, PSS distinguished itself as an equipment-driven company, says Sasen. Part of that was due to the fact that its reps lacked branded products to sell. But at the same time, selling equipment gave the reps an opportunity to prove to their doctor customers that they were sharp, willing to learn and full of insightful, consultative skills, which could benefit the practice.
''With CLIA coming along, doctors weren't certain if they could continue to do testing in their offices,'' says Sasen. ''Manufacturers of lab equipment were concerned.'' With its consultative approach to selling, PSS hit the market at just the right time.
Success in Florida emboldened Kelly to expand his reach. ''I thought we could duplicate what we did in Florida elsewhere,'' he says. Gradually, Kelly saw the opportunity to take the company national, a vision held by one of his mentors, Max Goodloe, at General Medical. ''Max saw a need to open up local companies and service the customer,'' Kelly recalls. ''I wanted to do what he did, but I wanted to focus on just one customer - the physician.''
PSS began opening up new centers, and ultimately, buying companies around the country, transplanting its ''can-do'' philosophy all over.
Articulating a Vision
Kelly's remarkable ability to articulate his vision and fire up the troops accelerated the company's rapid development.
''Pat walked the talk like few people I have ever met,'' says Sasen. ''He could develop a vision, then simplify it so people could understand it, and encourage them to take a role in it. He would also reward them handsomely. And he did all of these things with a high level of commitment.
''He made you believe that everything we were planning was possible. It led to a esprit de corps, and a feeling of 'Tomorrow, the world.'''
Kelly himself admits to having a fanatical focus - customer service. ''I don't know where it came from, but I knew we had to stay committed to it,'' he says. He credits his time at the Boys Home with giving him the tenacity needed to turn his vision into reality. ''I had to stand up for my beliefs there,'' he says.
The fact that his vision of quick service was so simple also helped him to get others to buy into it. ''It was a simple message,'' he says. ''It was easy to articulate, and to repeat over and over again.
''Any message you communicate has to be consistent and believable - and achievable,'' he continues. ''When we launched same-day delivery, no one believed it was possible or that the market wanted it. But we launched it in Texas, and within two years, we had done so throughout America.
''But you can't be same-day-service today, and then tomorrow skip a day. For a customer to believe you, you have to be fanatical.''
Kelly resigned as chairman in October 2000 following the collapse of his plans to merge PSS with Fisher Scientific the month before. Today, he serves on the boards of a few entrepreneurial companies (non-distribution-related), and is planning to launch a manufacturing company in Taiwan with some partners.
When Repertoire spoke with him, he was making preparations to return to Vietnam to supervise the construction of some orphanages there. He works in tandem with his uncle, who builds churches around the world. Kelly has been to Vietnam several times since the War ended. ''The people are just beautiful,'' he says. He considers his work there to be an opportunity to give something back to them.
Kelly has a simple formula for leadership: ''If people believe in a cause, and if they have a real understanding of the mission, you don't have to worry about rallying them. They want to do it themselves. We created opportunities for people,'' he continues. ''People in PSS grew more than they expected.''
''Pat created real credibility for the physician rep,'' says Sasen. ''Without question, his entrepreneurship, his vision, his ability to allow people to develop and give them the rewards of their success were all key. Nobody ever doubted that Pat Kelly would reward them for success.''
Adds the PSS co-founder, ''Pat could see what was coming. He had a vision that old things had to change and new things had to come about - new types of markets, service and training.
''We were at the right place at the right time with the right story. And you have to credit Pat with recognizing that.''